Platforms are the newest cool thing— arguably the holy grail of digital strategy, if you read the headlines. Increasingly, many of the biggest businesses are software companies with platform business models. In a platform business, creators and suppliers add content and services to the platform, consumers flock to the platform to use those services and content, and the platforms exist in the middle, with the businesses behind them taking a cut. Many of the platforms seem to grow, as the saying goes, by just sitting back.
It can be an extremely effective model, no doubt—but here’s the thing: in our collective zeal for platforms, organizations sometimes overlook the other paths forward for creating a successful business in today’s digital world.
It’s time for business leaders to think more deeply about the difference between being a platform and using platform strategies. Being a platform means serving as the gravitational center of a broad ecosystem of consumers, suppliers, and increasingly developers (think Apple or Google); using a platform strategy, however, entails participating in another business’s platform—i.e., leveraging an existing ecosystem—to facilitate non-linear growth.
The businesses behind the most successful gravitational platforms have generally done at least two difficult things:
- They beat others to market. If you’re trying to compete with a business that launched its platform a decade ago, the time disadvantage may be difficult to overcome. Platforms encourage network effects—not just growth in the number of suppliers and consumers but growth in transactions among them. As the platform aggregates value and creates interdependent ecosystems of participants, its scale becomes such that a competitor may need to attract millions of users just to mount a challenge.
- They invest large amounts in research and development (R&D). Despite the image of “just sitting back” and making money, a platform is only valuable if its features and services remain useful and innovative. Accordingly, many large platform businesses invest 10-figure amounts annually in R&D, with the most aggressive companies spending more than $10 billion per year.
This suggests that if two platforms launch with comparable capabilities around the same time, their adoption rates should be similar. Likewise, if a platform launches later, after a competing platform has already aggregated large ecosystems of participants, the late entrant is likely to attract only a fraction of its competitor’s user base, incur enormous costs attempting to catch up, or both. This is why, in many developed industries, a limited number of platforms control disproportionate market share.
Put another way, if you have a special niche in the market, have the advantage of being the first or second in your space to make a big platform play, and are committed to continued excellence in software and software R&D, establishing a platform may be possible and lucrative. But if you lack these qualities (and many businesses do), your company may face an uphill climb.
Luckily, having a platform strategy—while not necessarily being the platform—can also potentially be very lucrative. Again, this means that rather than attempting to launch a fully proprietary end-to-end platform with the resources and gravitational pull of an Android or iOS, businesses can leverage other platforms to bootstrap their strategies. That is, they can use platform strategies even if they are not currently a platform.
A classic case study is how AirBnB leveraged Craigslist early on to bootstrap demand on its limited supply. Of course, AirBnB eventually grew out of its dependencies on Craigslist and became a true platform. The lesson? A company doesn’t have to start by developing fully-featured platform capabilities in-house if its strategy is built on driving growth by connecting to other platforms and ecosystems.
This example demonstrates why it can be more important to drive users toward core services than to attempt jumping straight to full platform capabilities. It also demonstrates that connecting to other ecosystems can mitigate the challenges of trying to become a platform.
These benefits of employing a platform strategy occur because of network effects. Suppliers are attracted both to other suppliers with whom they can combine assets for new services (á la AirBnB’s use of Craigslist) and to end users who consume those services. Likewise, consumers are attracted both to other consumers with whom they can interact and to ecosystems of suppliers that produce rich connected experiences. In this way, the suppliers and consumers can reinforce one another, creating the conditions both for gains in one part of the network to quickly translate into gains elsewhere and for value creation to be distributed across many participants.
There are already many examples of this strategy in action. Consider how Magazine Luiza*, one of the biggest and fastest growing retailers in Brazil, made its APIs interact with Facebook, leveraging the social media platform to give more users access to Magazine Luiza’s marketplace. Or how ride-sharing companies leverage platforms such as iOS, Android, and Google Maps, among others, to create their services, piggybacking off these platforms to gain traction before evolving into more fully-featured platforms themselves.
For many companies, then, the most accessible and viable strategy may be to distribute value creation across platforms that others have built, rather than attempting to build a new, world-beating platform themselves. This approach may lead to growth in core services in the short term, while also potentially enabling bigger platform plays in the long run.
Do you have valuable services and APIs? Do you want to attract developers who will use those APIs to create new products and connected experiences? And customers who will use the products those developers create? If so, then you’d better be visible in the iOS and Android communities if you’re targeting consumers. And if your APIs are for enterprises? Then you should be active on platforms such as Amazon Web Services, Microsoft Azure, and Google Cloud Platform. Can your APIs power consumer interactions? Then you will want to figure out a way to make those APIs interact with the platforms users already use.
Participating in established platforms still employs a platform approach, to be sure. If you have APIs and are continually leveraging them to speed up development, create new products, and pursue new partnerships, you’re using platform strategies. But employing platform strategies isn’t the same thing as becoming a platform—at least not in the broad, gravitational sense with which we often use the word. The better bet for many companies may be to focus on ecosystem participation, leveraging the platforms that already have users to quickly generate an influx of suppliers and consumers around core services.
[* Magazine Luiza is a customer of our employer, Google.]