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 Platform Business Models

Dr A G Beckett
 Introduction: Platforms are everywhere

What is a Platform?

Lots of different 'types' of platforms can be identified

Transport platforms: train & road networks

Communications platforms: telephone networks
Consumer product platforms: Lego/Barbie/beds
Producer product platforms: VW/mobile telephone producers
Market platforms: London Stock Market/Shopping centres Cribbs
Digital platforms: Apple/Google/Tencent/Spotify

Why are we seeing more platform business models?

What links these platforms together?

 Defining Platforms
Fundamentally all these examples of platforms are the same. They establish a system
that is partitioned into a set of 'core' and 'peripheral' components

Core components: low variety (the platform)

Peripheral components: high variety

The platform operates by creating visible design rules:

1. An architecture which specifies which components will be part of the system and
what their functions are
2. Interfaces that describe how the components will interact, including how they fit
together, connect and communicate
3. Standards for testing a component's conformity to the design rules

This is known as modularity in design, modularity is built into the platform.

 Examples of platforms
Infrastructure platforms: roads are the core component; driving rules determine how the
peripheral components, cars, buses, cyclists, scooters, pedestrians interact on the road

Market platforms: the LSE determines how the parties interact, how prices are quoted,
transactions are completed.

Producer product platforms: VW creates cars using a platform system, see case
study. Mobile-phone manufacturers (Apart from Apple) assemble phones from
components based around Google's operating system.

Consumer product platforms:

1. beds and bedding sizes. Standardised design rules

2. Hi-Fi music systems: components linked by shared interfaces

These are known as modularity in use its not designed by a single authority
 Platforms and Network Effects
Network effects occur where the value to an individual of adopting a standard or
platform system depends on the number of others who have already adopted it or who
can be expected to adopt it.

See next slide: an example of a telephone system

Examples:
1. Electric cars and charging platforms: there are currently three different systems
world-wide
2. Deciding where to list shares: LSE is losing some of its advantages to the USA
3. European v UK bed sizes: Issue when buying beds from Ikea
4. EU versus UK product standards (Notice how a standard can act like a platform
hence standards 'wars')
5. Amazon and linking up buyers and sellers
Network Effects: Telephones
 Platforms: Scale & Scope
Scale & Scope driven by the re-use of knowledge

Platforms drive increased scale & scope

Examples:

1. VW create car platforms which are used across multiple different models: scale,
mass product of 'modules' engines from a single factory, scope the costs of
designing the engine are spread across multiple models

2. By adopting EU product rules (modularity in use) - increase the market size

 Digital Platforms

Digital platforms developed in the past 25 years

Some operate like traditional product platforms: Netflix

Two-sided digital platforms: Match/Tinder facilitates interaction between users

Multi-sided digital platforms: Amazon, Apple facilitates interaction or co-

ordination between users and complementors

All generate huge network effects:

Netflix: more customers more films
Tinder: more users more choice more dates
Amazon: more users and complementors, the more useful and valuable is the platform
Digital Platforms and Business Models
Business model: how producers organise
Value exchange: to create and distribute value
1. Physical retail stores
2. Platforms: new ‘place’ for value exchange Capabilities

Business
Consumer x Supply Networks
Model
Complementors

Value
Exchange
Platform
The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power. Cusumano, Gawer and Yoffie, Harper Collins, 2019
Four Steps to building a Platform
Step 4: Establish
And enforce
Ecosystem rules
Step 3: Design
your business
model
Step 2: Solve
the chicken-or-
egg problem
Step 1: Choose
your market
sides

The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power. Cusumano, Gawer and Yoffie, Harper Collins, 2019
Stage 1: Work out your value offering
Platforms operate by bringing together two or more market actors

1. Reducing costs in terms of price, time and effort:

Amazon/Pinduoduo/Myntra

2. Creating new ways of interacting: Facebook/Instagram/Snapchat/Twitter

3. Deliver new services: video streaming/cloud computing/photo sharing

Step 2: Solve the chicken-or-egg problem
This is the most challenging decision

One side of the market needs to come on board first to attract the other side

The challenge is where & how to start?

Options are usually:

i) Create stand-alone value for one side first (Airbnb)
ii) Subsidise one or both sides (Apple)
iii) Simultaneously bring on-board two sides (Uber)

Strategies differ between transaction & innovation platforms

Step 2: Solve chicken-or-egg problem: Innovation Platforms

Innovation platforms solving the C-or-E problem

By creating or buying complements or encouraging others to create

complements

Eg Apple and Apps for the iPhone

Complementary assets – remember my story about frozen food!

Step 2: Solve chicken-or-egg problem: Transaction Platforms
How can a transaction platform attract enough buyers & sellers?

Airbnb example

Etsy, Amazon, Taobao, Twitter- all subsidised one side of the platform to
bring in the other side

Subsidising both sides is costly & risky

Makes sense if three conditions exist

1. The platform has very deep pockets
2. The platform has a realistic chance of winner takes all
3. Barriers to entry can be created to stop new entrants
Stage 3: Design the Business Model: Network Effects
Goal for every platform is to create scale network effects

Direct network effect: customers attract more customers and so the network
becomes more valuable, traditional telephone network

Indirect network effect: Complementors attract new users eg apps on

mobile phones

More users increases the value of the platform and attracts more
complementors and users

Powerful upward cycles

Stage 3: Design the Business Model: Innovation Platforms
Innovation platforms generate profits in one of two ways:

i. Customers willing to purchase the platform - complementary features

Android makes money on every Android phone sold

ii. Capture value as a portion of the sale of every complimentary product or

service

Google collects a licence fee for every app used on its platform
Stage 3: Design the Business Model: Transaction Platforms
Transaction platforms generate fees for providing services or advertising

Transaction platforms make money in five ways

1. Matchmaking: Tinder
2. Reducing friction in transactions: Amazon
3. Complementary services: Airbnb offering additional services
4. Complementary technology sales: Deliveroo logistics platform & data
analysis
5. Advertising: Tripadvisor

Transaction platforms look to add additional fee streams

Step 4: Establish and Enforce Ecosystem Rules
Who should be allowed to do what?

Innovation platforms:
Apple iOS tightly controls App developers

Transaction platforms:
Checking users credentials & general rules of use: Uber/Airbnb
Facebook Platform & Ecosystem: Engaging Multiple Sides of a Market

Side 1: Side4:
Users Platform Partners

Facebook
Platform

Side 2: Side 3:
Advertisers Applications

The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power. Cusumano, Gawer and Yoffie, Harper Collins, 2019
Platforms and Strategy
Platforms do not ‘replace’ strategy, they are new ways of connecting
consumers and producers

They work with existing strategies to increase consumer value:

More Choice
Lower Price
Less Effort
Less Time

Create new strategic positions/possibilities

New economies of scale & scope

Offer new ways to diversify/expand
Conclusion: The Future?
1. Competition will encourage more hybrid platforms:
Amazon Web Services (AWS) with multiple platforms
2. AI, machine learning big-data analytics: AWS makes AI capabilities
available for developers
3. Growing concentration of power: Government regulation

New battlegrounds:
1. Voice wars: Siri/Alexa/Assistant
2. Ride-sharing & food delivery: Just-Eat/Deliveroo/Uber-Eats
3. Film/TV streaming: Disney+, Netflix, iQiYi, Tencent