Platform Shift: How New Business Models Are Changing the Shape of Industry

Barcelona, Spain • October 29-31, 2015
© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
Marshall Van Alstyne
Boston University & MIT
marshall@mit.edu
InfoEcon@twitter.com
Platform Shift: How New Biz Models
Are Changing the Shape of Industry
Gartner Research Board March 11, 2015

2© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
InterBrand: 2013 Best Global Brands

These Grew Fastest

These are Platforms

Dominated by Platforms

Platform Firms Becoming More Important in Economy
3 of top 5 firms in 2015 by market cap.
FIRM MARKET CAP
Apple 627
Exxon Mobile 385
Microsoft 377
Berkshire Hathaway
357
Google 344

Platform Firms Becoming More Important in Economy
% of top 20 firms by market cap since 2001
Percentage of Platform Firms weighted by MKT CAP
(2001-2014)
35%
30%
25%
20%
15%
10%
5%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014
MKTCAPWeightedPlatform
Firms

The Product Business
Model is Broken

The Product Business Model is Broken
In 2009, BlackBerry had nearly 50% market share in
U.S. operating systems, according to IDC. Now: 2.1%
2008 2009 2010 2011 2012 2013
50%
40%
30%
20%
10%
0%

1980-2000 Microsoft Platform Beats Apple Product
Apple launched the PC revolution but Microsoft licensed
widely, built a huge developer ecosystem, 6X larger.

Apple Feb 5, 1996
Michael Dell - ”Shut it down and give the money back to the
shareholders.”

Interbrand: 2014 Best Global Brands

Nike Builds a Biz Platform

15
1. Enumerate embeddable features: salty,
citrus, sour, toasted, …
2. Get consumer preferences
3. Match to best recipes
4. Mix new combinations, help users create
& upload, allow ratings, build a
community
How would you create a platform around spice?

16
Create a whole geometry of flavor combinations

Products Have Features, Platforms Have Communities
Definition: A platform is an open
architecture together with a governance
model.
Platform Potential: System must
provide a useful function or service and
should provide 3rd party access.
Platform Purpose: The goal of the
platform is to consummate the match –
more & better! Subgoals are seed creation
& consumption.

Any enterprise that grows in value by adding
information / community can be transformed.
The greater the proportion of value, the
sooner it will transform.

Services
Protected by Credentialing, Complexity, Regulation & Hard Assets
Consumer
Goods
Home Goods Automotive
Conslt: Eden MacC
Labor : oDesk
$$$: eToro, Kickstr
News : Twitter
Insurance : ?
Law : LegalZoom
Education : edX
Art & Craft : Etsy
Apparel:Lee & Fung
Shirts : Threadless
Shoes : Nike Fuel
Watches : Apple
Thermostat : Nest
Lighting : Philips
Appliance : Haier
Rides : Uber
Cars : 3d Printed
Cars : Mercedes
Info & Tech
Games : Nintendo
Cloud : AWS
Search : Google
OS : MS Windows
Maps : Google APIs
PDF : Adobe
Movies : Netflix

Food & Agri
Protected by Credentialing, Complexity, Regulation & Hard Assets
Crop Yield : IBM
Spices : McCormick
Energy &
Mining
Heavy Industry Government
Farming : eChoupal
Mining : Gold Corp
Utility : EnerNOC
Tractors : Hitachi
Engines : GE Predix City : Singapore
Medicine
Devices : Biomet
MRI : Cohealo
Healthcare:Harvard

SHIfT HAPPENS
So Why Now?
It’s more than SMAC
Platforms Draw Value from
Communities & Network Effects

Network Effects
Value rises as more people use
the platform
Metcalfe’s Law

How are these Related?
Each Side Attracts More of the Other
eBay Buyers
Uber Riders
Xbox Gamers
Amex CardHolders
Aga Khan Patients
YouTube Viewers
AirBnb Renters
Tesla Car Drivers
Mechanical Turk Jobs
LinkedIn Employees
Android Users
eBay Sellers
Uber Drivers
Xbox Developers
Amex Merchants
Aga Khan Doctors
YouTube Videographers
AirBnb Rooms
Tesla Charge Stations
Mechanical Turk Laborers
LinkedIn Employers
Android Developers

More Amex Users
… get more Amex Merchants…
More Amex Merchants
… get more Amex Users…

More Android Users
… get more Android Developers…
More Android Developers
… get more Android Users…

In any market with network effects, the focus of
attention must shift from inside to outside the firm.
Reason: You can’t scale network effects inside as
easily as outside.
Source: Marshall Van Alstyne

