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Design and architecture

Designing platforms for network effects and value creation

SANGEET PAUL CHOUDARY


Best-selling author of the books Platform Scale and Platform Revolution
ABOUT THE AUTHOR

SANGEET PAUL CHOUDARY


is the founder of Platformation Labs and the best-selling author of the books Platform Scale and Platform Revolution. He has been ranked
as a leading global thinker for two consecutive years by Thinkers50, ranking among the top 30 emerging thinkers globally in 2016
(Thinkers50 Radar) and ranking among the top 50 thinkers of Indian origin in 2015 (Thinkers50 India).
He is the co-chair of the MIT Platform Strategy Summit at the MIT Media Labs and an Entrepreneur-in-residence at INSEAD Business
School. He is also an empaneled expert on the global advisory council for the World Economic Forum’s initiative on the Digital
Transformation of Industries. His work has been featured as the Spotlight article on Harvard Business Review (April 2016 edition) and the
themed Business Report of the MIT Technology Review (September 2015).
As the founder of Platformation Labs, Sangeet is an advisor to leading executives globally. He is also an empaneled executive educator with
Harvard Business School Publishing, and has advised the leadership of Fortune 500 firms, family-owned conglomerates, and key
government bodies.
He is frequently quoted and published in leading journals and media including the Harvard Business Review, MIT Technology Review, MIT
Sloan Management Review.The Economist, The Wall Street Journal, WIRED Magazine, Forbes, Fortune, and others. Sangeet is a
frequently sought after advisor to CXOs globally on the topic of digital transformation and also serves as a fellow at the Centre for Global
Enterprise in New York.
He is a frequent keynote speaker and has been invited to speak at leading global forums including the World Economic Forum’s Annual
Meeting of the New Champions (Summer Davos), the WEF ASEAN Summit, and the G20 Summit 2014 events. Sangeet has a bachelors in
computer science from IIT Kanpur and a masters in management from IIM Bangalore.

CONTRIBUTING AUTHORS ABOUT PLATFORMATION LABS


Marshall Van Alstyne and Geoffrey Parker Platformation Labs is C-level executive advisory firm and think-tank, focused on the analysis
are contributing authors to the research and implementation of platform business models and network effects towards the digital
published by Platformation Labs, including transformation of industries. Platformation Labs has advised governments, Fortune 100
the books Platform Revolution (co- firms and high growth startups in 40+ countries across the Americas, Europe, Africa and
authors) and Platform Scale. Asia-Pacific. Our thought leadership and intellectual capital are commissioned and licensed
by leading consulting firms globally and have been featured in leading global forums.
THE PLATFORM STACK:
FOR EVERYONE BUILDING
A PLATFORM… AND FOR
EVERYONE ELSE
A unifying framework for digital business models

Sangeet Paul Choudary


In the fall of 2013, Paul Graham rattled out two tweets in quick succession:

This highlights an interesting issue.

Because of what I do, I meet a lot of people who say they’re building platforms. The problem isn’t
that they actually aren’t building one. The problem, often, is that:

Different people mean vastly different things when they use the word ‘platform’.

Within the software development community itself, the discussion on platforms is never ending,
and the jury’s still out on the various terminologies that float right there. We call Android,
Salesforce, Facebook Connect and a host of other things ‘platforms’.
Moving away from the developer community, we talk about Medium and WordPress as blogging platforms.
YouTube, Facebook, and even Instagram are described as platforms. Uber, Airbnb and their ilk are widely
described as ‘marketplaces’, ‘platforms’ or ‘marketplace platforms.’

To make things, even more, complex, the Nest thermostat is called a platform, Nike says it’s building a
platform to connect its shoes and GE claims to be using a platform approach to manage its factories. The
Internet of Things movement repeatedly talks about platforms, but those definitions don’t align with any of
Uber, Medium or Android. And none of these align with each other either.

So what exactly is a platform? Through this essay, I want to propose a unifying framework for thinking through
the concept of platforms.

This is a long analysis, but it’s heavily illustrated. Stay on for the ride!

Let’s start with definitions

Let me try and propose a definition and then validate it through a framework that follows.

Let’s start with the WHY of platforms. Why does a platform exist?

The goal of a platform is to enable interactions between producers and consumers.

HOW does it do that?

It achieves this by

1.Architecting incentives that repeatedly pull these participants to the platform,


2.Providing a central infrastructure on which participants create and exchange value,
3.Matching participants with each other and with content/goods/services created on the platform
So…

WHAT is a platform?
A platform is a plug-and-play business model that allows multiple participants (producers and consumers) to
connect to it, interact with each other and create and exchange value.
So how does this bring together Android, Airbnb, Alibaba, YouTube, Nike and GE? Let’s dive into this
further.

UNPACKING THIS FURTHER

The most important aspect of this definition is to understand the following:

1. Business model, not technology: There’s a lot of talk about ‘platform’, especially in developer circles,
as a technology infrastructure alone. I’m not trying to address that at all. I’m trying to propose a definition
of platforms as we see it in business today. To understand this further, you should also read up on
an earlier essay on pipes vs. platforms.

2. Plug and play: We’re talking about something that external participants can plug and play with.
Producers can ‘plug-in’ and create on top of a platform. When consumers ‘plug’ into a platform, the
platform serves them what is more relevant for them. So developers create apps on top of Android,
writers create articles on top of Medium, hosts create room availability on top of Airbnb, sellers create
goods on top of Etsy, eBay, and Taobao (Alibaba). Consumers plug in and are served what they’re
looking for.

3. Interactions: The core role of the platform business is to enable interactions between the participants
that connect to the platform. Everything that the platform does should encourage these participants to
participate and create and exchange value. The interaction is the fundamental unit of analysis on a
platform. Some platforms may have multiple parties connecting to it and many different types of
interactions. But all platforms will have a core interaction as we discuss here.

The Platform Stack: Let’s define an architectural framework

This is where the fun starts. Let’s revisit the three key roles of the platform business model:

1.Architecting incentives that repeatedly pull these participants to the platform,

2.Providing a central infrastructure on which participants create and exchange value,

3.Matching participants with each other and with content/goods/services created on the platform
Across all platforms, we repeatedly see three layers, as follows:

Network / Marketplace / Community

Technology Infrastructure

Data

Network/Marketplace/Community Layer: Some platforms may have users explicitly connecting with each
other, as in social networks. Some may have users not connecting but exchanging items as in marketplaces.
And some platforms may have an implicit community layer. e.g. If you use the Nest Thermostat or Mint.com,
your usage is benchmarked against others. So you are benefiting from the community implicitly but you don’t
explicitly connect with them.

More importantly, this is also the layer at which the external network of producers creates value. To enable
this value creation, we need the second layer: Infrastructure.

Infrastructure Layer: This is what you ‘build’. Of itself, it has little value unless users and partners create
value on top. External producers build on top of this infrastructure. On Android, developers build apps. On
YouTube, video creators host videos. On eBay, sellers build/host product availability. In some cases, the
infrastructure layer may be very dominant, e.g. development platforms like Android. In other cases, the
infrastructure layer may be much thinner e.g. Instagram. The infrastructure layer essentially provides the
infrastructure on top of which value can be created.

However, with a lot of value creation comes the problem of abundance. Relevance dips. If YouTube has too
many videos, how do you find the best ones? This brings us to the third layer: Data.
Data Layer: The final layer is the data layer. Every platform uses data in some way. But in some cases, the
data layer may play a more dominant role than in others. In most cases, data serves to provide relevance,
matching the most relevant content/goods/services with the right users. In other cases, the value may
exclusively lie in the data layer. The Nest Thermostat example, as we will revisit below, is what one would
think of as a data-intensive platform, where the value is entirely in the data being aggregated with a
minimal.

The reason I propose the Platform Stack is to highlight that we’re increasingly not talking
about different families of platforms. It’s not one vs. the other. Development platforms are
building out marketplaces. Marketplaces are opening up APIs for platform extension. We
are talking about different configurations of one stack.

Platform Configurations
Let’s play around with some of these configurations for a bit. As we mentioned, all platforms have all 3
layers but the degrees to which each dominates may vary.

To start with, let’s lay out the 3 basic configurations. These are merely for illustration. To understand
specific platforms, it may help to tweak these around a bit.

BASIC CONFIG 1: THE MARKETPLACE/COMMUNITY PLATFORM

When we think of Airbnb, Uber, all those sharing economy platforms, we’re looking at a configuration that is
heavy on the marketplace/community layer. The key source of value is the network. Online communities
like Reddit also fall into this category.
Network / Marketplace / Community

Technology Infrastructure

Data

One would naturally argue that all parts play a role. Data is important too. In some cases, infrastructure plays
a role along with the community. And that is precisely the point. The idea of using this stack is to illustrate that
we’re not talking about one vs. the other. Every platform will have its unique configuration.

Having said that, there are examples of Craigslist or discussion forums that are pure marketplaces or
communities with almost no infrastructure play and not leveraging data at all. They still exhibit many of the
platform dynamics that an Airbnb and Facebook demonstrate but they lie at an extreme end, almost perfectly
demonstrated by the stack above.

BASIC CONFIG 2: THE INFRASTRUCTURE PLATFORM


This is the basic configuration we would associate with a development platform like Android, which provides
the infrastructure on top of which apps may be created. Of course, a key chunk of the value is in the
marketplace created on top: the Play store. (We’ll explore that configuration in a minute) But the infrastructure
is clearly important. Almost all traditional views of development platforms focus entirely on the infrastructure
layer.

WordPress is a platform that provides the infrastructure exclusively and doesn’t provide network benefits or
any value through data. Medium, as we shall soon see, has a different configuration.
Network / Marketplace / Community

Technology Infrastructure

Data

Let’s move to the third configuration.

