Why Platforms are Important

Our willingness to trade with each other has played an integral role in the economic, scientific and happiness gains we have made over the past few millennia. Without trade and the logical outcome of division of labor, we would all be confined to a very limited amount of goods and services. It would essentially be every man and woman for themselves.

 

There have been different types of trade throughout history. The gifting system was used in more close environments which essentially represented a form of debt. One person would provide a service or good in the understanding that a favor would be returned at a later date. There was an unspoken social contract that enforced this – with penalties in reputation for people who broke it.

 

The other type of trade is barter – exchanging one good for another. But this has a few problems. First, you can’t divide certain goods to reflect accurately the value of the trade. E.g if all you had was a whole living cow, how do you trade that for bread? The second was that not everybody wanted what you were selling, due to division of labour. And the third is that barter is practically inefficient in terms of having to constantly move inventory to make exchanges.

 

Eventually, this gave birth to money – first commodities such as pelts or shells, and then rare metals such as gold and silver; smelted, minted and backed by Kings around the world. This provided a new medium of exchange that people were able to put their trust in – regardless of where they were from.

 

Trade was catalyzed and the first international marketplaces were born. In major trading hubs such as Alexandria or Persia, citizens from around the world congregated and exchanged value with the different goods produced in their respective regions. Spice, incense, and pearls were swapped for gold and silver. Smart business people of the old world began to capitalize on this, setting up vendors, guilds and trade routes to max out their profits. 

 

This quick summary of trade will set the stage for why platforms are important. In terms of centralized marketplaces, e.g Uber or the Play Store, we can see that these aren’t actually new phenomena. We have been congregating and trading in central hubs, owned and operated by an elite, for thousands of years. But instead of a software platform, marketplaces of old operated in the physical space of a geographically suitable location. And instead of usernames and passwords, the security of the market was enforced by armed men.

 

When it comes to decentralized platforms as being proposed by blockchain technology, the history of money is relevant. Although the banking industry isn’t a platform in the traditional sense, it has monopolistic features as fiat currency is the only way for modern people to exchange value efficiently. The rise in Bitcoin which is a decentralized currency represents a trend for the desire to be liberated from the kings and bankers – market or platform makers – into a model that has no intermediaries. And decentralized money is just one aspect – goods, services and how we structure society are all being uprooted.

 

Hardware platforms

 
The marketplaces of old still exist but have evolved in different ways. There are still open markets where you can buy and sell goods, typically food, clothes and other household items. But with a more sophisticated consumer economy, we eventually developed more sophisticated markets in the form of shopping malls and consumer high streets. For a time, these were the dominant locations that people bought and sold goods. Services on the other hand were still being fulfilled by word of mouth or advertisement. 

 

The invention of the personal computer, operating systems and the internet would give the word platform new and bigger connotations. Two definitions of the word are a ‘raised surface on which people or things can stand’ and an ‘opportunity to voice one’s views or initiate action’. These definitions relate to the physical act of a performance – be that theatre or an oratory event – but the semantic meaning is relevant. Platforms are about enabling something – trade, the flow of ideas, increased visibility, construction and so forth. 

 

Computers and the internet would become the first universal platforms. Both in the sense that they were global and that they enabled people and businesses to flourish – facilitating content and software creation, social connections, trade and work. Not only that, these platforms even allowed people to create other platforms on top of them, leading to further market making in specific industries. 

 

The personal computer and the internet can be described as hardware platforms. Although they have software aspects such as the operating system and the networked functions of the internet, they mainly provide the physical and electrical infrastructure that is needed for software platforms to be built on top. This comes in terms of graphical units and processors for computers or servers and cabling when it relates to the internet. Other hardware platforms include smartphones and virtual reality headsets which have their own unique physical aspects.

 

Platforms vs agents

 

The platforms that are most relevant to consumers are the software platforms that have amplified in recent years. Although the trend has taken off recently, these type of platforms have their origin in the internet boom at the turn of the millennia, with the biggest star being Amazon, which started off as a website that allowed people to buy and sell books. The platform model was wildly successful, and Amazon took this concept and evolved into a multi-purpose, general platform for consumer goods. 

