BUSS 215

Online Platform (II)

Jiye BAEK
Department of MIS
Korea University Business School
 TODAY

BUSS215: Introduction to MIS

Fundamentals IT Trends and Applications

Online Platform

Digital Economy
Business Analytics

Big Data Analytics

E-Commerce

Emerging Technologies

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 ONLINE PLATFORMS (I) OVERVIEW
Online Platforms (I)
IT Infrastructure
Hardware
Software
Data management
Networking and telecommunications

Technology Drivers of Infrastructure Evolution

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 IT INFRASTRUCTURE
IT Infrastructure
IT infrastructure provides platform for supporting all information
systems in the business

Networking

IT
Hardware Software
Infrastructure

Data
management

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 ONLINE PLATFORMS (I) OVERVIEW
Online Platforms (I)
IT Infrastructure
Hardware
Software
Data management
Networking and telecommunications

Technology Drivers of Infrastructure Evolution

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 DRIVERS OF INFRASTRUCTURE EVOLUTION
Technology Drivers of Infrastructure Evolution
Moore’s law
“The number of transistors per square inch on integrated circuits
doubles approximately every two years.” (Moore, 1965)

Processing power for

computers double
every two years.

~ Gordon Moore
Co-founder and Chairman Emeritus, Intel Corporation
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 DRIVERS OF INFRASTRUCTURE EVOLUTION
Technology Drivers of Infrastructure Evolution
Metcalfe’s Law and Network Effects
Value of network glows exponentially as a function of the number of
network users.
As network members increase, more people want to use it.

Declining communication costs and the Internet

As communication costs fall toward a very small number, utilization of
communication and computing facilities explodes

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 DRIVERS OF INFRASTRUCTURE EVOLUTION
Technology Drivers of Infrastructure Evolution
Technology Standards
Backward compatibility: a property of a system, product, or technology that
allows for interoperability with an older legacy system.
• A new standard is considered backward compatible when it is able to read, write or
view older formats.
• Allows newer technology to advance without replacing a current component.
• Also known as downward compatibility

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 TODAY

BUSS215: Introduction to MIS

Fundamentals IT Trends and Applications

Online Platform

Digital Economy
Business Analytics

Big Data Analytics

E-Commerce

Emerging Technologies

BUSS215 © Jiye BAEK 9

 ONLINE PLATFORM (II)
Online Platform (II)
Two-sided Markets (Platforms)
Characteristics of two-sided markets
How two-sided markets are different
Two-sided markets examples
Network effects for two-sided markets
Strategic challenges in two-sided markets
• Pricing: which side to subsidize?
• Winner-takes-all or shared?
• Threat of envelopment

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The Structure of organization is in transition

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Firm Year Empl. Mkt Cap

BMW 1916 116,000 $53B

Uber 2009 7,000 $60B

Marriot 1927 200,000 $17B

Airbnb 2008 5,000 $21B

Walt Disney 1923 185,000 $165B

Facebook 2004 12,691 $334B

Kodak 1888 145,000 $30B (heyday)

Instagram 2010 13 $1B (acquisition)

Observation 1. Ratio of employees

Observation 2. Timing
Observation 3. Externalization of value proposition
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BEST GLOBAL BRANDS

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THERE ARE PLATFORMS

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 PLATFORM
Platform
A product that brings in distinct groups of users who are willing to
adopt the product not only because of the stand-alone value the
product offers, but also because of the positive network effect value
provided by users.

This product can be hardware, software, or even a shopping mall

We are living in the world full of platforms around us.

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Marshall Van Alstyne Geoffrey G. Parker

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 https://hbr.org/2006/10/strategies-for-two-sided-markets
https://www.amazon.com/Platform-Revolution-Networked-Markets-Transforming/dp/0393354350

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 What Changes :: Structure

Falling transaction costs and rising (positive)

externalities shift value creation outside the firm
but onto the platform

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 VALUE OF TECHNOLOGY
Value of Technology
The value of a technology is increasingly dependent on the following
two:

Technology’s
Network
Stand-alone
Effect Value
Value

The value of technological utility such Network effect exists when the value
as functionalities, simplicity, of a technology increases with the
convenience, design, ease of use, number of other users of the same
risk, etc. technology

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TWO-SIDED MARKETS WITH NETWORK EFFECT

Side 1 Side 2

Platform

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What is two-sided market?

