platform shift: how new business models are changing the shape of industry

Barcelona, Spain • October 29-31, 2015

© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

Marshall Van AlstyneBoston University & [email protected]@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 :: [email protected] :: 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 CAPApple 627

Exxon Mobile 385

Microsoft 377Berkshire 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

MKT

CAP

Wei

ghte

d Pl

atfo

rm

Firm

s


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 preferences3. Match to best recipes4. 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 HAPPENSSo Why Now?

It’s more than SMAC

Platforms Draw Value from Communities & Network Effects



Network EffectsValue rises as more people

use the platform

Metcalfe’s Law


How are these Related?

Each Side Attracts More of the Other

eBay BuyersUber RidersXbox GamersAmex CardHoldersAga Khan PatientsYouTube ViewersAirBnb RentersTesla Car DriversMechanical Turk JobsLinkedIn EmployeesAndroid Users

eBay SellersUber Drivers

Xbox DevelopersAmex Merchants

Aga Khan DoctorsYouTube Videographers

AirBnb RoomsTesla Charge Stations

Mechanical Turk Laborers

LinkedIn EmployersAndroid 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


http://ssrn.com/abstract=1496336


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 Produce

rListen

erApple iPod Retailer

$ $ $


Apple Platform

Apple iPod Combined with iTunes

Music Produce

rListen

er 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 Dvpr

PSP

Usr Gam

MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Zune

Usr Mus

MicrosoftSonyNokia

Apple has vastly stronger network effects.


Zune

Usr Mus

Microsoft


Lumia

Usr Dvpr

PSP

Usr Gam

MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

SonyNokia

So what happened?

2007

Today

$30/share

$8/share

2007

Today

$53/share

$22/share


Message for you: A great standalone product is not sufficient.

PolycomSpeakerphone

R1P1 U1 R1P1 U1

CiscoFlip Camera

R1P1 U1

HPCalculator


MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User


MP3

User

Music

Video

TV

Games

Dvpr

Web

HTML

eBooks

Publi

Calls

User

Photo

Usr Upld

FlickrBlkbry

Usr Dvpr

RIMGPS

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

WestinghouseDynamo

1893

Ford Model T1908

Carnegie Steel1905

VanderbiltColossus of (Rail) Roads


Giants of Demand Side Economies of scale

Micro BlogNow

Social NetworksNow

Windows OS1990s-00s

Matched MktsNow

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

https://dl.dropboxusercontent.com/u/5981639/Papers/2-Sided-Networks%20HBR.pdf

For work on antitrust regulation, market power & two-sided platforms

Jean Tirole: Nobel Laureate in Economics 2015© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

Nobel Prize in Economics 2014


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

If markets are independent, collect profits in both.

Pric

e

Quantity

Market One

q1

p1

Pric

e

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.

Pric

e

Market One

Quantityq1

p1

p1

q1

Pric

e

Market Two

Quantityq2

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 BillionAswath 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 BillionSource: 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


``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© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

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 :: [email protected] :: PlatformEconomics.com © 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: 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 :: [email protected] :: 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

GoatCarrier

Sawmill

MobileChurch


− 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

Valu

e Ad

ded

Platforms will Displace Gatekeepers with Meritocratic Crowds

What Changes :: Industry Bottlenecks


Forget designers, product buyers, marketers.

Threadless uses crowd to guarantee sales.© 2015 Parker, Van Alstyne & ChoudaryTwitter: @InfoEcon :: [email protected] :: PlatformEconomics.com

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 sharp3. Weapon is cost leadership or

product differentiation4. Inimitable resources you own

provide sustained advantage5. 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



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

2. Boundaries can be altered




2. Boundaries can be altered3. Competition is multi-

layered, more like 3D chess.



Owned / inimitableresources

Profits increase when others add to platform’s

Long Tail

You don’t need to own this


2. Boundaries can be altered3. 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


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 YOUQUESTIONS & DISCUSSION


[email protected] Twitter: @InfoEcon

Find research HERE. Find blog posts HERE.

http://scholar.google.com/citations?user=zMqwIkIAAAAJ&hl=en

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