Industry competition is constantly redefined through transformation. Fragmented industries are using open platform ecosystems, reputation systems, and ubiquitous connectivity to connect communities to create value. Unlocking the hidden value starts with an understanding of the capabilities for the four main platform ecosystems and the communities they connect.
The appeal of platforms for profitability
Platforms magnify profitability by offering non-linear ecosystem growth. Network effects are the primary driver for scale and community management is replacing human resource management. As more users participate in ecosystem interactions, the value of the ecosystem increases. More people equals more value. The network effect or network externality is the value as it relates to the number of users participating in an ecosystem. The concept network effects developed over one-hundred years ago. Theodore Vail, president of American Telephone & Telegraph between 1885 and 1889, leveraged the power of network effects to build a monopoly on US telephone service. By 1908, he had signed up over 4.000 local and regional carriers. The concept of network effects has matured through 1995. Robert Metcalfe, co-inventor of the Internet, popularized the term network effect. Today, platforms are the greatest benefactor from network effects and create the large potential for value and profitability.
The Center for Global Enterprise does a great job segmenting platform ecosystems and classifies platforms that leverage network effects into four categories:
1. Innovation: co-creation of value
2. Investment: portfolio of value
3. Transactional: exchange of value
4. Integration: production of value
First, major innovation platform companies include Microsoft, Intel, Oracle, Salesforce, and SAP. Innovation platforms co-create value with producers and consumers. New decision-makers are improving the ability for platforms to orchestrate interactions by exploring user journeys, not stretching conventional sales funnels. Co-creation unifies multiple parties to jointly produce a mutually valued outcome. In the search for the wisdom-of-the-crowd, these are products, services, and interactions are co-created or built based on shared value. This new co-creative enterprise model aims to satisfy the needs of all the stakeholders, not only a select group. Co-creation differs from the classic process design approach, which might ask, “How do we redesign this experience to decrease the consumer touchpoints.” Alternatively, co-creation begins with a different starting point. The focus is not on a single stakeholder e.g. the consumers or customers. Co-creation focuses on all the stakeholders. The renewed focus asks, “How do we together create new value?”
Innovation platforms co-create value for a redesigned interaction experience.
Second, investment platforms provide a different value by offering back-end infrastructure to enhance the front-end user experience. Typically, these experiences span across multiple brand categories. This platform approach is appealing to multinational companies challenged to provide global consistency for consumers. Significant investment platforms include Priceline Group (U.S.), Rocket Internet (Germany), Naspers (South Africa), Softbank (Japan), and IAC Interactive (U.S.). Academics could argue, that these companies are not, at their core, investment platform companies. However, I’d disagree. It’s harder to argue their strategy is not tightly coupled with the success of platforms an integral part of emerging company portfolios. A prime example is Priceline Group (U.S.) diverse portfolio that now includes: Booking.com, Kayak.com, agoda.com, Priceline.com, rentalcars.com, and OpenTable. Naspers made a bet big with the Chinese platform Tencent, and now has a broad mix of investments in over 30 platforms. The digital transformation is not moving to digital; it’s moving from business models to platform models.
Investment platforms improve the consumers’ interactions by connecting platforms for a better consumer experience.
Third, transactional platforms have a total market capitalization of $1.1 trillion, and most transactional platform companies are private — although that may soon be changing with the emergency and industry adoption of blockchain technology. In 2008, in response to the global financial crisis of 2007-08, Satoshi Nakamoto wrote a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The paper suggested that “trusted third parties” could be eliminated from financial transactions using blockchain technologies. Blockchain makes it possible, for the first time in history, to remove — or disintermediate — the middleman from business transactions, and by doing so improves the value of existing products, services, and interactions. Transactional systems are preparing for disruption. IBM, Microsoft, Intel and J.P. Morgan have already invested heavily into blockchain technology. Through 2015 there was $1.2 billion invested in blockchain technology, by the end of 2016 that cumulative number will reach $10 billion. Blockchain technology is a foundational element of many trust-based platforms. Companies aren’t just talking about blockchain, and they are investing their company’s future on it. Firms remember what happened in 1995 with the Internet and the lost profitability when you’re an industry lager.
Most economic and social platforms fall into the category of transactional platforms including social media platforms, marketplaces, media, music, money, financial technology (fintech) and gaming. Daimler AG was a first mover in this space with two purchases extending their platform capabilities. Daimler AG’s first acquisition was US-based moovel (formerly RideScout), a technology platform that aggregates public, private and social rideshare. The second acquisition was the German-based MyTaxi, one of the world’s first taxi application and today MyTaxi boasts over 10 million international users across 45,000 taxies. MyTaxi is a transaction-based platform for ride-share similar to lyft. Daimler AG challenged Uber Technologies Inc. in the ride-hailing space when it merged a well-known cab-calling service Hailo. The result was the creation of Europe’s biggest transactional platform for hailing a taxi.
Transactional platforms reduce transaction costs through disintermedication enhacing interactions through connected technology.
Fourth, integrated platform companies contain aspects of transactional platforms and largely depend on third-party developer networks and multi-sided markets to build value. Multi-sided markets connect multiple distinct groups who value each other’s participation. A simple example of a two-sided market is Airbnb. There are consumers on one side (renters), and on the other side, there are producers (hosts). In multi-sided markets, the participation is more complex, namely due to the many favors of consumers and producers. Health insurance is a good example of a multi-sided market. With over $2 trillion in market capitalization, there are six well known integrated platform companies including Apple, Google, Alibaba, Facebook, Amazon, and XiaoMi. Integrated platform companies are considered platform conglomerates because they utilize multiple platforms. These companies hold less traditional platform characteristics as they may have large physical fulfillment facilities and manufacturing supply chains.
Integrated platforms combine platforms to produce new value, leveraging seamless consumer interactions with new behavior designs.
These new platform strategies are reinventing how we do business and opening new economic markets – by working together, we create new value.