Why Platforms Beat Products Every Time
See ‘’Platform Envelopment’’ (2011) Strategic Management Journal, Eisenmann, Parker & Van Alstyne

Apple iPod pre-Platform
(1) Product First Thinking
(2) Standard linear value chain
(3) User bought music retail (or P2P)
(4) Minimal network effects
Music
Producer
ListenerApple iPod Retailer
$ $ $

Apple Platform
Apple iPod Combined with iTunes
Music
Producer
Listener Retailer
$ $ $
Apple iPod

Apple iPod post-Platform
(1) Remove supply chain inefficiency
(2) Triangular platform supply network
(3) Apple owns financial chokepoint
(4) Apple helps users find content
(5) Stronger network effects
User Content
Apple
$$
$

Sony could have done this. It has many great standalone products.
Google is not making this mistake with Android
How Apple is Killing Standalone Platforms
Lumia
Usr
Dvp
r
PSP
Usr
Ga
m
MP3
User Music
Video
TV
Games
Dvpr
Web
HTM
L
eBooks
Publi
Calls
User
Zune
Usr Mus
MicrosoftSonyNokia
Apple has vastly stronger network effects.

Zune
Usr Mus
Microsoft
Lumia
Usr
Dvp
r
PSP
Usr
Ga
m
MP3
User Music
Video
TV
Games
Dvpr
Web
HTM
L
eBooks
Publi
Calls
User
SonyNokia
So what happened?
2007 Today 2007 Today

Message for you: A great standalone product is not sufficient.
Polycom
Speakerphone
R1P1 U1 R1P1 U1
Cisco
Flip Camera
R1P1 U1
HP
Calculator
MP3
User Music
Video
TV
Games
Dvpr
Web
HTM
L
eBook
s
Publi
Calls
User

MP3
User Music
Video
TV
Games
Dvpr
Web
HTM
L
eBooks
Publi
Calls
User
Photo
Usr Upld
Flickr
Blkbry
Usr Dvpr
RIM
GPS
Usr Upld
TomTom
Message for you: A great standalone product is not sufficient.
Wear
Fitness

© 2012 Zimedia
Why Apple isn’t Killing Kindle: Amazon Ecosystem

The giants of the Internet era resemble those of the
Industrial era but for the opposite reason.
Source: Marshall Van Alstyne

Giants of Demand Side Economies of scale
Westinghouse
Dynamo
1893
Ford Model T
1908
Carnegie Steel
1905
Vanderbilt
Colossus of
(Rail) Roads

Giants of Demand Side Economies of scale
Micro Blog
Now
Social Networks
Now
Windows OS
1990s-00s
Matched Mkts
Now

Monetizing Platforms Means Free Pricing is Profitable
What changes :: Marketing & Prices
See ‘’Strategies for Two Sided Markets” (2006) Harvard Business Review Eisenmann, Parker & Van Alstyne

For work on antitrust
regulation, market power
& two-sided platforms
Jean Tirole: Nobel Laureate in Economics 2015
Nobel Prize in Economics 2014

To Price a Platform with Network Effects, Who Gets the Subsidy?

If markets are independent, collect profits in both.
Price
Quantity
Market One
q1
p1
Price
Quantity
Market Two
q2
p2
See "Two Sided Network Effects” (2006) Management Science, Parker & Van Alstyne

But if markets are coupled, discounting one builds demand in the
other.
Price
Market One
Quantity
q1
p1
p1
q1
Price
Market Two
Quantity
q2
p2
p2
q2
See "Two Sided Network Effects” (2006) Management Science, Parker & Van Alstyne

There are 2 types of Free
1. Cellphones & Minutes,
Razors & Blades
2. eBay, Amex, Google, Amazon
all use 2-sided platform
pricing.
Platform
Group 2Group 1

Corporate valuation models that underestimate
market expansion due to network effects fail to invest
What Changes :: Finance

• Estimate global taxi market
• Estimate market share
• Est. risk adjusted cash flow
• Consider proprietary
methods, barriers to
competition
• Value: $5.9 Billion
Aswath Damodaran: NYU Finance professor, Corporate
Valuation author, Herb Simon Prize.

