Platforms eating your lunch

Brian Arthur’s seminal 1996 article in HBR highlighted the tectonic shift from supply driven economies of scale to demand driven increasing returns, driven by network effects. That perspective, that thought, that insightful postulation underpins the strategic shift in the digital era from pipeline to platform business models.

The inherent scarcity of physical resources results in some or the other constraint in supply as traditional companies’ scale, finally yielding the diminishing return curve. On the other hand, digital resources are infinitely abundant. Hence, they pose no such constraints, finally yielding increasing returns as network effects kick in and result in winner take all markets.

Deloitte published research that sorts companies into four broad categories based on their chief economic activity: asset builders, service providers, technology creators, and network orchestrators. On average, network orchestrators enjoy a market multiplier (based on the relationship between a firm’s market valuation and its price-to-earnings ratio) of 8.2, as compared with 4.8 for technology creators, 2.6 for service providers, and 2.0 for asset builders.

So, the word is out there and clear. Both in market valuations and outcomes. Platform business model are eating traditional pipeline models for lunch.  

At the heart of platforms is a value creating interaction. This interaction needs to be orchestrated for network effects. The keyword here is orchestration. The core value within the interaction is created by the participants of the network and not the owner of the platform. This is a deep shift in role which incumbent enterprises find difficult to deal with. The platform owner only provides the infrastructure and ensures quality of interactions.  The participants are the ones who actually create value using the platform infrastructure.

Having said that, orchestration is no mean feat. Paraphrasing Sangeet Paul Choudary, the platform 

must provide three key capabilities – craft incentives, provide the factory floor, play match maker for both sides of the marketplace. Efficiency of the financial incentive design is critical to ensuring a profitable scale out for platform companies. In today’s clamor for growth, valuation and abundant capital, this efficiency is being neglected. Future proofing this business model demands a balance between growth and efficiency, which is surely going to be the predominant pattern for success in the future. Another indirect incentive is the inherent FOMO that takes root in the participants of both sides of the marketplace. Hence the owner needs to design the platform for this FOMO and virality. The whole art of growth hacking has its roots in the need to drive virality.

New generation of technology is key to executing the platform business model. The factory floor for platform business models is the cloud. Data and advanced AI especially the recent advances in deep learning, underpin the matching capability for platform owners. Digital marketing along with social drives virality and growth hacking. Sensors enable sentience for platforms contributing to more personalised incentives as well as real-time and relevant match making. Mobile is the channel for participation in the platform, to both produce and consume value.

The future is here it is just not evenly distributed. If your pipeline has not been hit by a platform yet, it is only a matter of time. The tipping point for platforms has long been reached. 

Platforms are the new engines of the digital era and technology is its fuel. 

Get on the train before it is too late.