 

What these platforms are essentially doing is taking the marketplace of old as described earlier and digitizing it. They are identifying industries and connecting together the different agents and consumers – the buyers and sellers – in a centralized place. Using the power of software and the internet, they are facilitating markets in more efficient ways; matchmaking and providing security which leads to more business, reducing cost of marketing, greater transparency, fairer competition and greater time savings. All of which are the presented goals, but the reality may be different as you will eventually find out.

 

Centralization vs decentralization

 

The nature of platforms, which is also a byproduct of how we structure companies, is that they are centralized. What this means is that they position themselves as a middleman between buyers and sellers, usually adding various fees such as service charges or commission. For this, they justify it by claiming to provide match making, security and customer support. Before these centralized platforms existed, there were typically just individual vendors in the market, but in some cases also unions as seen with the New York taxi cabs. 

 

However, there have been growing concerns about the roles platforms are playing in the economy. Questions in regard to actual value provided, money charged and the monopolistic and predatory implications of centralized platforms have gotten louder. In recent years, companies such as Amazon have come under fire for squeezing out individual retailers using their immense war chest to deliver unparalleled customer service. There is also the threat from companies using their power to bully individual vendors – having the ultimate decision if they have the capacity to work or not. 

 

It is ironic that technology and the internet is touted as a democratizing force, but at the same time its power being consolidated in the hands of a few technology elites and venture capitalists. This contradiction is one of the drivers behind decentralized platforms which blockchain technology hopes to empower. 

 

Blockchain is a technology that enables both the technical and philosophical aspect of decentralization. Essentially, this technology solves problems around authenticity, trust, security and value exchange – key components when it comes to facilitating markets and platforms. But what makes this technology special is that it doesn’t need centralized authorities to facilitate it – these qualities are built and designed into technology. It is the code that allows individuals to trade in a trustless environment, without the need for middlemen that become monopolistic or collect fees.

 

What’s fascinating about blockchain is that it represents a paradigm shift. The centralized technology platforms are part of a long trend of consolidating power for profit. But instead of kings and local lords collecting their fees on trade, we have geeks and investors. Blockchain is to economics what democracy is to politics – a supposed means to fairer distribution, a more dispersed power structure and the ultimate empowerment of the individual. 

 

Why platforms matter

 

Platforms are important because they represent one of the biggest functions in our economy. They are universal in the sense that they can apply to most industries as every part of the economy requires buyers and sellers. An understanding of platforms, their roles and their implications is essential both for consumers and businesses. Whether in the centralized or decentralized form, every aspect of our purchasing decisions will be influenced by platforms in the future. 

 

The benefits of platforms which we will discuss in more detail are simply too numerous for them not to exist. Greater trust, authenticity, matchmaking, fairer competition, transparency and so forth are benefits that help both buyers and sellers. Without platforms, efficiency in the economy will decrease leading to less happy consumers, less trade, slower growth and less innovation. 

 

As part of a broader trend enabled by increased technology, platforms also best represent the winner takes all dynamic of the modern day. Technology has reduced the cost of manufacturing and has set up global logistical and supply chains which has allowed companies to grow much faster. But this effect is on steroids when it comes to software platforms – with companies such as AirBnB and Uber being able to ‘blitzscale’ to billion dollar valuations in a matter of years. These software platforms are able to consolidate markets very quickly due to the first mover advantage of platforms, leading to potential problems with monopoly like entities. 

 

For business leaders and entrepreneurs, there is a chance that your business may experience the effects of platforms. In some industries this may not be as relevant right now. But with technologies such as Blockchain, platforms could appear in your industry that rethink your entire business model. For instance, Blockchain can utilize cryptocurrency technology to turn monthly fee SaaS tools into a by the meter model, with consumers switching over to these platforms to save money. In short, it is best to keep an open mind about how these platforms can affect you in order to not be blindsided by unforeseen innovations.

About the author

Sascha Grumbach

Sascha Grumbach is an entrepreneur with comprehensive practical experience as a business consultant and project manager in innovation- and disruption projects.

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