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Platforms are technology products that connect people and organizations in ecosystems that allow the exchange of value. In other words, platforms create a market – the opportunity for buying, selling, exchange of ideas, collaboration and so forth. They are indispensable because they make relationship-building easier between 3rd-party suppliers and end users. I wrote here on the importance of platforms and how more companies are revamping their business model to become tech companies with additional services such as insurance, healthcare and mediation among others. It’s time to take a brief look at the anatomy and benefits of tech platforms.
There are some key differences between platforms such as Apple, Microsoft and Shopify versus aggregators such as Facebook and Google:
Replaces gatekeepers – For businesses that operate in traditional industries such as book publishing, platforms create an avenue to go direct to the consumer without gatekeepers. Amazon Kindle Publishing is an example which allows authors to publish their work directly to their readers – without a traditional publisher to decide what gets published.
Network effects – The quantity and quality of the people on the platform is what gives it value, as they are the ones that create the market. This means the more people join the network, the greater the value of the platform. Imagine if you wanted to sell something on eBay but there were no buyers in your market. If, however, there were many buyers, you could sell your products and are likely to return to sell more things. This creates a positive feedback loop, otherwise known as network effect. The speed of growth and strength of the community determine how durable the platform will be.
Connects multiple sides of the market – A platform’s primary purpose is to create a market that is liquid – one where there is the right amount of buyers and sellers. All platforms will face the same problems in regards to building one side of the market while simultaneously having to build the other – the famous ‘which came first the chicken or the egg’ problem.
Good platforms are also in the business of vetting the participants in the market – particularly on the supply side so that buyers receive a good quality of service. This isn’t always feasible as seen with the Uber assault scandals, but harmful actors in the marketplace can reduce the overall trust in the network.
Doesn’t own inventory/content – Even in physical industries such as the sale of goods, platforms are unique in that they typically don’t own any stock. Alibaba is one of the largest ecommerce companies in the world but holds no inventory. Instead, its model is built around providing the technological infrastructure, making markets and the flow of buyer and seller information. This, of course, leads to higher margins and greater ability to scale.
Similarly, Facebook and YouTube are the biggest content providers but create no content themselves. Everything they have is user generated or sourced which also means the companies can’t be held liable for it.
Allows exchange of value – The platform itself doesn’t have inherent value. The value is only activated depending on the quality and quantity of the participants and how they interact with the platform. In that sense, platforms are not creators of value, but catalysts, enhancers or facilitators of value.
Depending on the industry, this value can come in many forms including trading physical goods, providing services, exchanging information and creating social relationships. Both the platform and users benefit from and need each other’s existence. Platforms streamline the value exchange process, but the users are the ones that create it.
Is market driven – Platforms are designed to scale fast and create a market. This means that they have to capture as many users as possible while maintaining the quality and integrity of the platform. This is unachievable after a certain point as manual curation relies on other factors such as the community and review systems to self-regulate. In this sense, platforms essentially become peer to peer in many ways, with human touch only coming in to manage disputes between participants.
Uses data – Software platforms are also in the unique position that they collect, analyze and deploy large amounts of data. They have an overarching view of the activities of all participants on the network which they can use to create an understanding of broader market trends and also to tailor the service to each individual. Netflix is an excellent example of this. They use machine learning to study the type of programs that you are watching and how you rated it. Comparing your habits to what they’ve learned about other people, they are able to provide recommendations about what you should watch next to ensure that you stay on the platform.
For vendors on a platform, the first point of attraction will likely be the increase in business that is available. In many cases before the market was made by the platform, small suppliers would have to go through agencies or gatekeepers to sell their goods. Now that there is a market, they have a new channel where they can access their customers directly. In many cases, a completely new business opportunity is opened up for individuals as seen with the case of Dumpling. In the past, few people had the opportunity to transition from a food app delivery worker to become a solopreneur.
