Book Extract: The Platform Revolution

Book Extract: The Platform Revolution The platform revolution is here—and the world it is ushering in is here to stay. But what exactly is a platform? What makes it unique? And what accounts for its remarkable transformative power? Let’s start with a basic definition. A platform is a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participative infra- structure for these interactions and sets governance conditions for them. The platform’s overarching purpose: to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants. Broken down in this way, the workings of platforms may seem simple enough. Yet today’s platforms, empowered by digital technology that annihilates barriers of time and space, and employing smart, sophisticated software tools that connect producers and consumers more precisely, speedily, and easily than ever before, are producing results that are little short of miraculous. THE PLATFORM REVOLUTION AND THE SHAPE OF CHANGE To understand the powerful forces that are being unleashed by the explosion of platform businesses, it helps to think about how value has long been created and transferred in most markets. The traditional system employed by most businesses is one we describe as a pipeline. By contrast with a platform, a pipeline is a business that employs a step-by-step arrangement for creating and transferring value, with producers at one end and consumers at the other. A firm first designs a product or service. Then the product is manufactured and offered for sale, or a system is put in place to deliver the service. Finally, a customer shows up and purchases the product or service. Because of its simple, single-track shape, we may also describe a pipeline business as a linear value chain. In recent years, more and more businesses are shifting from the pipeline structure to the platform structure. In this shift, the simple pipeline arrangement is transformed into a complex relationship in which producers, consumers, and the platform itself enter into a vari- able set of relationships. In the world of platforms, different types of users—some of them producers, some of them consumers, and some of them people who may play both roles at various times—connect and conduct interactions with one another using the resources pro- vided by the platform. In the process, they exchange, consume, and sometimes cocreate something of value. Rather than flowing in a straight line from producers to consumers, value may be created, changed, exchanged, and consumed in a variety of ways and places, all made possible by the connections that the platform facilitates. Every platform operates differently, attracts different kinds of users, and creates different forms of value, but these same basic elements can be recognized in every platform business. In the mobile phone industry, for example, there are currently two major platforms— Apple’s iOS and the Google-sponsored Android. Consumers who sign up for one of these platforms can consume value provided by the plat- form itself—for example, the image-making capability provided by the phone’s built-in camera. But they can also consume value supplied by a set of developers who produce content for the platform to extend its functionality—for example, the value provided by an app that users access through Apple’s iPhone. The result is an exchange of value that is made possible by the platform itself. In itself, the shift from the traditional linear value chain to the complex value matrix of a platform may sound reasonably straightforward. But its implications are staggering. The spread of the platform model into one industry after another is causing a series of revolutionary changes in almost every aspect of business. Let’s consider a few of these changes. Platforms beat pipelines because platforms scale more efficiently by eliminating gatekeepers. Until recently, most businesses were built around products, which were designed and made at one end of the pipeline and delivered to consumers at the other end.* Today, plenty of pipeline-based businesses still exist—but when platform-based businesses enter the same marketplace, the platforms virtually always win. One reason is that pipelines rely on inefficient gatekeepers to manage the flow of value from the producer to the consumer. In the traditional publishing industry, editors select a few books and authors from among the thousands offered to them and hope the ones they choose will prove to be popular. It’s a time-consuming, labor-intensive process based mainly on instinct and guesswork. By contrast, Amazon’s Kindle platform allows anyone to publish a book, relying on real-time consumer feedback to determine which books will succeed and which will fail. The platform system can grow to scale more rapidly and efficiently because the traditional gatekeepers—editors—are replaced by market signals provided automatically by the entire community of readers. The elimination of gatekeepers also allows consumers greater freedom to select products that suit their needs. The traditional model of higher education forces students and their parents to purchase one-size-fits-all bundles that include administration, teaching, facilities, research, and much more. In their role as gatekeepers, universities can require families to buy the entire package because it is the only way they can get the valuable certification that a degree offers. However, given the choice, many students would likely be selective in the services they consume. Once there is an alternate certification that employers are willing to accept, universities will find it increasingly challenging to maintain the bundle. Unsurprisingly, developing such an alternate certification is among the primary goals of platform education firms such as Coursera. Consulting and law firms are also in the business of selling bundles. Firms might be willing to pay high prices for the services of experts. In order to gain access, they must also purchase the services of relatively junior staff at high markups. In the future, the most talented lawyers and consultants might work individually with firms and transact across a platform that can supply the back office and lower-level services once provided by a law or consult- ing firm. Platforms like Upwork are already making professional services available to prospective employers while eliminating the bundling effect imposed by traditional gatekeepers. Platforms beat pipelines because platforms unlock new sources of value creation and supply. Consider how the hotel industry has traditionally worked. Growth required hospitality firms like Hilton or Marriott to add additional rooms to sell through their existing brands using sophisticated back-office reservation and payments systems. This means continually scouting the real estate markets for promising territories, investing in existing properties or building new ones, and spending large sums to maintain, upgrade, expand, and improve them. Upstart Airbnb is, in one sense, in the same business as Hilton or Marriott. Like the hotel giants, it uses refined pricing and booking systems designed to allow guests to find, reserve, and pay for rooms as they need them. But Airbnb applies the platform model to the hotel business: Airbnb doesn’t own any rooms. Instead, it created and maintains the platform that allows individual participants to provide the rooms directly to consumers. In return, Airbnb takes a 9–15 per- cent (average 11 