BASIC CONFIG 3: THE DATA PLATFORM


The third – and often, least evident – basic configuration is the one where data dominates. Data plays a role
with every platform. Facebook uses data to fashion your news feed; Airbnb uses data to show you relevant
accommodation. But in certain cases, the data itself is the key value created on the platform. We discuss
those platforms here.

Network / Marketplace / Community

Technology Infrastructure

Data
This brings us to a whole family of platforms that often don’t look like platforms:

Wearables: Nike’s shoes and fuelband constantly create data, and the underlying platform integrates the user
experience across the shoe, the wearable and the mobile apps. Jawbone – and most wearables for that matter
– create value through the data platform. The wearable acts as the producer of data. The platform provides
value back to the user but also pools the data from many users to create network-level insights.

Nest Thermostat and the Internet of Things: When we talk about the internet of things, we are obsessed with
the ‘thing’ rather than with the ‘internet’. Nest Thermostat, as an example, uses a platform approach to make
sense of all the data being produced by the thermostat. Aggregating all the data from a city’s thermostats, it
provides analytics and other services to the city’s utilities board. This is made possible because of the data
platform.

Industrial Internet: GE’s theme of the industrial internet is another example of data platforms. Machines,
enabled with sensors, constantly stream activity data into a platform that helps each machine learn from other
machines and provides network-wide intelligence.

Enterprise 2.0: Andy McAfee talks about the rise of social software in the enterprise and how it’s replacing
traditional enterprise systems. All of this needs an underlying data platform to make sense of the many
workflows and many knowledge exchanges within an organization.

Omnichannel Customer Journeys: Retailers like Burberry and Target use an underlying data platform to unify
customer journeys across the store and other remote touchpoints. Actions that a user takes on an app lead to a
change in the in-store experience and vice versa. This is possible because an underlying data platform
manages the users’ interactions with the store. Over time, this data can be used to actually create explicit
communities by connecting users with similar shopping behavior in the same area with each other.

Data platforms like the above are a unique category where the platform works like a pool into which, different
sources bring in data and from which, different participants derive value.
Let’s make this more interesting
To do that, let’s leave the world of data platforms behind and revisit the Platform Stack:

Network / Marketplace
/ Community

Technology Infrastructure

Data

Let’s illustrate this with a few case studies.

AIRBNB VS. CRAIGSLIST

Let’s visualize the competition between Craigslist and Airbnb using this stack.

Network / Marketplace
Network / Marketplace / Community
/ Community
Network / Marketplace
/ Community
Technology Infrastructure Technology Infrastructure

Technology Infrastructure
Data
Data

Craigslist Early Airbnb Airbnb today


In a well-known move, Airbnb disrupted Craigslist and created a whole new playbook for platform competition.
(Access the playbook here.)

If we use the Platform Stack to stack up Craigslist, we see immense network effects because of a strong
network/marketplace. However, Craigslist does very little on infrastructure (no handling of payments, no
facilitation mechanisms like trust, etc.).

Airbnb started out with poor network effects, but better use of data and a more robust infrastructure to enable
interactions between hosts and guests. Over time, it has built out arguably much stronger network effects within
the travel/accommodation vertical and has a treasure trove of data which powers the business model.

YOUTUBE VS. VIMEO

Network / Marketplace Network / Marketplace


/ Community / Community

Technology Infrastructure Technology Infrastructure

Data Data

Youtube Vimeo
In it’s early days, YouTube’s hosting and bandwidth infrastructure coupled with its
flash-based in-browser, embeddable player formed a compelling value proposition for
content creators. As YouTube gained traction, the focus of the platform moved from
improving video hosting (technology/infrastructure layer) to improving match-making
of videos with consumers (data layer) and increasing viewer engagement (network
layer). Vimeo decided, instead, to focus its platform on the content creators and
provide them with superior video infrastructure (HD player, a netter embeddable
player for bloggers). This has helped the two co-exist despite YouTube’s dominance.

MS WINDOWS (FOR COMPUTERS) VS. ANDROID + PLAY STORE

Network / Marketplace
/ Community

Network / Marketplace
/ Community
Technology Infrastructure

Technology Infrastructure

Data

Android
MS Windows
+ Play Store
Development platforms, by default, have a strong infrastructure layer. But ever since Apple launched the app
store, they’ve come bundled with a strong marketplace layer as well.

Microsoft beat Apple with a more open platform for developers to create apps on. Arguably, through developer
ecosystem management, Microsoft did invest in nurturing the ecosystem. But it was nowhere near as structured
as the Android – Play Store combination. Ever since Apple’s and Android’s app stores, the idea of combining
app stores with development platforms has gained a lot of traction among existing and emerging platforms.

MEDIUM VS. WORDPRESS

Network / Marketplace
/ Community

Technology Infrastructure Technology Infrastructure

Data

Wordpress Medium
Much like the earlier example, WordPress only provided a technology infrastructure for writers to create
blog posts on. Medium is WordPress on steroids and more. It keeps the technology infrastructure simple:
easier plug-and-play. But it also leverages data to better help content discover its market. It also allows a
community to form on top of Medium and allows writers and curators to build a following. In doing this,
Medium has built a much more comprehensive platform stack than any blogging platform before it.

FACEBOOK VS. MYSPACE

Network / Marketplace / Network / Marketplace


Community / Community

Technology Infrastructure Technology Infrastructure

Data Data

Myspace Facebook
Myspace and Facebook are two social networks with vastly different platform stacks. Facebook’s largest draw,
arguably, is the News Feed. By focusing on using data better and engaging the community in a much more
stronger way, Facebook built out an entirely different business even though the two may appear similar on the
face of it. When Myspace started feeling the heat from Facebook, it tried to respond with many feature and
functionality changes that mimicked Facebook’s infrastructure but couldn’t quite get to building out the rest of
the stack quite as effectively. Facebook has done much to strengthen the data layer in creating the Social
Graph and the Open Graph. Most social networks of “The Myspace Era” were largely focused on the community
and building network effects through connecting people. Facebook, instead, through Connect, has ended up
creating a social data layer for the web.

MINT VS. QUICKEN

Network / Marketplace
/ Community

Technology Infrastructure
Technology Infrastructure

Data

Mint Quicken
Quicken isn’t really a platform, but the Quicken vs. Mint illustration using the Platform Stack is a good
illustration to show platform business models beating software product based business models. Quicken
provides users with the infrastructure to manage finances. In its initial days, Mint did the same but provided
it for free. This allowed Mint to gain traction through a superior product. Moving forward, Mint expanded to
fill out the rest of the Platform Stack. It creates an implicit network of consumers who benefit from social
analytics that benchmarks their spending habits vis-a-vis peers. It also creates a marketplace that allows
financial institutions to sell their offerings to these consumers. All of this is powered through a constant
stream of data coming in from consumer accounts connected to Mint.

INSTAGRAM VS. HIPSTAMATIC

Network / Marketplace
/ Community
Network / Marketplace
/ Community
Technology Infrastructure Technology Infrastructure
Technology Infrastructure

Data

Hipstamatic Early Instagram Instagram today


Hipstamatic and Instagram are deceptively similar. Both allow you to take photos and put on cool filters. But
here’s the difference. Hipstamatic simply provided the technology to take cool photos using filters. As a result,
Hipstamatic based its revenue model on charging for the app and premium filters. On the other hand, even in its
early days, Instagram focused on the network through its Facebook integration and, over time, built out the
entire platform stack. The core value provided by Instagram – and the reason it succeeded despite a late start –
was not the filters, it was the network and community for sharing pictures. Ironically, one of the most popular
hashtags on Instagram was #hipstamatic, indicating that while the pictures were taken using Hipstamatic, they
were being shared on Instagram.

FLICKR VS. FACEBOOK PHOTOS

Network / Marketplace Network / Marketplace


/ Community / Community

Technology Infrastructure Technology Infrastructure

Data Data

Flickr Facebook Photos


Despite Flickr’s earlier start, Facebook hosts the largest number of photos online today. Flickr still attracts
those who want to use it for its storage infrastructure. Facebook, in contrast, is used to generate
conversations around photos which it effectively does through a superior community and data layer.

LINKEDIN VS. MONSTER

Network / Marketplace Network / Marketplace


/ Community / Community

Technology Infrastructure
Technology Infrastructure

Data
Data

Monster Linkedin
Monster would have never seen LinkedIn as a potential competitor. It was too busy focusing on other job
portals. Job portals utilized basic data to help users find jobs and recruiters find resumes. LinkedIn uses more
holistic data on the user to match them with jobs. By building out a network of professionals, it helps activate
even passive job seekers who wouldn’t visit job portals. LinkedIn has, effectively, eaten Monster by building out
an entirely different stack.

Bringing it together
The Platform Stack is a tool for us to think through platforms and plan them. Irrespective of what you’re building,
the stack helps to figure which layers you differentiate yourself in and how. It helps understand the key strengths
of businesses that are already out there in the market. Without getting lost in the quagmire of features and
functionalities, the stack helps us understand the key drivers of value and helps us benchmark ourselves on
those parameters against competition and substitutes.
APIS AND PLATFORMS: HOW INTERFACES AND
ACCESS ENABLE THE NETWORKED ECONOMY
The theory of everything APIs and Platforms

Sangeet Paul Choudary


Manfred Sortenschlager is an API Market Development Director at 3Scale Technologies.

Much has been written about the benefits of platforms as a basis for building successful and scalable
businesses. Great examples of organizations that successfully deployed platforms include Amazon,
Microsoft, Intel, Google, eBay, Flickr, Airbnb, and Spotify.

The word “platform” is often used in a variety of situations. In an earlier article The Platform Stack, I
had elaborated on different platform configurations using the platform stack as a design framework.
Platforms have three distinct layers: Network, Technology Infrastructure, and Data, as shown in Figure.