Bill Gurley: Venture Capitalist, OpenTable, Zillow, Uber
• All true but overlooking
network effects.
• Prices decline expanding to
rental car market and car
replacement market and
delivery market.
• Oh, BTW, already 3x size in
2009 when Uber started.
• Value: $17 Billion
Source: David Sacks, COO PayPal, CEO Yammer

Platforms Unlock New Value from Spare Resources
and User Generated Content
What Changes :: Supply Chains

AirBnb sells users’ spare rooms, competing
with hotels that must own them
RelayRides sells users’ spare cars,
competing with rental firms that must
own them

Instagram sold for
$1B not because of
contributions from 13
employees but from 30
million users

2005

Platform Shift: How New Business Models Are Changing the Shape of Industry

``In 2015, Uber, the world’s largest
taxi company owns no vehicles,
Facebook the world’s most popular
media owner creates no content,
Alibaba the most valuable retailer
has no inventory, and Airbnb the
world’s largest hotelier owns no
real estate.’’
Tom Goodwin, Sr. VP of Strategy Havas Media

Employees Must See Across the Platform,
which Must Support a Shared Data Layer
What Changes :: Internal Organization

Sony was a virtual
Galapagos of holding
companies

56© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com

1. All teams will expose their data…
2. Teams must communicate
through interfaces.
3. … no other form of interprocess
communication allowed
4. Interfaces, without exception,
must be externalizable.
5. Anyone who doesn’t do this will
be fired.
Bezos Platform Mandate
Source: Yegge Rant

Platforms Open Themselves to Third Party
Contributions
What Changes :: Innovation

A platform is a system that
can be… adapted to
countless needs and
niches that the platform’s
original developers could
not possibly have
contemplated…”
Mark Andreessen: Venture Capitalist, Netscape
Founder, Board HP, eBay© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: marshall@mit.edu :: PlatformEconomics.com
Source: “The 3 kinds of Platform you Meet on the Internet” – Sept 16, 2007.

It’s Working when Users do Something You Didn’t Expect
Hay Carrier
RacecarFlour Mill
Ford Model T

It’s Working when Users do Something You Didn’t Expect
Snowmobile
Goat
Carrier
Sawmill
Mobile
Church

− Open to .com”
Open to developers −
The Rise & Ignominius Fall of MySpace – Business Week 2011
Does Openness Work?

The Rise & Ignominius Fall of MySpace – Business Week 2011
‘‘We tried to create every feature in the world and said,
‘O.K., we can do it, why should we let a third party do it?’ ‘’
says (MySpace cofounder) DeWolfe.
‘’We should have picked 5 to 10 key features that we totally
focused on and let other people innovate on everything
else.’’
Does Openness Work?

Most firms can only concentrate on
most valuable apps
Profits increase when others add
to platform’s Long Tail
You don’t need to
own this
Platforms Get Enormous Value from 3rd Party Developers

 Consider product innovation alone
 Harnessing 3rd party resources,
innovation occurs at a higher
combined rate
 Even if a platform starts behind, its
value overtakes the product leader
 ‘’Permissionless Innovation”
protects information asymmetry.
 Not only does this fill ecosystem
space, hard problems get solved by
multiple attempts.
 Shed costs, keep 30% gains!
Why Platforms Beat Products
Time
ValueAdded

Platforms will Displace Gatekeepers with
Meritocratic Crowds
What Changes :: Industry Bottlenecks

Forget designers, product
buyers, marketers. Threadless
uses crowd to guarantee sales.
Advice from travelers
replaces that of travel
agents

Goal shifts from control, entry barriers, and
differentiation to more valuable market exchanges.
What Changes :: Strategy

1. Goal is a protected market niche,
emphasizing industry barriers
2. Categories are sharp
3. Weapon is cost leadership or
product differentiation
4. Inimitable resources you own
provide sustained advantage
5. Core competence: focus what you
do best
Porter’s Five Forces & Resource Based View

Platform Strategy Differs
1. Goal is transactions volume &
creating customer value. Network
effects provide sustainability

effects provide sustainability.
2. Boundaries can be altered

3. Competition is multi-layered,
more like 3D chess.

Owned / inimitable
resources
Profits increase when others
add to platform’s Long Tail
You don’t need to
own this
3. Competition is multi-layered,
more like 3D chess.
4. Don’t need to own inimitable
resources. Have them join you!

What’s Next?

City as Platform

Energy/Smart Grid as Platform

Education as Platform

Healthcare as Platform

If you believe in the power of people connecting,
then embrace platforms.
If you convert your product/service to a platform,
what would it do, what community would it serve?

THANK YOU
QUESTIONS & DISCUSSION
marshall@mit.edu
Twitter: @InfoEcon
Find research HERE. Find blog posts HERE.

Platform Shift: How New Business Models Are Changing the Shape of Industry

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