These days it feels like any successful company, especially the so-called unicorns (aka private companies with over $1 billion valuation) are not selling a product but leverage a platform. Beyond the Silicon Valley lingo, there is also a growing body of work in the literature dealing with platform businesses and business ecosystems.
The end of the sustainable competitive advantage
New digital technologies and the relentless focus on core competencies have pushed companies to outsource a lot of their activities, leading to commodization and increased competition. Barriers to entry for copycats are lower than ever, therefore maintaining differentiation over a long period of time is now virtually impossible, despite trademarks or patents. Note that this phenomenon goes beyond what happens online: it is not uncommon to find clothes inspired by the latest fashion week in Zara or H&M stores before the actual designers are able to sell their original designs.
Speed of execution is increasingly the only way to stay ahead of competition. This has some drawbacks, such as the focus on being first to market and getting scale over monetization or profitability (from Twitter to Xiaomi), and sometimes leaves the impression that you are offered a beta product that has been rushed to market. Digital products can improve daily from their Minimum Viable Product status, but many Kickstarter or IndieGoGo supporters end up disappointed with what they get.
Today's unicorns are platforms, not products
To work around these limitation and remain competitive against low cost me-too products, companies of all sizes are all about platform and not standalone products. Value is now created through stickiness of a platform rather than differentiated products. The equity of a brand is increasingly equivalent to the value of its ecosystem.
What is a platform ? In a platform approach a company's product operates as a facilitator and large part of the value is created by the participants instead of the company itself, which can be Facebook users, Uber drivers or makers of Apple-compatible accessories.
Again, nothing really new here as Tupperware or Avon sales have been operating this way for decades, the PC industry has thrived around the Wintel ecosystem, and Android and iOS have won the mobile OS war with their ability to attract developers on their platforms rather than on BlackBerry or Windows.
What is new though is that the platform approach have become the standard practice in the digital B2C space to compete for companies aiming to disrupt (another popular buzzword) the market, or create a new one.
Some of the most famous examples can be found in eCommerce (Amazon, Flipkart or Alibaba) or messaging/social media (from Facebook to YouTube, Tencent or Snapchat). Online marketplaces such as Uber and AirBnB are currently some of the most prominent examples, getting as popular and powerful as Apple or Android.
Third party players: Ecosystems and Network Effects
- A prerequisite for a successful platform is the ability for a company to build a value proposition around an ecosystem and not only its own products. This means convince 3rd party companies to join and share value with them. In software this is usually done by publishing public APIs. Arguably, the most successful ecosystem is the one orchestrated by Apple, where you don't only buy an iPhone, you get into the Apple ecosystem of hardware, content and services.
In the mobile apps space, countless developers write apps for iOS and Android. Apple and Google provide the API, maintain the appstore and give back 70% of the revenue to the developers. Hence a platform can benefit but also become highly dependant on innovations developed by other firms.
"No single company can replicate all the innovative capabilities of the market."
- Another key component of platform is the ability to leverage network effects. For a thorough introduction to network effects and asymetric business models, I highly recommend the comprehensive slidedeck by Anu Hariharan at Andreesen Horowitz. In short, network effects happen is product or a service value increase exponentially as the number of users goes up. Some time ago it was the telephone line, then the fax machine and more recently Facebook
The key challenge of course is that in order to enter the virtuous circle of Metcalfe's law, a classic 'chicken and egg' problem must be solved first. Why should you install a telephone line if nobody you know has one ? In addition building a desirable product, "Growth hacking" is therefore a key activity for start ups: reaching critical mass is the necessary extension to first mover advantage and is usually seen as more important than effective monetization. That approach is sustainable in the digital domain as cloud services make it easy to scale to impressive level on the cheap: Whatsapp was able to serve 450 million customers with only 32 engineers, and Groupon or Living Social operating cost issues are only due to their huge needs for sales reps.
Only for digital start ups ?
However the trend towards platform also affects hardware companies. A vast majority on the start up in the chart below were pitching a platform, especially the most valued ones. A notable exception in the list is GoPro, and it currently pays the price of being a one-trick pony with slowing sales.
Literally everyone in the electronics space is trying to replicate the successful model developed by Apple. For example Samsung acquired the smart home platform SmartThings and is developing services like Samsung Pay and LG recently introduced the G5 modular phone. Obviously investments are much higher than for a digital start up, and efforts can take years to materialize.
In Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You, by Geoffrey Parker, Marshall Van Alstyne, and Sangeet Choudary explain that moving from a traditional 'pipeline' model to a platform involves three key shifts, which are quite suitable for agile start ups.
- Main activity moves from the control limited resources (raw materials, equipments...) to an orchestration of intellectual property and interactions of the community of users and partners
- Efficiency does not come from optimization of internal processes but through the ability to increase (external) network effects via the ecosystem.
- Value is contained by the whole ecosystem rather than individual products
More than a buzzword, the new normal for products
Platforms are not only the latest Silicon Valley fad for building unicorns, but they have become the new normal to build and sustain a strategic advantage. In markets where it is increasingly fast and easy for competitors to duplicate innovative products, often at lower cost, building and maintaining platform is arguable the best way to fend off competition. Like it or not, it is time to adjust to this new paradigm where even a great product cannot be successful for very long in isolation..,
Note: views expressed here are my own