Network / Marketplace / Community

Technology Infrastructure

Data

Figure 1: Platform Stack (for details refer to The Platform Stack)


This article will analyze the inner workings of a platform that enable the extension of the technology
infrastructure and the flow of data, as well as the development of a network on top of the technology
infrastructure.

We cover two perspectives:


An internal perspective for building platforms to ensure all necessary segments will work together, and
An external perspective for making platforms accessible and usable.
The common denominator for both perspectives is the design quality and choice of interfaces that enable
access to the infrastructure and flow of data into, through, and out of the platform.
To download this article as an ebook, click here now:

THE PLATFORM: EXTERNAL PERSPECTIVE

Marc Andreessen has stated that the key characteristic of a platform is that it “can be programmed.” Because
of that, it can be “customized by outside developers—users—and in that way, adapted to countless needs and
niches that the platform’s original developers could not have possibly contemplated.”

The generic nature of a platform leads to its most powerful aspect: the potential for a mul-
titude of new use cases built on top of the platform, or mashed-up with other platforms. Think of it as LEGOs
on steroids, where the blocks are not only able to connect and build on top of each other but can also talk to
each other and benefit from each other.

To achieve this goal of extendibility, platforms need to be accessed via some form of technical interface
referred to as application programming interfaces (APIs), as also described in Marc Andreessen’s article. The
better these APIs are designed and documented, the more effectively the platform infrastructure can be
accessed and leveraged. This argument aligns with the external perspective mentioned above.

An API is an interface. The abstract concept of “interface” is defined in Communication


Theory as “a point of interaction between a number of systems.” An integral part of Systems Theory, this
concept is used for describing or modeling any type or form of system. The idea of using interfaces—or APIs in
our concrete case—it not just useful for accessing the platform from an external perspective, but also for
designing a platform from an internal perspective.
THE PLATFORM: INTERNAL PERSPECTIVE
A platform, internally, may be viewed as a composition of multiple complex systems.This is especially
true when we consider platforms built across large organizations that facilitate workflows across their
resources and harmonize access to these organizational resources (data or services). If an
organization is built from scratch—say, a new venture or startup—with aplatform business model in
mind, it becomes easier to set up the company around the platform business model. We call this the
platform-first design approach. Gall’s Law would encourage going this route whenever possible:

A complex system that works is invariably found to have evolved from a simple system that worked. A
complex system designed from scratch never works and cannot be patched up to make it work. You
have to start over with a working simple system.

Because of this, it is much more challenging to build a platform within the constraints of an existing
organization’s legacy systems. But therein lies the challenge for many large enterprises looking to
transition to a platform-based business model today.

However, several existing academic theories can help us create a design for these companies. Herbert
Simon’s theory of Decomposability suggests that complex systems can be simplified by breaking them
up into smaller discrete pieces with clearly defined interfaces for interaction. Baldwin and Clark go a
step further, and argue that three principles need to be followed to make a decomposed complex
system work:

1.An explicit architecture design needs to specify the various sub-systems and their function.
2.A definition of interfaces that describe how the sub-systems interact with each other.
3.A set of standards to lay out the ground rules for the overall system.

By following these three principles, complex systems can be aligned with well-designed platforms. The
technical interfaces act like glue and allow the various platform-internal sub-systems to communicate
with each other.

Built with APIs, they are crucial for programmable platforms, not only for access (the external
perspective) but also for building platforms (the internal perspective). To create a best practice
platform-first approach, we recommend an API-centered focus for building the technology infrastructure
for the platform. API-centered means that the interfaces are in focus and are designed first, the rest
follows from it. Figure 2 below illustrates the two uses of APIs in platform businesses.
Any platform
– external party

API

Platform

API

API
Sub-System 1 Sub-System 2

API

Sub-System n

Figure 2: Internal and external perspective of using APIs in platforms

HOW CAN THE BENEFITS OF PLATFORMS BE REAPED?


There are multiple perspectives that need to be considered while laying out a platform
infrastructure’s relationship to external stakeholders.
1. The private scope refers to the use of a platform-based integration approach within the boundaries
of an organization. An organization’s different business units may still need to use these interfaces
to access the platform infrastructure, as well as stakeholders external to the platform. When we
refer to the external perspective, we mean external to the platform, which can still be internal to the
organization. Amazon serves as a great example of this. At some point, Amazon decided that every
internal service had to be represented by an API, which created an internal platform infrastructure.
Every business unit communicated with each other via these internal platforms. These platforms
created a network of business units that were always plugged-in and working with each other,
integrated through the flow of data and information.

2. The curated partner scope refers to APIs that are open beyond the organization but only to
selected, curated partners.

3. The open access scope refers to public APIs that can be accessed by anyone. These are typically
self-serve and open to external developer communities to plug and play with.

The obvious difference between these scopes is one of access. Irrespective of the scope, five typical
use cases for platforms, made accessible via APIs emerge:

1. Enabling mobile channels


2. Growing an ecosystem
3. Increasing reach
4. Powering new business models
5. Driving innovation

For more detailed background regarding these use cases, please refer to the ebook
“Winning in the API Economy.

PLATFORM ECONOMICS: THE NETWORK LAYER


All five use cases are enabled via underlying platform infrastructures. These use cases can
leverage platform economics, which enable platform-based business models. This can be seen in the
network layer of the Platform Stack.
Network / Marketplace / Community

Technology Infrastructure

Data

Figure 3: Platform Stack with focus on Network layer

Side 1 - Market Side 2 - Market


Price Price

P P
1 1
Quantity Quantity
Q1 Q1

Platform

Figure 4: Interdependence between platform markets


The graph on the left-hand side represents the market of side 1. The graph displays the price vertically
and the quantity horizontally, with a resulting demand curve. The price is set to P1 which, based on the
demand curve, impacts a certain quantity Q1. Because side 1 and side 2 markets are connected via
the platform, the price/quantity combination in the side 1 market has an effect in the price/quantity
combination of the side 2 market.

The next illustration shows what happens when something in this constellation changes.

Side 1 - Market Side 2 - Market


Price Price
P1  P2  (free)

P P
1 1
Quantity Quantity
Q1 Q1

Platform

Figure 5: Effects of platform market changes


In this example, we assume that the platform provider decides to lower the price in the side 1 market from P1 to
P2—or even make it free, as in the Google Search example. P2 in side 1 would result in a much higher quantity
Q2. Again because both markets are interdependent, which would result in a change in the side 2 market.
Because of the higher demand in side 1 there will be more demand in the side 2 market, which means an
outward shift of the demand curve. This outward shift also means a higher quantity Q2 in the side 2 market and
potentially a higher price P2. Both combined mean a higher revenue in the side 2 market indicated by the red
rectangle in the above illustration. These interdependencies of side 1 and 2 markets go both ways. If, for
example, a platform provider changes price or quantity in the side 2 market, perhaps via special promotions or
price reductions, this will have a knock-on effect on the side 1 market.

More details about the market dynamics of platform-mediated markets are explored in the blogPlatform Thinking.
The mechanism by which different platforms create value is also explained in detail in this article explaining the
Platform Stack. The ideas were also discussed at theAPIDays conference in Paris.

BUILDING PLATFORMS: TAKE-AWAYS


The benefits of platforms—adaptability to countless needs and niches—are clear, the challenge lies in building
them. When building or re-designing organizations or units, we recommend the interaction-first approach that is
discussed often in the Platform Thinking blog. In order to implement the technical infrastructure for a platform,
we recommend an API-centered approach. Focus on the design of the technical interfaces first—everything else
follows from that.

As outlined in this article, we see the interfaces (APIs) as the unseen enablers of platforms. APIs serve platforms
externally by allowing managed and controlled access.Internally, APIs can be used to connect services or
applications and control access to data or services resulting in an extremely clear and clean system architecture.
If API centered design is not possible due to the need for the integration of many legacy systems, we
recommend that organizations follow the three principles proposed by Baldwin and Clark: architecture,
interfaces, and standards. To have control and visibility into an API’s usage, and behavior—internally as well as
externally—API Management solutions may be deployed.

Building businesses on platforms can be tremendously effective. The unseen enablers of platforms are APIs.
These technical interfaces standardize access to an organization’s assets (data and services). APIs lead to a
liberation of access to data and services.In the coming years, every organization will need to have an API
strategy and allow access to assets via APIs, just like every organization has a website strategy today to allow
access to its information.
WHAT THE UBER-LYFT WAR
TEACHES US ABOUT BUILDING
THE NEXT UBER FOR X
Interaction failure and multihoming costs will determine winners in the war for the
next big platform

Sangeet Paul Choudary


Note: Special thanks to Griffin Anderson.

The on-demand economy is bringing together technology and freelance workers, to deliver us services
in exciting new ways. We are increasingly using our cell phones as a remote control for the real
world. In the past, you could sit on a sofa and flip through TV channels. Today, you can click on a
button and request a taxi, get your home cleaned, or order a bite to eat.

Every week, we see a new platform come up that connects consumers with freelance labor. New
companies are forming in almost every service vertical.

• Transportation: Uber, Lyft


• Home Cleaning & Handyman: HomeJoy, TaskRabbit, Handy
• Food Delivery: Postmates, DoorDash, Spoonrocket, Instacart
• Dry Cleaning & Laundry: Washio
• Shipping: Shyp
• Hotel: HotelTonight

All of the above on-demand experiences are delivered by platforms connecting consumers with
freelance labor or spare service capacity.

Success in the On-demand economy


There are two critical factors that will determine the success of a company in the on-demand economy:
multihoming costs and interaction failure.

MULTIHOMING COSTS
In computer networking parlance, multihoming refers to a computer or device connected to more than
one computer network. In the world of platforms, this notion is an important one. If your producers
and/or consumers can co-exist on multiple platforms, you face a constant competitive threat. Eventually,
it may be difficult for clear winners to easily emerge.