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 TWO-SIDED MARKETS

More Amex Merchants More Amex Users

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

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TWO-SIDED MARKETS

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TWO-SIDED MARKETS

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 TWO-SIDED MARKETS

http://www.techgistics.net/blog/2016/11/30/theuber-for-x-model-and-the-complexity-of-on-demand-delivery BUSS215 © Jiye BAEK 25

TWO-SIDED MARKETS

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TWO-SIDED MARKETS

Source: Eisenmann et al (2006)

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 TWO-SIDED MARKETS

Side 1 Side 1 Side 2

Product Platform

Tech Stand-alone value

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 TWO-SIDED MARKETS
Before iTunes

Apple User Content

$ $

Product First Thinking

Standard linear value chain
User matches MP3 player to library
Minimal network effects

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 TWO-SIDED MARKETS
After iTunes

User Content

$ $

Apple

Remove supply chain inefficiency

Triangular platform supply network
Apple owns financial chokepoint
Apple matches users to content
Stronger network effects
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 TWO-SIDED MARKETS
Characteristics of Two-Sided Markets

Definition: Products or services create a two-sided market when

(1) they serve two distinct types of consumers
(2) they facilitate these different types consumers to interact with each other
(3) at least one type of users care about the size of the other type of
users

Examples:
E-bay: connecting buyers and sellers
LinkedIn: job seekers, recruiters, and advertisers
• When there are more than two sides: multi-sided market
Credit card: cardholders and merchants

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 TWO-SIDED MARKETS
Two-Sided Markets
Platforms with two (or more) user groups
Provide each other with beneficial network effects

Market Market
Side 1 Side 2

Platform

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 TWO-SIDED MARKETS
How Two-Sided Markets are Different

$ $
Supplier Customer
Conventional business

Market $ $ Market
Side 1 Platform Side 2

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 TWO-SIDED MARKETS
How Two-Sided Markets are Different
The main difference between a two-sided market and traditional
manufacturing and services business:
In a traditional value chain, value moves from left to right (e.g., producers to
consumers)
• To the left of the company is cost; to the right is revenue.

In two-sided markets,
“cost and revenue are both to the left and the right” – Eisenmann et al (2006)

The value to one side of the market increases with the number of participants
on the other side of the market.

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 ONE-SIDED MARKET VS. TWO-SIDED MARKETS
One-sided market vs. Two-sided markets
ONE-SIDED MARKET
§ Market that derives most of its value
from a single class of users.
§ Same-side network effects:
the value of a product to a user
depends on the number of users on
the same side.
§ Telephone, skype
§ Users directly communicate with each
other from the same side
TWO-SIDED MARKETS
§ Network markets comprised of two
distinct categories of participant.
§ Both need to deliver value for the
network to function.
§ Cross-side exchange benefit:
the value of a network to a user
depends on the number of users from
the other side of the market.
§ Ebay, credit cards, LinkedIn
§ Would a buyer benefit when there are
many buyers on Ebay? No! Sellers will
benefit.
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Network Effects for Two-Sided Markets

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 TWO-SIDED MARKETS EXAMPLES
Shopping Mall

Shopper Store

Platform

Mall
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 TWO-SIDED MARKETS
Two-Sided Markets
Cross-Side
Network Effect

Market Market
Side 1 Side 2

Same-Side
Network Effect

PLATFORM

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 NETWORK EFFECTS FOR TWO-SIDED MARKETS
Network Effects for Two-Sided Market
Gamers
Positive
Same-side NE
the value of a product
to a user depends on
the number of users
on the same side.