A large part of business constitutes coming up with creative marketing process to get your products and services in the hands of your customers. Although there will always be some need to market yourself, platforms take a lot of that heavy work out by providing a means to be discovered. Users on the platform can use search technologies to find what they want, and also benefit from recommendation algorithms that can help lead customers to vendors. If vendors have a good reputation, their marketing expenditures could be considerably reduced by a platform.
Although most platforms charge fees, in some industries this fee can be less for individual vendors who may have had to deal with traditional gatekeepers or agencies. The freelance industry is one example, with platforms such as Upwork allowing freelancers around the world to connect with companies. Agencies were usually the best ways for individuals to get work in this capacity and took large fees, but now there is less need for them. This can also be observed in other industries like home care, taxi services and cleaning.
Depending on what is being bought and sold, there is a large amount of trust that is needed between the two participants. For luxury goods and consumer electronics which command higher price points, there is always the problem that the product may be fake or dysfunctional. For services, theres is the concern as to whether the vendor is authentic and can deliver on what they promise. Trust is enabled by platforms in three ways.
Firstly, most platforms provide some type of security guarantee for buyers or sellers in the case of malicious practices. This allows buyers and sellers to interact with more confidence. Secondly, trust is enabled is through the community generated review system. If the platform is built correctly, these reviews will be very hard to fake which helps create an accurate picture of the vendor that is being dealt with. Finally, another way in which trust is built is through platforms vetting different sides of the market. For instance, AirBnB verifies identities of both renters and landlords to increase safety.
If you are going down the route of building your own platform strategy, you obviously realize its perceived benefits such as scalability and monopoly for your business. Depending on your industry, you might not even have to reinvent the wheel and could create a hybrid model or a platform based ecosystem. In addition, you could also start joint ventures such as the one between Factor10 and Vattenfall. Make sure that the department in your company responsible for platform development operates as an independent unit and is only answerable to the CEO.
Centralization could be defined as “the concentration of control of an activity or organization under a single authority” while decentralization is “the movement of departments of a large organization away from a single administrative center to other locations.” The most well-known example of a centralized platform is Google while BitTorrent and Limewire are very good examples of decentralized platforms. Since one of the main concerns of a centralized platform is privacy, Blockchain technology offers an alternative to this by being built on a peer-to-peer network which cannot be operated from a single computer.
The first issue that blockchain solves is that it creates a trustless environment. Trustless means that trust as a factor when it comes to buying and selling is irrelevant – specifically referring to the issue of double spending in digital currencies. Essentially, the problem was that before blockchain, people weren’t able to exchange value without a bank because there was no way to transfer ownership of digital money to another person. Through the mechanisms of the blockchain, this problem is solved, allowing people to exchange value directly without a financial institution.
The trustless component is also enhanced due to the transparency of the blockchain – all transactions are recorded and immutable – they can’t be tampered with and are there for everyone to see. This means you can truly see if there has been an exchange of value from the other person’s side. Blockchain startups are going a step further to build biometric identity systems and tools that identify the authenticity and ownership of physical goods too, contributing to the trustless environment of future decentralized platforms.
The cryptocurrency element of blockchains provides a useful tool to exchange value or facilitate activity on the blockchain platform. An example of such is Ether for the Ethereum platform, which serves as a fuel that rewards people for sustaining the network by providing computer resources or writing quality applications. Cryptocurrencies can also provide a strong incentive for individuals to invest both time and resources into your platform, as the scarcity of this form of digital money means that its value would most likely increase over time. This means that the cryptocurrency element can solve problems around seeding the market.
As blockchain platforms are decentralized and not owned by any group, there is less room for abuse as seen with centralized platforms. There are no issues of censorship, corruption and monopoly malpractices as the power of the network is more evenly distributed. Typically, these networks have much less fees as they get rid of the middleman (the centralized platform) and truly create a peer-to-peer environment.
Leveraging digital platforms and ecosystems for businesses is crucial for business growth and long-term relationship building. Ultimately, companies that transform their businesses with a smart platform strategy will likely be the most successful ones in a business world that is constantly in flux.
Sascha Grumbach is an entrepreneur with comprehensive practical experience as a business consultant and project manager in innovation and disruption projects.