Multihoming costs are relatively high for developers to co-develop for both Android and iOS.
Multihoming costs are high for consumers also because of the cost of mobile phones. Most consumers
will own only one. However, multihoming costs for drivers to co-exist on Uber and Lyft are relatively low.
Most drivers participate on both platforms. Given the ease of booking rides, multihoming costs are very
low on the consumer side as well.
In a previous article on TechCrunch, I had elaborated in detail how multihoming could be prevented by creating
long-term stored value within the platform.

For on-demand platforms, this is important because multihoming allows producers (service providers) to co-
exist on multiple platforms. With a limited supply of service providers available, this can lead to interaction
failure.

INTERACTION FAILURE
Interaction failure happens when the producer or consumer (or both) participate(s) in an interaction, without
the interaction reaching its logical, desired conclusion. Imagine a merchant setting up a listing on eBay that
never gets any traction, or a video enthusiast uploading a video on YouTube that fails to get a minimum
number of views. Quite often, these outcomes could be the result of poor quality listings or videos, but they
could also be owing to the platform’s inability to find the right matches. Producers and consumers who
experience interaction failure get discouraged from participating further and abandon the platform.

If reverse network effects set in, this can eventually lead to an implosion of a platform. In the initial days,
interaction failure regularly leads to the chicken and egg problem. To understand these phenomena better and
how they could impact your platform, I’d recommend this post on reverse network effects and this one on the
chicken and egg problem.

Bringing it together – The Uber-Lyft war


Interaction failure is especially important for on-demand platforms. Imagine a consumer requesting for a
service and the service never arriving. Imagine, in turn, a producer receiving a request, preparing to fulfill that
request, only to find that the request gets canceled. In both cases, the consumer or the producer may decide
to abandon the platform.

This is exactly what Uber had in mind when it waged its war on Lyft. Unethical as that was, I’d like to focus on
that to glean lessons for building the next Uber for X.
In some of the largest cities we see drivers drive for both Uber and Lyft, and other competitors. It’s not
uncommon for these drivers to switch between the two platforms multiple times a day. With a limited
supply of drivers in a city and the cost for a driver to connect to an additional platform so small, we see
drivers multihoming on both Uber and Lyft. This has naturally led to intense competition between the
two companies and Uber infamously resorted to a playbook to create interaction failure on Lyft using
questionable tactics.

Uber decided to target interaction failure on Lyft, by contracting third party employees to use disposable
phones to hail Lyft taxies. Before the Lyft taxi arrived at its pickup location, the Uber-contracted
employee would cancel the ride. With so many cancelations on the Lyft platform, drivers would become
frustrated driving for Lyft and, in some cases, switch over to Uber. Lower drivers would lead to further
frustration for consumers as they would have to wait longer for their requests for cabs to be fulfilled,
eventually spurring them to abandon the platform. This loop is illustrated below.

More requests
cancelled
Higher Driver
Abandonment

Fewer ride Longer waiting


requests times for travelers

Higher Traveler
Abandonment
When multihoming costs are low, producers and consumers will connect to many platforms. With multiple
platforms sharing the same producers and consumers, it is difficult for a business to build defensible networks.
Thus, it is difficult for a clear winner to emerge in the market. With many platforms operating and defensibility
low, interaction failure becomes a key factor in determining long-term winners.

What does this mean for you?


If you’re building the Uber for X, you need to ensure that you’re tracking a metric that helps you determine the
degree of interaction failure on your platform. Freelancers that don’t get business within X days, requests that
don’t get satisfied within Y minutes, may all be indicative of interaction failure. The exact measure of
interaction failure will vary by platform, and the importance of tracking interaction failure will, in turn, depend on
the multihoming costs.

Tweetable Takeaways
If you’re building the Uber for X, focus on the interaction failure metric.
Building the Uber for X? Multihoming could destroy your startup.
This is the science behind why Uber sabotaged Lyft.
HOW STARTUPS COMPETE
WITH FRICTION IN PRODUCT
$
DESIGN
Can making product usage difficult for users actually be a good
idea? In some cases, yes!

Sangeet Paul Choudary


Startups need Traction. A startup which doesn’t get discovered doesn’t go anywhere. This is all the
more critical for platform businesses which rely on their users to create value and network effects. In the
specific case of platform businesses, Traction dictates the value that is created. A social network
without enough users or a marketplace without enough activity isn’t going anywhere. Traction
essentially refers to the additional value that is created on these businesses by the users using it, value
created through interactions between users.

Often, one of the core principles of building for Traction is removing Friction from the product
experience. Friction comes in the way of users using the product and, hence, in the way of value
creation. Friction may result from anything that acts as a barrier to a user for using the product. Friction
may be created by design (e.g. users are curated before they get access) or by accident (e.g. poor
product navigability).

Traction and Friction don’t go well together. We’re living in an age where frictionless is increasingly
synonymous with desirable design.

But Friction continues to have an important place in the world of platform businesses. Getting Friction
right is critical to the success of an internet startup. Through this essay, I’d like to explore some of the
top design considerations while building for friction.

As with all design considerations, the ultimate goal of a platform startup (marketplace, community,
social network, UGC platform etc.) is to facilitate interactions.

Hence, as a rule of thumb:

Friction is a good thing if it facilitates the interaction instead of coming in the way of it.
Let’s dig further!
The Traction-Friction Matrix
This is pretty much how the traction-friction trade-off works out:

High
OPEN VENTURE
HOUSE SCALE

TRACTION

TRACTION COUNTRY
Low

HELL CLUB

Low High

FRICTION

High Friction-Low Traction: There are two reasons your startup may be in this quadrant:
by design or by accident. You’re either curating who gets access or you’re suffering from
really bad design.

Low Friction-High Traction: Again, a startup hits this quadrant for one of two reasons:
frictionless experiences by design or lack of checks and balances.
High Friction-High Traction: This is a great place to be and ultimately successful startups migrate to this
quadrant after starting off in one of the quadrants above.

Low Friction-Low Traction: This is clearly the worst quadrant to get stuck in for too long.

Movements in the Matrix


1. Pivoting around Friction:

High
OPEN VENTURE
HOUSE SCALE
TRACTION

TRACTION COUNTRY
Low

HELL CLUB

Low High

FRICTION
2. Avoiding friction altogether: CraigsList pretty much allows anyone to do anything, except for a few
categories that it polices and a few categories where listing are paid.

High
OPEN VENTURE
HOUSE SCALE
TRACTION

TRACTION COUNTRY
Low

HELL CLUB

Low High

FRICTION
3. Embracing friction with scale: Quora has been increasing friction as it scales. Anyone could ask a
question in the early days but asking a question now requires the user to pay forward in points.

High
OPEN VENTURE
HOUSE SCALE

TRACTION

TRACTION COUNTRY
Low

HELL CLUB

Low High

FRICTION
4. Relaxation of norms: App.net started off with high friction with a $50 subscription fee. However, it has
gradually reduced friction to allow for traction.

High
OPEN VENTURE
HOUSE SCALE

TRACTION

TRACTION COUNTRY
Low

HELL CLUB

Low High

FRICTION
5. Scaling the country club: Several invite-only platforms have successfully scaled with this model.

High
OPEN VENTURE
HOUSE SCALE

TRACTION

TRACTION COUNTRY
Low
HELL CLUB

Low High

FRICTION
Design Considerations for Friction
As mentioned earlier, Friction, like every other design consideration, should lead to smoother and better
interactions between users on the platform. With that as a guiding principle, let’s look at a few case studies
where Friction works well.

Interestingly, two platforms in the same vertical and category often compete and co-exist by being in two
different boxes in this matrix, as the examples below demonstrate.

FRICTION AS A SOURCE OF QUALITY


Some platforms risk losing activity (interactions) when there is a lot of noise on the platform. Women tend to
avoid dating websites which attract stalkers and men with poor online etiquette. Clearly, noise leads to lower
probability of interactions.

Some dating websites invest in incentivizing women to join the network. An alternate model is to increase
friction on the other side and curate the men that get access to the network. Sites like CupidCurated have
taken this approach as a way to differentiate themselves from existing dating sites which relied on
incentivizing women.

High Friction-Low Traction: CupidCurated

Low Friction-High Traction: Match.com

FRICTION TO CREATE TRUST


Some interactions may require a minimum guarantee and an environment of trust. Hiring a babysitter is
different from asking a question online. False positives can cause much greater damage in the former case.
In such scenarios, Friction in the form of curation of babysitters provides a critical source of value. In
contrast, the Friction-less Craigslist is hardly the destination for finding babysitters online.
High Friction-Low Traction: SitterCity
Low Friction-High Traction: Craigslist
FRICTION AS SIGNAL
In both examples above, Friction not only controls who gets access to the platform, it also creates some
form of signal about those getting access. Curation of babysitters yields exact parameters which would
be used by parents for making a decision. Hence, Friction also helps with signaling.

Interestingly, financial markets work with signaling too. VCs, in private markets, are responsible for due
diligence and determining whether a startup is worth investing in.

Crowdfunding tries to disrupt venture capital but most current models (like Kickstarter) merely unlock
new sources of funds, they don’t necessarily provide the expertise curation and signaling that a VC fund
would. Startups like RockThePost are working on the Country Club model and allowing only heavily
curated startups to raise money through their platform. In this way, the platform is placing a bet on the
fact that signaling and curation need to be part of the platform, to credibly provide an alternative to
venture funds.