percent) transaction fee for every rental arranged through the platform.1 One implication is that growth can be much faster for Airbnb or any rival platform than for a traditional hotel company since growth is no longer constrained by the ability to deploy capital and manage physical assets. It may take years for a hotel chain to select and purchase a new piece of real estate, design and build a new resort, and hire and train staff. By contrast, Airbnb can increase its “inventory” of properties as quickly as it can sign up users with spare rooms to rent. As a result, in just a few years, Airbnb has achieved a scope and value that a traditional hotelier can hope to reach only after decades of often risky investment and hard work. In platform markets, the nature of supply changes. Supply now unlocks spare capacity and harnesses contributions from the community which used to be only a source of demand. Whereas the leanest traditional businesses ran on just-in-time inventory, new organizational platforms run on not-even-mine inventory. If Hertz could deliver a car to an airport just as the plane arrived, it ran as well as could be expected. Now RelayRides borrows the car of a departing traveler in order to loan it to an arriving traveler. The person who used to pay to park an empty car now gets paid, complete with insurance, to let others use it. Everyone wins except Hertz and the other traditional car rental companies. TV stations built studios and hired staff to produce video. YouTube, operating a different business model, has more viewers than any station, and it uses content produced by the people who watch it. Everyone wins except the TV networks and movie studios that once had a near- monopoly on video production. Singapore-based Viki is challenging the traditional media value chain by using an open community of translators to add subtitles to Asian movies and soap operas. Viki then licenses the subtitled videos to distributors in other countries. Thus, platforms disrupt the traditional competitive landscape by exposing new supply to the market. Hotels that must cover fixed costs find themselves competing with firms that have no fixed costs. This works for the new firms because there is spare capacity that can be brought to market through the assistance of the platform intermediary. The sharing economy is built on the idea that many items, such as automobiles, boats, and even lawnmowers, sit idle most of the time. Before the rise of the platform, it might have been possible to loan something to a family member, close friend, or neighbor, but much harder to loan to a stranger. This is because it would be difficult to trust that your home would be left in good shape (Airbnb), your car would be returned undamaged (RelayRides), or your lawnmower would come back (NeighborGoods). The effort necessary to individually verify credit- and trustworthiness is an example of the high transaction costs that used to pre- vent exchange. By providing default insurance contracts and reputation systems to encourage good behavior, platforms dramatically lower transaction costs and create new markets as new producers start producing for the first time. Platforms beat pipelines by using data-based tools to create community feedback loops. We’ve seen how the Kindle platform relies on reactions from the community of readers to determine which books will be widely read and which will not. Platforms of all kinds rely on similar feedback loops. Platforms like Airbnb and YouTube use such feedback loops to compete with traditional hotels and television channels. As these platforms gather community signals about the quality of content (in the case of YouTube) or the reputation of service providers (on Airbnb), subsequent market interactions become increasingly efficient. Feedback from other consumers makes it easy to find videos or rental properties that are likely to suit your needs. Products that receive overwhelmingly negative feedback usually dis- appear from the platform completely. By contrast, traditional pipeline firms rely on mechanisms of control— editors, managers, supervisors—to ensure quality and shape market interactions. These control mechanisms are costly and inefficient to grow to scale. Wikipedia’s success demonstrates that platforms can leverage community feedback to replace a traditional supply chain. Reference works like the venerable Encyclopaedia Britannica were once created through costly, complex, difficult-to-manage centralized supply chains of academic experts, writers, and editors. Using the platform model, Wikipedia has built an information source comparable to Britannica in quality and scope by leveraging a community of external contributors to grow and police the content. Platforms invert the firm. Because the bulk of a platform’s value is created by its community of users, the platform business must shift its focus from internal activities to external activities. In the process, the firm inverts—it turns inside out, with functions from marketing to information technology to operations to strategy all increasingly centering on people, resources, and functions that exist outside the business, complementing or replacing those that exist inside a traditional business. The language used to describe this process of inversion differs from one business function to another. In marketing, for example, Rob Cain, the CIO of Coca-Cola, notes that the key terms used to define systems of message delivery have shifted from broadcast to segmentation, and then to virality and social influence; from push to pull; and from outbound to inbound. All these terminological changes reflect the fact that marketing messages once disseminated by com- pany employees and agents now spread via consumers themselves—a reflection of the inverted nature of communication in a world dominated by platforms.2 Similarly, information technology systems have evolved from back-office enterprise resource planning (ERP) systems to front-office consumer relationship management (CRM) systems and, most recently, to out-of-the- office experiments using social media and big data— another shift from inward focus to outward focus. Finance is shifting its focus from shareholder value and discounted cash flows of assets owned by the firm to stakeholder value and the role of interactions that take place outside the firm. Operations management has likewise shifted from optimizing the firm’s inventory and supply chain systems to managing external assets the firm doesn’t directly control. Tom Goodwin, senior vice president of strategy for Havas Media, describes this change succinctly: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.”3 The community provides these resources. Strategy has moved from controlling unique internal resources and erecting competitive barriers to orchestrating external resources and engaging vibrant communities. And innovation is no longer the province of in-house experts and research and development labs, but is produced through crowdsourcing and the contribution of ideas by independent participants in the platform. External resources don’t completely replace internal resources— more often they serve as a complement. But platform firms emphasize ecosystem governance more than product optimization, and persuasion of outside partners more than control of internal employees.

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Book Extract: The Platform Revolution

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