Positive Negative
Cross-side NE Same-side NE
the value of a network to
a user depends on the
number of users from the Game developers
other side of the platform.

Games are complementary goods for a game console;

Gamers (consumers) value them together
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 NETWORK EFFECTS FOR TWO-SIDED MARKETS
Network Effects for Two-Sided Market
Same-side network effect
Preference regarding number of other users on own side
Positive: more players à more online interactions
• E.g., player-to-layer contact in Xbox game, end-user PDF sharing
Negative: more sellers à more competitions
• E.g., competing suppliers in auction, competing dates on Match.com

Cross-side network effect

Preference regarding number of users on other side
Positive
• E.g., developers and end-users for windows
Negative
• E.g., more advertisement in programs and users for programs

Must manage all such interactions

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https://www.intercom.com/blog/surviving-thriving-in-two-sided-markets/ BUSS215 © Jiye BAEK 42
https://medium.com/immutable/network-effects-1b975c7a6859 BUSS215 © Jiye BAEK 43
https://fourweekmba.com/negative-network-effects/ BUSS215 © Jiye BAEK 44
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STRATEGIC CHALLENGES IN TWO-SIDED MARKETS
Strategic Challenges in Two-Sided Markets
1. Pricing: which side to subsidize?
Who pays and how much?

2. Winner-takes-all or shared?
How to manage winner-takes-all dynamic?

3. Threat of envelopment
Competitors can come at you sideways

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 PRICING: WHICH SIDE TO SUBSIDIZE?
Two-Sided Markets Pricing

Platform providers have to choose price for each side

Factoring in the impact on the other side’s growth and willingness to pay
Subsidy side: a group of users who are highly valued, attracted in volume
• quality- and price- sensitive users
• sets prices below the level it would charge
Money side: the other user group

Goal: generate cross-side network effects!

If the platform provider can attract enough subsidy-side users, money-side
users will pay more to reach them.

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 WINNER-TAKES-ALL OR SHARED?
Winner-takes-all or shared platform?
Critical strategic decision either:
Try to dominate the whole market or share the platform

Winner-takes-all market characteristics

1. Multi-homing costs are high for at least one side.
• Homing cost: upfront, ongoing, and termination costs borne by users due to
platform affiliation
• Switching costs: costs incurred when leaving a platform to join another

2. Network effects are positive and strong.

• Same-side and cross-side network effects

3. Niche specialization is low

• Users have relatively homogeneous needs (similar preferences)
• Neither side’s users have a strong preference for special features

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 WINNER-TAKES-ALL: FOUR GIANT PLATFORMS

Source: http://www.nsuchaud.fr/2015/02/gafa-disruptin-all-industries/
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 THREAT OF PLATFORM ENVELOPMENT
Threat of Envelopment
Platform envelopment: rival platform with same users offers your
functionality
Bundled as part of a bigger offer
• Deliver more value at a lower price to the money-side à DANGER!
Blurs market boundaries
Netscape vs. Internet Explorer
Real Player vs. Windows Media Player

Defenses against envelopment

Reduce price on the money-side or enhance value proposition
Change business model
Find a “bigger brother”
Lawsuit: anti-trust law is still open in two-sided markets
Sell out to the attacker or exit the field

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 PLATFORM STRATEGY
To ensure platform’s success

Right Pricing Strategy

Subsidize quality- and price- sensitive users
Secure marquee users’ exclusive participation in your platform

Cope with Winner-Take-All Competition

Decide whether the two-sided market you’re eyeing will eventually be served
by a single platform.
Decide whether to share the single platform or fight for proprietary control.

Avoid Envelopment
Many platforms have overlapping user groups, tempting some related platform
providers to swallow others’ users.

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PLATFORM EXAMPLES

Source: Eisenmann et al (2006)

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 RECOMMENDED READINGS

https://hbr.org/2006/10/strategies-for-two-sided-markets
https://www.amazon.com/Platform-Revolution-Networked-Markets-Transforming/dp/0393354350

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