High Friction-Low Traction: RockThePost

Low Friction-High Traction: KickStarter

FRICTION ON ONE OR BOTH ROLES


Most platforms support two distinct roles: consumers and producers. In all the examples above, Friction
was being applied to only one side. This is the model used in most cases. However, where there
is high overlap between the two roles i.e. the same user produces as well as consumes, Friction can be
applied to both roles. Quibb is an example of a network that applies Friction across the board. It works
for Quibb because users want to be part of an exclusive community, to benefit from superior quality
interactions. But more often than not, applying Friction on both sides comes in the way of creation of
network effects, as demonstrated in the next example.

High Friction-Low Traction: Quibb

Low Friction-High Traction: Reddit


FRICTION AS A BARRIER
For all the hype and fanfare surrounding App.net’s launch, the platform has never quite lived up to its initial
stand of providing an alternative to Twitter. There were two design considerations that were fundamentally
flawed in this case:

1) Applying Friction to both producer and consumer roles. The core value of Twitter is the ability to build a
following. By restricting who could access App.net, the platform limited its ability to deliver that value to
producers.

2) More importantly, the source of Friction did not guarantee any form of quality, trust or signal. Friction was
created by charging an access fee. That didn’t help make interactions on the platform better in any way. If
any thing, it just came in the way of these interactions. App.net realized it wasn’t getting anywhere and
subsequently brought down the access fee, through a series of revisions, by 90%.

High Friction-Low Traction: App.net

Low Friction-High Traction: Twitter

In summary, the following is a non-exhaustive list of design questions to consider while introducing Friction
onto a platform.

A. Do you add Friction to one side or both sides?

B. What criteria are used to create Friction? Does it improve quality and add value?

C. Does Friction lead to higher likelihood of interactions?

D. Is the interaction high-value or high-risk? In other words, how important is trust, signal or quality as a
source of value?
THE SECRET TO SCALING
$
SOCIAL NETWORKS AND
LOCAL MARKETPLACES
Why some social networks scale and others don’t.

Sangeet Paul Choudary


We often associate social networks with hyper-growth, a perception largely fostered by growth
infographics of Facebook, Twitter and Pinterest that get shared all around. But not all social networks
scale that easily.

There are three patterns that I often see across the growth of most social networks (and most platform
business models, for that matter). I’ve talked at length about this in earlier posts, but here’s a quick
recap:

First, most social networks start with a chicken and egg problem at launch. Since users create value,
there is no value when there are no users on board, which in turn makes the social network unattractive
for the first few users to sign up. You cannot just growth-hack your way out of chicken and egg
problems. They are solved through careful incentive design and seeding of initial value. So chicken and
egg problems are immensely difficult to overcome.

Secondly, social networks scale when users bring in other users. Without organic virality, it is very
difficult for social networks to scale.

Finally, most networked startups start out by targeting a specific market. They do not start out by
targeting the whole world. Facebook started with Harvard, Groupon started with Chicago and Quora
started with the tech community in the Valley.

The Unscalable Social Network


While Facebook, Twitter and Pinterest have great growth curves to show off, many social networks fail to
scale at that rate. There are certain characteristics that structurally prevent such networks from scaling
at that rate, irrespective of the quality of execution. Typically, such networks have one or more of the
following characteristics:

1) They need to solve the chicken and egg problem multiple times, not just once

2) There is a cap to organic virality i.e. users cannot bring in more than a certain number of other users

3) There is very low overlap between markets and hence, a low probability of easily expanding from one
to the other
These three characteristics create conditions that are unfavorable to scalability.

These three characteristics usually occur when a network tends to get concentrated into clusters of user nodes.

Some networks actually allow cluster formation by design. Let’s look at a few examples.

Path – The anti-viral network

Path is a network that mirrors very strong offline family ties. Every family constitutes a network cluster, and
Path is made of many such network clusters. Let’s define a network cluster as a subset of the network where
users tend to cluster together because of a shared characteristic. In the case of path, it’s family ties and every
user is part of a particular network cluster. In contrast, users on Facebook are part of multiple such network
clusters. Path, being about family, has every user as part of only those network cluster(s) that represent her
family.

If one were to visualize these networks, Path would likely have multiple network clusters which are
unconnected to each other, since these would be different family groups with no common relationship.
Facebook, in contrast, would have links between different network clusters (say your college network and your
work relationships network).

Facebook benefited from high virality because a user gets greater value out of the network by getting all her
friends on board. In contrast, Path structurally requires users to invite only family members. The use case itself
imposes a natural cap on virality.
Nextdoor – Solving thousands of chicken and egg problems
Nextdoor is another example of a social network that has multiple network clusters within. Nextdoor is a
social network for the neighborhood, and each neighborhood is a network cluster. Since users are
unlikely to be part of multiple neighborhoods, these network clusters aren’t connected with each other.
Every neighborhood is insular and siloed.

Nextdoor faces a unique problem. Since every neighborhood is an independent network cluster, every
such network needs to be seeded from scratch. Members in neighborhood A do not have a natural
incentive to invite members in an unconnected neighborhood B, even though they may be friends
otherwise.

Yes, some word of mouth does help to get new network clusters started, but Nextdoor has a unique
problem. Network clusters in Path (i.e. the family) are so close-knit that there isn’t much of a chicken and
egg problem there once you get two users from a particular family in. Nextdoor needs a larger number of
active users for users in a neighborhood to find value. Hence, it faces some form of a chicken and egg
problem every time it spreads to a new neighborhood. The problem is likely to become easier as it
achieves created penetration in a particular city but it still does exist.

City Networks – When spillovers don’t happen


City-specific networks and marketplaces like Uber, Yelp and OpenTable also have fairly insular network
clusters. Every city is a network cluster of producers and consumers. There is some cross-usage, e.g.
traveler from city A to city B may reserve a restaurant in city B. But the primary and dominant use case
is within one particular network cluster.

Social networks scale when the activity in one network cluster can spill over to another network cluster.
LinkedIn, for example, started out in the US but spilled over across markets as users started inviting
connections in different markets. LinkedIn already had millions of users in Asia before it ever opened an
office there.

This spillover is discouraged when your product fosters insular non-interacting network clusters like
families, neighborhoods or cities.
While Path and Nextdoor have some potential for spillover (through word of mouth among users in the same
city), city-specific platforms like Yelp, Uber or Foursquare need to start operations ground up in every new city.

eBay realized that it was a network of country-level network clusters. Buyers in one country were not too likely to
buy from sellers in another country. eBay’s expansion strategy, in its early days, was simply to acquire copycats
in different countries. Facebook, in contrast, never followed this strategy partly because it would have been a
product and data nightmare, but also because geographical barriers do not pose a problem to the type of user-
user interactions that Facebook enables. eBay had very little spillover while Facebook had loads of it.

Growth and Spillover


The networks with the fastest growth are the ones that freely allow spillover. Airbnb, unlike Uber and OpenTable,
has tremendous potential for spillover. The fact that the use case is travel makes such spillover organic to the
network. The host and traveler will most likely be part of different city networks. Such cross-cluster interaction
allows growth to occur without having to be confined within geographical boundaries.
In contrast, Uber and OpenTable need to start operations ground-up in every city every time they want to scale
geographically.

Tipping Points
This brings us to another interesting point. The growth curves of Facebook, Twitter, Airbnb and Pinterest have
well-defined inflection points. Social networks with clusters may not have such well-defined tipping points
because of the additional investment in starting up new clusters. They are more likely to show some step
function characteristics.

Strategies for achieving spillover


So what do you do if you’re running such a business? When a platform business has isolated network clusters,
there are two ways of kickstarting activity in new network clusters.
1. CROSS-CLUSTER INTERACTIONS

Can you create an interaction where a user in network cluster A needs to interact with a user in network
cluster B? How often do these interactions occur? How often is such an interaction likely to bring in new
users and create new networks?

Interestingly, Facebook started out by building standalone campus networks but later allowed cross-
campus interaction, and subsequently opened out completely. In case of Facebook, cross-university
relationships already existed offline. In case of Path or Nextdoor, some other trigger may be needed on
which two families or two neighborhoods may exchange information. Whenever your platform
encourages the creation of multiple network clusters, as in the examples above, creating an interaction
across them creates much-needed spillover.

2. CROSS-CLUSTER INCENTIVES

Groupon is another example of a buyer-seller network where every city is an isolated network cluster.
Hence, starting new cities, again, has the same chicken and egg problem. Groupon combated this by
creating national deals: a cross-network incentive that attracted consumers in cities where Groupon
hadn’t yet launched. By amassing consumers through national deals, Groupon had an initial base of
consumers to start with while kick-starting a new city and just needed to get the merchants and deals.

Tweetable Takeaways

1. The hockey stick isn’t universal. Not all social networks grow exponentially.

2. Social networks like Path or Nextdoor inherently restrict virality because of network clusters.

3. Groupon’s National deals helped kickstart new markets.


PIGGYBACKING MECHANICS: WHATSAPP,
INSTAGRAM AND NETWORK EFFECT
MARKETING

How to grow like Instagram, WhatsApp, PayPal and YouTube. The common pattern
behind all large growth stories.

Sangeet Paul Choudary


Welcome to the age of the zero-dollar marketing startup. WhatsApp and earlier Instagram have officially
become a permanent part of startup lore for having built multi-billion dollar businesses without
(reportedly) spending a dime on marketing.

Meanwhile, Airbnb has grown from a hipster community of mattress-renters to the world’s largest
provider of accommodations without spending even a fraction of what traditional hotel chains spend in
marketing.

Marketing is dead! Or that’s what many would have you believe. A great product sells itself, of course!
Fire the marketing team!

Well… not quite!

The fastest growing networks on the internet – Airbnb, Instagram, Facebook, YouTube, Snapchat – may
not have spent much on marketing, but they all have one thing in common: Each of these
networks piggybacked on top of another pre-existing network.

