by Nicholas D. Evans

Platform business models: A primer

Oct 26, 2016
Digital TransformationInnovationIT Leadership

Platform business models are gaining a lot of attention lately, but not everyone knows precisely what they are. These business models, which allow enterprises to set up powerful ecosystems for value exchange and innovation among participants, can be used across industries and are fast becoming a dominant business model for the digital economy.

Here are some examples of platforms and the core services that a platform typically provides, and some go-forward strategy recommendations for executives and managers to help you get started.

Definition & benefits

A useful definition of the platform business model comes from management thinker Sangeet Choudary, who defines it as follows:

A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and exchange value.

Platform business models are particularly compelling because they convert traditional, linear value chains into multi-dimensional value networks. They convert the pipeline business model, where value creation is one-way and subject to bottlenecks throughout the supply chain, into a platform business model where value creation is two-way and continuous.

In other words, the platform provides the base services and overall environment that facilitates matches and exchange of value between producers and consumers who connect to it and transact with one another.

While the traditional value chain involves the production of physical goods and assets, the platform provider doesn’t need to own physical assets and simply provides the environment for participants to connect and exchange value. This means that certain types of platform business models can be launched rapidly and attain high market valuations within a matter of a few years.

A perfect example is Airbnb. The room-rental platform gained a valuation of $30 billion just eight years after its founding in 2008. In this situation, the platform business model benefited from well-known “network effects,” where the value proposition of the platform increases as the number of participants grows, thus creating a virtuous cycle. This is not uncommon.

When it comes to digital transformation, platform business models can also facilitate powerful new customer value propositions that extend well beyond traditional industry boundaries, because they can aggregate the value propositions of core and extended partners in the platform ecosystem.

As an example, GE’s Predix industrial internet platform, their software platform for collecting and analyzing data from industrial machines such as wind turbines and jet engines, has a broad value proposition because Predix developers can practice “permissionless innovation” and write new apps on top of the platform for a variety of new industry scenarios.

Types of platform

While there’s a number of different types of platforms, and many differing classifications, two of the most common platform business models are what we might call value exchange platforms and innovation ecosystem platforms.

Companies such as Airbnb, Amazon, NetFlix, PayPal and Uber are value exchange platforms. They perform a match-making function of sorts that consummates matches between buyers and sellers, producers and consumers, and so on.

Companies such as Apple (App Store), GE (Predix), Google (Apps Marketplace), Microsoft (Azure IoT Suite) and Philips (HealthSuite) are all innovation ecosystem platforms. They provide a foundation for others to innovate on top of by creating complementary applications, technologies, products or services.

While much of this activity started in the tech sector many years ago with various electronic marketplaces and developer platforms, it is now moving rapidly into the non-tech sector with almost every industry vertical strongly represented.

And it is not surprising that this is happening now. A large number of factors including technology maturity (e.g. social, mobile, analytics and cloud), proven successes (e.g. Airbnb, Uber and many others), large valuations for both private and public companies (i.e. often a 4x multiplier over traditional business models) and the power of the platform model to enable digital transformation have made this the perfect time for platform business models to expand beyond the tech sector.

Platform services

If we take a look at the base platform services provided by innovation ecosystem platforms, we find that they contain the following common characteristics:

  • Cloud foundation: A robust cloud foundation that can scale with the network effects of the ecosystem. This is often a major cloud provider’s platform, such as those from Amazon, Microsoft, Pivotal or Salesforce. For platform providers and participants it provides the cloud benefits of agility, flexibility, scalability, pay-per-use pricing, cost savings, and time-to-market.
  • Security & governance: Industrial-grade security that supports the platform’s real-time business models and data architectures. A high level of security is needed for business-critical applications, for data sensitivity, and — in the case of IoT platforms — for connectivity with expensive devices and equipment such as medical devices or industrial machinery. A governance layer sets out and manages the governance conditions and business rules for how the platform operates, with the goal of enticing participants onto the platform with a win-win value proposition.
  • Data & analytics: A data management layer that also provides algorithms and analytics for customer insights, operational insights or risk management. For instance, in the GE example, participants gain insights into the operations of their industrial equipment for asset performance management, predictive maintenance and operations optimization. Whatever the industry, this data and analytics layer often supports analytics all the way from the individual person or device to a broader population, fleet of devices, or network of factories or infrastructure.
  • Service catalog: A rich catalog of services, built with open standards and APIs, enables developers and partners to innovate on top of the platform by building applications that enhance the platform’s overall value proposition and accelerate the growth of the ecosystem. The platform is also architected and designed for continuous change by supporting techniques such as agile and DevOps for rapid service iteration and innovation.
  • Service integration & management: An integration and management layer helps to ensure interoperability and integration across service providers and their digital services while also monitoring the quality of service for platform managers and participants.
  • Industry services & microservices: Perhaps the most important layer, sitting on top of the base platform services, is an initial set of application services offered to platform participants to support a number of industry-specific use cases for the platform. While the rest of the services might be considered essential plumbing, this layer represents the core application functionality in the platform and the core value proposition for use by participants. As an example, the Philips HealthSuite Digital Platform connects an ecosystem of devices, apps and digital tools to empower personalized health and continuous care.

Planning your platform strategy

For executives and managers thinking about platform strategies in 2017, it’s worth exploring where this business model may work in your industry, where the opportunities are, the kind of strategy you wish to pursue, and your go-to-market teaming partners.

Platforms are changing the rules for innovators with implications for strategy and execution that ripple back all the way to corporate innovation. The strategic alternatives are many and range all the way from operating your own platform, to participating in the platforms of others (as a core partner or ecosystem partner), to becoming a technology provider for others who are building and operating platforms, to simply becoming a platform participant.

Success in digital transformation requires not only new technology enablers and a mastery of digital services delivery, but a platform business model as the new way to engage. With the IDC stating that, “by 2018, it’s predicted more than 50% of large enterprises — and more than 80% of enterprises with advanced digital transformation strategies — will create and/or partner with industry platforms​,” it will be important to move quickly since any industry can support only so many industry platforms. 

Those who enter early, with the right partners and with the right value propositions, will gain a first-mover advantage and scale that will be hard to overcome.