Most of us visualize what a platform is based on those we engage with in our consumer lives each and every day. Platforms such as Amazon, eBay, Alibaba, Google, and Facebook bring together different communities to interact with one another and in the process, the platform provider takes their financial cut. The more these communities grow, the more valuable the platform becomes to everyone, and the more others are attracted to the value proposition. This phenomenon is called the network effect and it’s pretty lucrative for the platform providers. Arguably, these large-scale platforms deliver such a great value proposition for consumers that it becomes hard for those consumers to move elsewhere. The data is clear: once a certain scale is reached, it’s almost impossible for competitors to catch up. It’s no surprise that seven of the 10 most valuable companies globally are based on a platform business model (see chart below). According to McKinsey Research, such is the sheer scale that it’s estimated that roughly 30% of global economic activity could be mediated by digital platforms by 2025.
The Rise of B2B Platforms
Platform companies serving the needs of business customers are strong and growing rapidly. McKinsey estimates that B2B platforms could represent $10 trillion in socio-economic value creation through 2025. A recent study by TSIA found that 90% of surveyed product leaders claim to be preparing, emerging or scaling their platform strategy. Why? The stakes are extremely high and most technology businesses would prefer to be a platform provider rather than simply participating in someone else’s ecosystem. As mentioned above, within each business category there is room at the top for very few players. Once scale is reached, companies can escape velocity (to quote organizational theorist, author and management consultant Geoffrey Moore). While some multi-billion dollar, born-in-the-cloud companies like Salesforce, ServiceNow,and Freshworks are in the scaling phase, many others are much earlier in defining their strategy and pivoting their business to include platforms. Arguably, very few corporate leaders are acting fast enough to create platform strategies that can meaningfully impact their performance.
Understanding Platform Models
While there are many reasons that executives are not acting fast enough, most commonly these include a lack of understanding in platform economics and indecision on how to operationalize the model. Let’s face it, they don’t teach platform economics much in business school, and certainly not when the incumbent tech leaders were in business school. The term platform is loaded. There are different types of platforms, and it’s worth understanding the differences. Let’s review a framework to distinguish what exactly we mean when we say the word "platform."While all platforms are characterized by multiple constituent groups that benefit from the network effects with growth, there are significant differences to be considered. Let’s break this down to get us grounded. In the market today we tend to see two distinct platform models*:
- 1-1 Platform
- The first platform model is focused on building communities of buyers and sellers. These platforms facilitate direct and discrete transactions of a 1-1 value exchange of a unique element, between the parties.
- In the 1-1 platform model, there are multiple types – product platforms like Amazon Store where buyers and sellers transact physical products, services platforms like Uber and Airbnb, payments platforms like PayPal and Venmo, and more.
- 1-to-Many Platform
- The second platform model is focused on building communities of buyers and creators, where instances of the same content or application can be sold to many buyers. These platforms are designed for ongoing delivery of the core platform services as an integrated part of the vendor and/or the partner application.
- With the 1 to Many platform there are two primary types: content and development. Content platforms like YouTube make it easy for content developers to create and publish unique content for consumption by the visitors to the platform. Developer platforms like Apple iOS, Microsoft Azure, Google Cloud, and Salesforce make it easy for app developers to create and publish apps that embed the platform functionality.
Much of what is written about in tech literature has focused on the consumer businesses and exchange on 1-1 platforms. However, the 1-to-Many platforms are largely the focus of the B2B industry.
The 1-to-Many Continuum
A simple way to look at 1-to-Many platforms in the tech industry is software producers creating one solution and delivering that value across many customers. In times past, these product centric businesses delivered a standalone value proposition that was a self-contained solution or a set of technologies provided by the same vendor.Within the 1-to-Many platform, there are two different, equally viable models on continuum:
- Solution centric: open technology platform that enables partners and customers to produce products and services that collectively deliver a stickier value proposition to their customers. Examples include Dell Boomi, Tableau Oracle Cloud and SAP/Hana
- Ecosystem centric: open technology platform that empowers a partner ecosystem to develop and monetize their own IP while inheriting attributes of the core platform. This contributes value to the platform and generates a network effect that creates pull-through revenue growth multipliers for the platform provider. Examples include Microsoft Azure, DocuSign Dropbox, Genesys Cloud, and Hubspot.
Which type do you think Bill Gates was referring to in this quote? “You are not a platform until the people who build on you are collectively making more money than you.”This ecosystem-centric mindset differs greatly from what you’d hear an executive of a solution centric platform would say. So, when a technology industry leader says, "yes, my business is a platform business,” it’s worth understanding whether we’re talking about a solution centric or an ecosystem centric business. The business operational engine and the KPIs monitored for both can differ significantly.
Setting Yourself Up for the Future of Platforms
If your business today is product centric with software or hardware technology, consider ways you can open up to leverage the technology ecosystem for growth. If you don’t begin to make moves into the platform space, you could end up on a “technology island” and fade into the sunset.On the other hand, if your destination is a platform business model, you’re well set up for the future. You’ll be participating in the global interconnected technology ecosystem, building sustainable relationships, and competing and cooperating with some of the same vendors. Expect the investment to be difficult, but the potential rewards can be high if you act decisively and execute well. The road to a growing scalable ecosystem centric business is a long one. It takes strategic vision, patience and funding.
Building a platform takes a long time. It’s hard because you may be leaving money on the table as you keep your eye on the bigger, longer-term picture. - Tobi Lutke, CEO Shopify
*Contributing resource: Modern Monopolies | What it takes to dominate in the 21st Century.