Facebook and Bebo grew on top of the network embedded in our email. Many networks, including
Instagram, grew on top of Facebook itself. For a while, Airbnb grew on top of Craigslist, while Snapchat
and WhatsApp have leveraged the mobile phone’s organic network, the phone book, to create networks
native to mobile,

If you’re building a social network, marketplace or platform and you haven’t considered piggybacking on
a network, you need to think again.

Much so-called ‘growth hacking’ relies on testing of cause-and-effect and optimization of funnel
conversions. But in the early days of a network or a marketplace, startups are faced with a radically
different problem. Why will users come on board when there’s no one else there? Why will producers set
up shop in a marketplace that is not yet frequented by consumers and vice versa?

The classic chicken and egg problem cannot be solved by pulling in users and optimizing conversions.
Before network effects set in, users will neither get activated nor will they get engaged.
Set a network to catch a network
To grow a network, you need to think like a network. To get enough users on board to create network effects,
you need to piggyback upon another network. Piggybacking on a thriving network works wonderfully as long
as your platform is co1mplementary to that network and delivers additional value to the users there.
As far as growth strategies go, there are few strategies that are more scalable and sustainable as engines of
growth.

PayPal got almost all its traction by piggybacking on eBay and offering a much superior payment method than
the painful check-over-mail. It solved the pain points around payment on eBay providing instant payments
without the hassle of credit cards and assuming much of the risk of online fraud.

Soon enough, PayPal was the predominant mode of payments on eBay and rode its growth to become
synonymous with online payments.

But not all piggybacking stories end happily ever after. Apps that have leveraged Facebook to grow
aggressively, have found their business jeopardized with a change in Facebook’s news feed algorithm.
Startups that tried to emulate Airbnb and siphon users away from Craigslist were sent cease and desist
letters. Even PayPal was banned on eBay for a while before the marketplace had to accede to the wishes of
the users.

So what does it take to successfully piggyback a network?

The biology of piggybacking


Successfully piggybacking a network is more complex than simply choosing a network and executing an API
integration. A startup looking to piggyback on an underlying network needs to understand the nature of its
relationship with that network.

Borrowing analogies from biological systems, there are three types of relationships between your startup (the
Guest) and the underlying network (the Host).
The Happy Clownfish

In certain cases, a partnership model may be initiated by the Host i.e. the underlying network.

Much like how colorful clownfish (Guest) inhabit sea anemones (Hosts) whereby each party gains
protection from their respective predators, both networks benefit from each other.

For example, Facebook’s partnership with Spotify, following its launch of frictionless sharing, is designed
in a way that both Facebook and Spotify benefit.

Facebook needed greater engagement among users and Spotify needed listeners, even though the
implementation of frictionless sharing has much that can be improved. Earlier, Zynga, Slide, and
RockYou benefited from a similar relationship with Facebook, piggybacking on Facebook for growth by
providing value to Facebook users, while improving user engagement and retention on Facebook.

The Hitchhiking Remora

Not all networks may initiate partnerships the way Facebook did. In fact, most don’t.

In such cases, it is the prerogative of the guest (your startup) to be backward compatible with the host,
much like a remora attaching itself onto a shark and feeding off it, you need to figure out a way to embed
your functionality in the host network.

YouTube gained early traction by piggybacking on Myspace. Engagement on Myspace was built around
musicians who needed a way to showcase their talent. At the time, online video was broken. YouTube
fixed that with its flash-based one-click video experience and Myspace users finally had an answer to
their problems.

Flickr solved the pain of sharing pictures in the blogosphere. Every blogger putting up a picture on his
blog helped showcase the service to others. Flickr rapidly grew to become the fifth most visited website
on the internet by the time Yahoo lapped it up.

As these examples demonstrate, these relationships start without an explicit partnership. The Guest
makes a conscious decision to make its functionality and content embeddable in the Host network. If
such embedding solves a key user pain point, the users start embedding Guest functionality into the
Host network, driving adoption. The chicken and egg problem is solved as more users on the Host get
exposed to this functionality and migrate to start using the Guest’s functionality.
The Bloodsucking Parasite
Finally, some networks may actively discourage any form of guest-host relationship. In these cases, the
startup needs to reverse-engineer an integration with the host. Such piggybacking is generally non-
consensual.

Airbnb reverse-engineered a de facto ‘integration’ with Craigslist and offered users on Craigslist, an alternate,
more convenient and safer destination for their interactions. Airbnb stole the network interactions away from
Craigslist and was promptly blocked by the Host as soon as it realized what was afoot.

Skype, Viber, and WhatsApp have similar relationships with carriers where they piggyback the connections
created by the carriers (via the user’s phone book) to provide an alternate communication channel.

Viber rode this success to a $900M acquisition recently, and WhatsApp was acquired by Facebook for $19
billion in cash and stock.

Sidenote: It is interesting to note Skype, Viber, and WhatsApp are able to arbitrage users because of a lack of
effective carrier data discrimination. That is to say, carriers are well-aware of WhatsApp allowing users an
end-around onerous SMS fees, but feel powerless – at this point in time – to raise network data rates to make
it unprofitable for WhatsApp, forcing users back to SMS.

How to succeed with piggybacking


While piggybacking may seem attractive, startups need to be aware of the relationship they have with the
host network and pursue strategies accordingly.

More importantly, not all piggybacking is successful. The stories above suffer from survivorship bias and are
useful only when understood in the context of the factors that dictated their success and spelled failure for
other startups that tried similar strategies.

In general, everyone wins in The Happy Clownfish scenario.

But in most Hitchhiking Remora relationships, the Host controls the relationship with the piggybacking Guest.
This is specifically the case whenever the Host launches an open-access API upon which startups build off
that to access the Host’s netwo1rk. While remora may add value by plucking parasites, fickle sharks have
been known to bait-and-switch and devour orbiting remoras.
The Bloodsucking Parasite relationship is a lot easier to anticipate and is always antagonistic. In most
cases, it triggers an instant immune system response, which, translating to business, amounts to legal
action.

The only long-term sustainable network-piggybacking, then, is the Happy Clownfish. Both the clownfish
and the sea anemone need each other. Their respective physiologies are a clue. A clownfish will never
grow poisonous tentacles to sting potential predators, and a sea anemone will never grow fins to swim.

To be a clownfish in a sea anemone, your network needs to provide high-contrast, high-value-add


differentiation with significant barriers to entry. Otherwise, you risk coming across like one of thousands
of commoditized remoras. Facebook doesn’t want to build its own music library, and Spotify isn’t
interested in connecting the world outside of music.

There are three factors that determine success with piggybacking:

1. If the host explicitly calls for piggybackers, be the first to the party

When Facebook opened its platform to external developers, Zynga jumped on board and gained rapid
adoption. Many startups that followed failed to get such adoption because users had become more
sophisticated to the viral invites by that time and Facebook, as well, started dampening the spread of
these invites subsequently.

Being the first to the party helps to get users deeply engaged before they get sophisticated and start
ignoring messages from other services that follow.

Be the first clownfish to get to your sea anemone.

2. If you can build for backward compatibility, ensure you add value to the underlying platform

YouTube solved a problem for Myspace bands. Flickr solved a problem for bloggers. PayPal solved
multiple pain points for buyers and sellers on eBay. Be the useful remora that eats the little parasites on
the shark.
3. Be the first to reverse-engineer before the host wises up

When stealing traction parasitically, it pays to be the first to discover the chink in the armor of host network.
Airbnb gained traction before Craigslist wisened up. But every startup that has tried that strategy
subsequently has failed to replicate the same success and has instead been caught in a legal quagmire.

Being first to piggyback a host network is the most important determiner of success. There is typically a time
window while these strategies work. And almost always, first-to-the-party wins. When the host wants you to
piggyback, there’s a window while it will be effective. When the host doesn’t want it, there’s a window before
which the host wises up. In either case, being first helps.

The story of many of today’s large social networks and marketplaces follows similar trajectories. Bringing in
users through linear funnel hacking tactics often prove counter-productive. Finding a new network and
piggybacking it helps gain traction among enough users simultaneously and build network effects.

So the next time you hear about a startup boasting a zero dollar marketing budget and putting it all on building
a great product, think again! Piggybacking is the new marketing for the age of the network effect.
MARKETPLACES 2.0: MOVING FROM
TRANSACTIONS TO STICKINESS AND
ENGAGEMENT
As countless marketplaces emerge, user stickiness will be key
to scaling network effects

Sangeet Paul Choudary


Online marketplaces have always been transaction-oriented. The goal of the marketplace is to match
buyers and sellers. Marketplaces often focus entirely on moving buyers towards purchases and sellers
towards listing more products/services. Marketplaces benefit from network effects: more buyers attract
more sellers and vice versa.

However, this transaction-only focus is often at odds with creating stickiness and repeat usage. Buyers
rarely use the marketplace except when they actively need something. This also leads to low retention
and lower lifetime value for the platform owner. But, more importantly, it leads to lower liquidity on the
marketplace.

If buyers don’t return often, sellers do not see much action in the marketplace. This, in turn, may
discourage sellers from participating on the platform, leading to fewer listings and even fewer choice for
buyers. As more buyers and sellers start abandoning the platform, the network effects that made it
attractive starts weakening rapidly.
A new breed of marketplaces has realized focusing on transactions alone is insufficient for maintaining
network effects. Increasingly, marketplaces are investing in creating engagement on the platform.
There are five key mechanisms by which marketplaces can move from purely transactional, to an
engaged and ‘sticky’ one.

Some of these apply to sellers, others to buyers, and some apply to both roles. The upcoming book,
Platform Scale, explores these and many other elements of designing marketplaces and platforms in
detail.

Reputation Systems
Marketplaces like Airbnb and TaskRabbit create stickiness by helping a user build reputation across
transactions. A good reputation can pay dividends, creating an incentive for a seller or service provider
to stick around. Building reputation is a high-investment act. Reputation is earned over many
transactions.

