Imagine a square with buyers and sellers. The owner of the square decides who gets which stall: who gets a stall in the middle and who is placed farther back. She can decide how customers move by planning the paths, and who stands next to whom. Further, the owner collects statistics and information on what sells best, who buys what, and what can be done to increase sales. The owner of the square doesn’t own any products, doesn’t need sales representatives, and avoids warehouse handling, but takes a commission on every sale made. What is required is to ensure that the square is as attractive as possible for buyers and sellers.
Imagine now that the square moves to the Internet where it reaches millions of shoppers and retailers from all over the world, so that even the largest sellers have to comply with the owner’s rules. This is an example of how the business model can look for a platform company. Such companies build their business models on technological platforms that create value by connecting supply and demand. Sellers and buyers. Workers and employers. Investors and entrepreneurs. Developers and innovation projects. To enable these exchanges, the platforms offer large, scalable networks where users can integrate and exchange with each other. All transactions, including payments, pass through the platform and leave heaps of data behind.
The concept of the platform model was first used primarily as a metaphor in the beginning of the 2000s to describe digital sites that connect different actors. Since then, platforms have invaded an increasing share of the world economy. According to platform expert David Evans, three of the world’s five largest companies (Apple, Google, and Microsoft) base their business models on platforms. Amongst so-called unicorns – that is, startups that have been valued at over one billion dollars without being listed on the stock exchange – 70 percent are platform companies.1 Many platform companies are also extremely innovative. For example, in 2014, 11,585 approved patents were owned by nine av the largest platform companies in the United States.2
Platform companies have developed so intensively that today we can talk about a platform revolution. Accenture estimates that 25 percent of the total global economy will be comprised of digital companies in 2020, and an increasing share of these will be platform companies. The growth in value of these platforms illustrates how fast this trend is growing. In 2015, the stock-market value of the 15 largest platform companies was a staggering 2.3 trillion dollars.3 To put it in perspective, that is equivalent to Great Britain’s total gross national product for 2016 (the world’s fifth largest economy). One can hardly fathom how so few companies can be valued so highly. But it says something about the change that has occurred in the past two decades. The platform economy is spreading and in many ways is creating a global ecosystem where platforms are acquiring an increasingly dominant position.
Platforms beat products All the time. | Marchhall Van Alstyne, Professor at Boston University specialized in the digital economy
Business models based on platforms can be categorized into transaction platforms, innovation platforms and integration platforms. Transaction platforms that create value by enabling transactions between individuals and companies that would otherwise have difficulty finding each other – i.e., digital “matchmakers” – are the most common form of platform. In this category we find e-commerce companies such as Amazon and Ebay, travel-reservation sites like Booking. com (Priceline), media companies like Netflix, social media like LinkedIn and Snapchat, and many other companies like Airbnb, Uber, Yahoo, Paypal and Baidu.
Innovation platforms create value by enabling independent innovators to contact each other, where they either together or independently can develop and create products that complement existing ones. For example, the marketplace Innocentive. com brings together innovators with companies that have difficult problems they want solved. Some illustrations: Someone who can create a better method for quality-testing motors can cash in 10,000 dollars. Someone who creates a solution for sorting gems can expect a reward of 15,000 dollars. And solving the problem of invasive mussel species is worth 75,000 dollars.
Integration platforms build on both transaction and innovation platforms. All of the big giants, like Apple, Google, Facebook, Amazon, Alibaba and Xiaomi offer such platforms. Apple’s App Store is a good example. The app, which was launched in 2008, is comprised of an ecosystem with approximately 380,000 developers that have created over 1.5 million applications, which have been downloaded more 100 billion times and have generated 30 billion dollars in revenue at the end of Apple’s 2015 financial year.4 Based on Apple’s 70/30 share with developers, the App Store generated close to 9 billion dollars for the company that year. Apple earns money on the transactions that are made in the app and on the innovations that resources in the platform have developed – resources that they don’t have to own themselves.
The strength of the platform idea lies in handling gigantic networks of people and companies. The infinite supply creates so-called network effects, which in practice have no platform growth limits. When the number of customers increase, even more suppliers want to connect. The ball is rolling. In the same way, the business can quickly deteriorate if customers think that a competitor’s platform is better. For those who succeed, the scalability is enormous, since the owner of the platform doesn’t need to invest in all of the products to achieve a growing product selection.
Network effects result in marginal costs for increasing revenue being extremely low. For Uber, costs don’t increase considerably if the number of taxi trips increases from 20 to 30 million. The difference is in how many ones and zeros that are registered on their platform. Pure platform companies essentially avoid maintaining inventories, paying rent, investing in products, employing loads of personnel and marketing their products, even if sales increase drastically – which creates an enormous growth potential.
The platform-based business model unarguably raises questions for most companies and businesses. Should you invest in building your own platform or collaborate with one of the big platform companies? Many companies will undoubtedly need to choose between one of those alternatives in the near future.
1 CB Insights. (2015). The Global Unicorn Club. Downloaded 2018-10-22 from https://www.cbinsights.com/research-unicorn-companies
2 Intellectual Property Owners Association (2015). 2014 Top 300 Patent Owners. Downloaded 2020-04-20 from: https://ipo.org/wp-content/uploads/2015/06/2014-Top-300.pdf