Three most important components of a platform business is 1.Focus on transactions 2.Be open 3.Have governance.
Back in 2004, if I asked you about GE, Exxon, Shell, Citi & Walmart. Do you know who they are and what they do? What do they have in common? They were once the top public companies by market cap. They are big because they control some of the most vital resources and services we rely on so much, like electricity, oil, gas, finance and retail.
Now, fast forward to today, think about a different set of companies: Apple, Alphabet (google), Microsoft, Amazon & Facebook. You know them by heart right? The current biggest ones are not in any of the vital businesses at all, they are platform business. This type of business is able to win the market without making many tangible products or own vital resources. If you think about it, it is actually mind boggling.
The rise of the platform businesses era is not coming. It’s here already… and for a few years now.
In this article I will talk about what it takes to be a platform business, and explain what it really means to be a platform business. So you can set your business strategy or platform strategy up for success.
Forget about products, focus on the interactions
Traditional businesses focus on selling specific products and services. Then it optimizes the value chain and gains tight control over the value pipeline and process. Think of energy companies like Exxon & BP, they control natural resources: coal, oil and gas. Creating barriers of entry for competitors. They take the leader positions by owning resources or the access to resources. So traditional businesses are running a supply economy at scale.
Platform businesses differ. They don’t focus on products or services. But they facilitate the exchanges between consumers and producers and encourage interactions to happen on their platform. Instead of blocking participation, they are breaking barriers of entries for participants. Taking AirBnB for example, they don’t own any real estates but they facilitate transactions between renters and landlords. The fees are charged on transactions rather than on something they produced. As a result, they want more people in the ecosystem generating demands for services which in turn attracts more supplies. So platforms are running demand economies at scale.
The biggest fear for platforms is lack of transactions and participation. Because this is how they fundamentally realize their value.
Be open, invite partners to co-create value
Platform must have a “default to open” position to encourage participation. The idea is not to do it all and do it yourselves, but to empower third parties to join the business, to build and to innovate together in standardized ways.
While traditional business tries to shut off competitors and discourage new business to join. The platform businesses welcomes partners with open arms. This is because for a platform business to succeed, they need to achieve critical mass in the economy and network effect. Platform business wants everything to be done within a standard, the one they make. So they are in a “winner takes it all” competing pattern in their region and in their particular space.
For example, When you download an app, what comes to your mind first? Apple app store or Android play store? They are effectively the standards of software distribution for mobile devices these days. Both Apple iOS and Android have an amazing set of free APIs and SDKs for any company or sole developers to build solutions and sell. So it is incredibly easy for anyone to participate.
Can you imagine how many people Apple and Google have to hire to produce 5 million apps?
Govern the participation
So it is like a marketplace, you ask? Not quite. Encouraging transactions is what marketplace does, but marketplace compared to platforms has a lack of governance. Most of the actors are allowed to act even if they are a bit naughty. But not in a platform ecosystem.
A platform must have power to exclude bad actors, steer community behavior and, most importantly, being able to monetize. Rules are essential to encourage healthy interactions and discourage unhealthy interactions. Someone must design these rules and have enough power to enforce them.
A lot of people believe big platforms must give as much freedom as possible. But as we learn how powerful the platforms are, especially on poorer countries and younger people, we start to realize how important governance is.
Can you imagine if Facebook and twitter don’t moderate their content? We will have to put up with watching live terrorism day to day.
Now the takeaways. Let’s start with the definition:
“A platform is an open architecture, with rules of governance, designed to facilitate interactions.”
Focusing on interactions, open architecture and governance, each of the three component is important to the overall concept and cannot be omitted. The undeniable truth is that in the information age, the rules are different than in the industrial age. Platforms are winning over the vital industrial businesses every day. Think about how you can turn your business into a platform business. See how you can empower others to do it! Create value through transactions and interactions rather than doing it yourself.
I didn’t come up with the above ideas myself, if you want to go deep into the toic, please consider doing Platform Strategies for Business by Boston University Course via Edx (Kudos to Bryan Williams for getting me on the course). And for the bookworms out there, have a read of this awesome book called Platform Revolution.