When a seller is committed to improving and maintaining their reputation in a marketplace, they cannot
afford to participate in multiple marketplaces. This, in turn, strengthens network effects. On transaction-
only marketplaces, sellers can easily move from one marketplace to another.
Fiverr allows service providers with higher reputation, the ability to charge for more ‘gig extras’ – extras
to the main offer. This ensures that sellers devote themselves to earning a higher reputation.

On Airbnb, hosts with good reputations often charge more for their listing. In addition, hosts with
positive reputations are ranked higher in search results and are booked more frequently. Reputation
directly leads to more revenue. Thus, it makes sense for a host to stick with Airbnb rather than switch
to a1n alternative.

Reputation isn’t just important in retaining users, it also helps track the health of the overall
marketplace and is a key metric to be monitored.

Collection
While reputation keeps the sellers sticky, user collections and collection management tools can make
buyers sticky. A wishlist or wardrobe feature on a marketplace allows buyers to collect listings and
items of interest.
As a buyer spends more time creating and customizing a collection, they are less willing to duplicate and
reinvest the same effort onto another platform. The invested effort in creating a collection discourages
the user from multi-homing on multiple platforms.

Personalized Feed
Marketplaces can also improve buyer retention by personalizing the buyer’s feed. Most buyers will only
spend a limited time in the marketplace. The limited time spent in the marketplace caps the amount of
transactions a user may engage in.

Tailoring content suggestions based on a buyer’s past transactions, lead to higher retention. More
importantly, in tandem with buyer-created collections, a personalized feed can benefit from actual
purchase data (from transactions) as well as intended purchase data (from collections created by the
buyer).

Facebook’s high DAU/MAU is largely attributable to its news feed. The feed shows content based on a
user’s network and past interactions. Facebook created a personalized feed, by customizing subsequent
interactions based on past usage. Marketplaces can do the same as well.
Influence
Seller-centered marketplaces are different from listing-centered marketplaces. Seller-centered
marketplaces allow sellers to brand themselves, build a following and create influence. Sellers regularly
push out content on their wares.

The more buyers subscribe to one’s content, the larger the broadcast of one’s next chunk of content.
Since a seller spends a lot of time in growing their audience, they are less likely to switch to a
competitor’s platform, where they will need to rebuild influence.

On Twitter, active tweet creators can create influence over time through acquiring more followers. The
larger the audience, the more opportunities there are to influence others. Twitter has designed a
platform where more value can be derived from more usage.

Seller-centered marketplaces need to apply the same design principle to create a mechanic by which
the seller gets greater influence over buyers with greater usage of the platform.

Workflow management
In order to create stickiness for both parties on a services marketplace, these platforms are moving
from a transaction-only model to a workflow management model. Traditional service based
marketplaces often fail to own the transaction.

The information required to complete a transaction in a service marketplace can’t be completed online.
Therefore, both parties are incentivized to move offline to finish the transaction. Thus, the marketplace
may lose the transaction. Increasingly, service marketplaces are building out SAAS tools to incentivize
the parties to complete the transaction online.

A successful example of a service marketplace implementing workflow management tools is Clarity.


Clarity connects advice seekers with experts. To lock in both sides and own the
transaction, Clarity provides additional workflow management tools such as call management and
invoicing. By offering these convenient and useful tools, both parties are incentivized to complete the
transaction online.
Substituting transactions with subscription
Marketplaces that can offer a fairly guaranteed form of service, often move from an a-la-carte
transaction model to an all-you-can-eat subscription model. Skillshare, an online education platform,
started on a transaction-only model but has increasingly been moving towards a subscription model.
In order to guarantee a minimum level of quality, it needs to curate courses that are offered through a
subscription. Subscription keeps buyers locked-in to the platform.

Amazon Prime is a slightly different example of a subscription layer on a marketplace. Buyers can
purchase Amazon Prime and receive free shipping on all their purchases. A buyer is less likely to buy a
product from a different e-commerce site when they have spent money on a service that gives them
free shipping and other benefits.

Conclusion
The focus on levers of engagement in traditional marketplaces is only one of many factors that will
determine success in the age of Platform Scale. As platform competition increases, the players who
focus not just on transactions and active usage, but on the strengthening of network effects, will win.

Over the last five years, new marketplaces have emerged in every niche. Buyers and sellers have
many more choices today. To ensure that a marketplace preserves its network effects, it needs to
ensure that buyers and sellers stay on and keep engaging repeatedly. Increasingly, this will be
achieved by adding levers of engagement and lock-in on top of the traditional transaction-only model.

This article was co-authored with Griffin Anderson and originally appeared on TheNextWeb
VIMEO VS. MEGAUPLOAD VS. YOUTUBE:
CONTRASTING STRATEGIES OF COMPETING
PLATFORMS
How two similar platforms coexist with different strategies.

Sangeet Paul Choudary


Startups often believe that technical aspects of the product provide competitive advantages and that two
products with similar technical aspects have little scope for differentiation. Hence, it is believed that a
late mover with similar technology cannot get traction and that the early mover has a significant
advantage. However, as we shall demonstrate with the cases below, late movers can compete
effectively with a similar technical product by structuring an entirely different value proposition.

Multi-sided platforms typically face the mutual baiting challenge. The producers will not participate in a
platform where they do not have access to consumers and consumers won’t show up at a platform
where there is no activity from producers.

Targeting both sides together is extremely difficult, and a startup often grapples with the question: “How
can I seed this one side at a time and which side do I get in first?” It would be tempting to theorize that
there is a one-size-fits-all solution to the “Which side should I target first” problem but the reality is that
there are too many factors that need to be taken into consideration while choosing a side to seed first.

Online Video Platforms

One might be tempted to generalize that what works for Platform A as a user acquisition strategy will
work for its direct competitor Platform B since the two are serving the same market, solving the same
pain point and delivering similar solutions.

Let’s look at three online video platforms which, for all practical purposes, are direct competitors. Online
video platforms have two sides: content creators and content viewers. Which side would you target first?

YouTube: Producer-first focus

YouTube was the first democratic (anyone can upload) video hosting platform that gained mainstream
traction. It gained traction by focusing entirely on content creators. During its initial days, YouTube
conducted several contests (Monthly video contests, Nano a day, targeting beautiful women to upload
videos of themselves, etc.) incentivizing content creators to create and upload videos. Additionally, it
allowed content creators to embed their videos off-platform which rapidly spread the word about
YouTube (especially on Myspace which did not have a comparable video hosting solution for the bands
on it). This created an initial corpus of content and simultaneously leveraged producers to bring in
consumers, some of whom eventually converted to producers as well. Strengthening its focus on
producers, YouTube even elevated top content creators to a partner status where it shared ad revenue
with the video creator.
This unrelenting focus on producers helped in four ways:

1. Seeded the platform with content

2. Created a curation dynamic on the platform (voting up or down) to identify quality content

3. Leveraged producers to bring in consumers

Most importantly,

4. It created a set of content creators who had already invested in the platform, already had a user following
and would not be easily incentivized to invest in another one.

Contrasting value propositions for initial platform seeding

Producers Consumers

Incentives to products
to create and share
videos

Access to content
not easily available
elsewhere

Enhanced
infrastructure for
discerning producers
MegaUpload: Consumer-first focus

MegaUpload, a YouTube competitor, was faced with the late-mover problem. Most content producers
were already active on YouTube, and there was no incentive for them to participate in a new platform
with a smaller market of viewers. MegaUpload couldn’t succeed with the same ‘get-producers-on-board’
strategy. Consequently, it focused exclusively on consumers (viewers) by seeding the platform with
content internally and specifically seeding content which was increasingly being policed on YouTube
(Copyrighted, pirated videos and porn). MegaUpload got significant traction trying to solve an ‘under-
served’ need but in the process, ended up exposing itself to lawsuits and the like.

It’s interesting, though, to note that as the second mover, MegaUpload had very little room to compete in
and couldn’t compete head-on following the same user acquisition strategy. This is often the case with a
late-mover competitor and, as in the case of MegaUpload, the competitor tried an alternative seeding
strategy (in-house seeding of videos).

Vimeo: Producer-first but with a different value proposition

Vimeo gained late traction, but it succeeded with a producer-first strategy competing directly with
YouTube. In it’s initial days, YouTube’s hosting and bandwidth infrastructure coupled with its flash-based
in-browser embeddable player formed a compelling value proposition to producers. As YouTube gained
traction among producers, the focus of the platform moved from improving video hosting infrastructure
(as a value proposition to producers) to improving match-making of videos with consumers (focusing on
video search, and a video feed). Vimeo leveraged this by focusing its platform on the producers and
providing them with superior video infrastructure (HD player, a better embeddable player for bloggers).
While MegaUpload didn’t have a value proposition for producers to move away from YouTube and
instead focused on a value proposition for consumers, Vimeo created a value proposition aimed at
producers and competed directly within YouTube to acquire producers who would create a sustainable
flow of videos.

As these examples illustrate, three competing platforms took on vastly different user acquisition
strategies based on the value proposition they offered and the nature of the competition when they
launched.

If you’re launching a platform, knowing the value propositions offered by your competitors can help you
structure your own and compete in a relative whitespace despite having a very similar technical product.
WHY SOCIAL NETWORKS THAT
PAY YOU MAY BE A BAD IDEA
Shouldn't users see some money when they are the reason for Facebook's massive
valuation?

Sangeet Paul Choudary


One of the most common questions I get asked, while talking about platforms, relates to the issue of labor
on platforms. Facebook and Twitter, among others, get a lot of value from their users and make billions of
dollars, but the users don’t see much kickback.

The economics of free-labor platforms


Social networks like Facebook and Twitter leverage free labor from a global talent pool to deliver a business
that has near-zero marginal costs of value creation. A mouthful of words but it essentially means the
following.

In traditional Pipe models, every act of value creation has an associated marginal cost associated. There
are fixed costs of running the pipe’s infrastructure (i.e. the factory, personnel, equipment, etc.), and there
are marginal costs associated with the production of every new unit of a good or service in that Pipe
business. While most Pipe businesses have a good handle on fixed costs, a lot of optimization work focuses
on reducing marginal costs, as that directly helps the company scale. If you can produce more units at less
cost per unit, your margins improve and your business scales.

This is where free-labor platforms like Twitter and Facebook becomes interesting. They drive marginal costs
of value creation to zero. Facebook incurs practically no marginal costs associated with the creation of a
new status update. YouTube, likewise, has no marginal costs associated with the creation of a new video. It
may incentivize the creation of some videos for a variety of reasons, but the video creation cost isn’t borne
by YouTube.

This allows such platforms enormous leverage. Coupled with the network effect, that creates a natural pull
for value producers (in the case of YouTube, video uploaders) as the network scales, this model of free
labor is guaranteed to create a form of scale, hitherto unprecedented.

These platforms then monetize the value created (in the form of attention, data etc.) but do not pass back
any proceeds to these value creators. YouTube, unlike many other platforms, does share some money back
with some producers, but most other platforms are run on free labor.

As a result, one of the common criticisms often leveled against such platforms is the argument that they live
off free labor and should logically/ethically/morally ‘do the right thing’ and pass some of the kickback back to
the users.
That’s a good idea, right? Think Network Effects

When it comes to platforms, the good ideas are typically the ones that strengthen the network effect, and the
bad ideas are the ones that weaken it.

Is paying value creators a good idea? Only if it leads to desirable interactions on the platform, that in turn,
strengthen the network effect.

Every networked platform needs to structure the right incentives for its users. These incentives may be organic
(fun, fame, fulfillment) or inorganic (fortune). But platforms need a balance of incentives that leads to the right
types of interactions.

Paying someone to use Facebook or LinkedIn may, for instance, possibly encourage the most undesirable
interactions. Teenagers in need of some quick money may fill up a professional network. Even when structured
on a model that rewards quality, users would tend to game the system. If higher votes mean more money,
entire alternate markets could get created to game the system, buy votes and make money. Such markets
already exist for gathering fake fans and followers (and votes, actually).

Essentially, shifting the balance of incentives towards inorganic incentives may often lead to unforeseen
governance issues.

The problem gets compounded when you realize that higher governance leads to inordinate friction for new
users. What sets apart platforms like Wikipedia and Reddit is their reasonably high quality despite the fact that
they are open. But this comes at a cost. New users find it very difficult to break through the hierarchy of the
Wikipedia and Reddit communities. But conversely, that hierarchy and tight control over actions are exactly
what ensure these communities create quality output.

Any platform that functions well on organic incentives may face issues with weakening network effect and
frictional governance when moving to inorganic incentives.
The Poverty Line on Platforms
The other issue with paying your users is that it isn’t actually as good an idea as it sounds. Most platforms
rely on social feedback as a measure of quality. Votes, likes, ratings, followers etc. typically indicate quality.
If platforms were to reward their users, they would likely reward them on the basis of some such parameter
that signifies social feedback.

A curious issue with social feedback is the fact that it makes the rich richer and the poor poorer. If I already
have more followers on Twitter, I find it easier to add a few more. If my videos are already popular on
YouTube, I am likely to have more subscribers making it easier for every subsequent video to also become
popular. As a result, platforms develop a poverty line. Users below this line languish in oblivion hoping for
their 15 minutes of fame.

The challenge with any form of monetary incentivization is that it would award the rich (in terms of social
feedback) way more than it would award the poor. This, in turn, discourages the poor (again, in terms of
social feedback) all the more from participating further. A feedback loop sets in, and the poor start to
abandon such a platform. We already see this in Twitter’s challenge in engaging new users who have just
been on-boarded.

Summary
This leads us back to the original debate. Is it a good idea to build a social network that rewards its users? If
it can do that without harming the network effect, creating clunky governance, or disincentivizing certain
types of users, it possibly is a good idea. But more often than not, we see things work out the other way.
Hence, the entire hue and cry about Facebook not sharing money with its users when it makes some $x per
user is too simplistic an argument to be judged purely on ethical grounds. And platforms that take the moral
high ground on launching in competition with free-labor platforms often realize that they completely messed
up the balance of incentives.

There is a reason why platforms that cater to organic incentives well, perform better than the more
transactional ones.

Tweetable Takeaways
Social networks that pay users often fail when they end up weakening network effects.
Platforms with high friction discourage new users from coming on board.
Platforms reward some users disproportionately owing to the rich-becomes-richer feedback loop.
THE ONE FEATURE THAT
$
CHANGED SOCIAL
NETWORKING FOREVER
What is Facebook’s most important innovation ever?

Sangeet Paul Choudary


What is the single most important innovation that Facebook ever came up with?

Before I answer that, let’s think of the real value for users on a social network. Social networks are a classic
example of the platform business model where users create all the value and there is very little value until
users come on board. Real value for every individual user, then, is the value that his network is capable of
creating.

Most communication and networking products have never truly succeeded in capturing this value on an
ongoing basis. E.g. I might be connected to a lot of users on a communication product but I need to be
actively engaged in a conversation to benefit from these connections.

This is why the News Feed is Facebook’s most important innovation. It allows users to constantly benefit
from the surge of activity in their network neighborhood. It’s a stalker’s delight, a lurker’s guilty pleasure. But
the News Feed is the single most important innovation that changed social networking from a user-centric to
a network-centric activity.

It changes the use case for an entire product category. Post the News Feed, social networking was no
longer about staying connected with a friend or even with a group. For the first time, social networking was
about staying connected with one’s entire network.

The move from transaction to engagement


The News Feed represents a leap in the evolution of online communication and networking products. Online
communication and networking have traditionally been transactional in nature. Email has always been a
transactional product. Chat is transactional as well. We use these products only when we want to engage in
an actual exchange (of information) with someone else.

Early social networks were built along the same lines. Imagine the days of Orkut, Bebo and, even,
MySpace. Social networking, back then, was an extension of the existing communication models around
email and chat. You typically logged on to connect with friends. If you didn’t want to connect with friends,
you just never logged on. The dominant use case on these social networks was transactional.
The News Feed changed that! It moved social networking from a transactional use case to an engagement-
driven use case.

Engagement products need to provide a minimum guarantee of activity to keep the user engaged.
Transaction products, in contrast, need to ensure liquidity and the assurance that the user can complete a
transaction conveniently.

If you think of Facebook pre-News-Feed, users used the platform largely to communicate with others. The
News Feed shifted value in the platform from mere connections (and communication) to content (and
engagement).

First among equals?


By no means is the news feed the only determiner of engagement on Facebook. The decision to allow
developers to build out an app economy on top of Facebook and the creation of social use cases on top of
Facebook (most notably gaming and gifting), clearly helped the engagement cause. However, across all
initiatives that Facebook ever took, the one that has been most persistent and that eventually took over as
the default home screen – the first ‘feature’ that a user is exposed to on every log in – is the news feed.

The representation of the network effect


In traditional social networking, the feature that the user kept returning to was his own profile, with some
notifications alerting specific network activity. This is why having the News Feed as the default Home Page
is rather important. It changes social networking from a user-centric to a network-centric activity.

The News Feed embodies the very concept of the network effect. It shows that the network effect isn’t
simply a function of the number of other nodes you are connected to but also of the nature of the links that
connect you with them. A user’s past interaction with other nodes is a great determiner of the strength of
ties between nodes. A real world network would have certain ties stronger than others. The news feed
captures this and creates a user-centric view of the network.
This is also why I believe Facebook deserves credit for pioneering the news feed. An activity stream or
news feed like feature was already present in Twitter, and before that, on Flickr. But these never gave an
accurate representation of the network and were at best, mere activity streams aggregating the activity at
neighboring nodes. There was no focus on the nature of the link with neighboring nodes. This is where
Facebook’s focus on optimizing the news feed algorithm creates a more accurate representation of one’s
network than ever before.

A stronger network effect?


One might argue that the news feed also creates a stronger network effect. With traditional social networks,
you could have a few hundred friends but it was arguably the same 10 friends bringing you back to the
platform. This meant that losing those 10 friends to another platform could signal the need for you to make
the move as well. With the news feed, a stream from a much wider circle of friends constantly hits you.
When the central use case shifts from communication with individual friends to interaction with the overall
network (via the news feed), it could potentialy make the network more resilient to a situation with reverse
network effects.

Beyond social networking


Moreover, this doesn’t apply only to social networks. Any business model which relies on user-generated
content can benefit from a well-architected news feed. Even marketplaces, which have traditionally been
transactional, are creating engagement with a news feed.

Design principles
The key design consideration is relevance. A news feed should help with personalized discovery. This
introduces another tension. Relevance and personalization often tend to reinforce things that we are already
interested in. A personalized feed should factor in some form of serendipity to ensure that users do not get
increasingly served only those objects that reinforce their preferences. (Designing for serendipity is far from
trivial and merits a post in itself, sometime soon.)
If you’re building a networked product, think of what embodiment of the network can be delivered to the user.
The News Feed is brilliant because it takes a user’s network and individual actions and builds out something
that results when the two are superimposed on each other. This is exactly how our social experience works in
the real world. Our world is shaped by a consequence of the actions that we take with our environment. None
of that is, of course, simple enough to be replicated through a mathematical model. But the news feed is a
great approximation.

Tweetable Takeaways

The news feed moved social networking from a transaction-first to an engagement-first

A news feed helps products deliver value from network effects.

The News Feed changes social networking from user-centric to network-centric.

Design principles for building products that capture network effects: Personalize with serendipity.
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