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Five FAQs about the platform business model

Five FAQs about the platform business model
July 26, 2016 Jill Holmes

Five FAQs about the platform business model

 

A lot of business experts are talking about the platform business model. In fact, some are going as far as to say platform businesses are set to deliver the best growth opportunities available in the digital economy across a range of industries in the next few years.

Accenture Strategy managing director Bruno Berthon is among the analysts saying platform models are set to drive growth in the digital economy.

“There is one key word at the centre of the digital economy or at the centre of your digital strategy: it is platform,” says Berthon in this video for Accenture.

He says companies that are not thinking about how they can develop aspects of their business into platform operations will be at a serious competitive disadvantage over the next five years.

“The platform business model is probably the greatest opportunity in the next 3-5 years to create growth in the digital economy.”

Business model analyst Sangeet Paul Choudary, who is the author of several books on platform models, has a dire warning for those companies slow on the platform uptake.

“We are moving from linear to networked business models, from dumb pipes to intelligent platforms. All businesses will need to move to this new model at some point, or risk being disrupted by platforms that do,” says Choudary.

So how do we understand the platform business model and why is it so important? Here are five things you need to know about how the platform business model works and why it’s changing the way we do business.

What exactly is a platform business model?

The platform business model can take several forms. The platform is basically a neutral utility which requires the participation of users in order to create value. As Choudary writes in his book Platform Power, “Platforms bring participants in, create the conditions for value creation and match participants to each other.”

Collaborative economy expert April Rinne refers to the basic function of platforms as being able to “match needs and haves more efficiently”. We see this process happen with platform businesses such as Uber and AirBnB, which are excellent examples of the platform model.

The creation of value in the platform model arises from the participation of users from both the supply and demand side. This is often referred to as the ‘chicken and egg’ problem for platform businesses such as online marketplaces. The optimally functioning platform when scaled becomes a win-win-win for the three main participants:

Riders + Drivers + Platform (Uber)

Guests + Hosts + Platform (AirBnB)

Viewers + Content Producers + Platform (YouTube)

Developers + Smartphone Users + Platform (Android)

Cyclists + Retailers + Platform (BikeExchange)

What are some examples of platform businesses?

As cited above, some of the better known platform businesses include Uber, AirBnB, YouTube and Android. Each of these businesses has used its platform model to revolutionary effect in disrupting and displacing industries, and consequently growing new value.

While platforms have been around since the first agricultural markets and ancient bazaars, the collaborative and scalable nature of the internet means platform models have become even more prevalent and powerful. Giant tech companies like Google, Facebook and Apple owe much of their success to leveraging platform models and creating user ecosystems.

What makes platform models so disruptive?

The platform model is disruptive because when executed well it uses the tools of digital and online technologies to more efficiently organise and utilise resources on both demand and supply sides of the equation.

In the case of Uber, it disrupted the taxi and limousine industry because it tapped into an underutilised resource to meet latent demand. Uber was also helped by the fact it was dealing with a technologically inept incumbent that had largely failed to capitalise on tech innovations to improve its value proposition to users.

While not as dramatic, online cycling marketplace BikeExchange disrupted the bike retail sector by creating a platform which leveraged the power of this fragmented market. Through its platform, BikeExchange performed the important task of ‘matching needs and haves’ more effectively, becoming the world’s biggest marketplace for everything bike-related in the process.

Why have platform models become such a big deal?

“The internet, being a participatory network, is a platform itself and allows any business, building on top of it, to leverage these platform properties,” says Choudary. This makes online businesses natural candidates for adopting the platform model.

The internet’s capability for community-building, marketing reach and commercial transaction fit well with platform models. The growth of online participation through higher uptake of personal devices such as smartphones as well as provision of broadband and Wi-Fi has meant numbers have now scaled to such an extent worldwide as to make platform businesses economically viable across all sorts of sectors and industries.

These factors have been noted by investors too, many of whom are excited about the growth potential of online businesses that display viable and scalable platform models.

In Australia, private investment deals have led to $21 million in funding for enterprise marketplace platform provider Marketplacer, which created the enterprise platform for BikeExchange as well as other online marketplaces, in the past year.

It’s an investment trend that’s evident in markets across Europe, Asia and the US. Writing for The Conversation, business academic Paul X McCarthy cites the US Center for Global Enterprise valued the global market for online platform-based companies at a staggering US$4.3 trillion.

One of the main reasons for the optimistic valuation of platforms and online marketplaces, McCarthy says, is that successful platforms open up dynamic, new value creation opportunities.

“The complexity and quality of services that are able to be created on platforms will expand as more markets are built on top of other platforms and services,” says McCarthy.

Is it only tech companies that can be platform businesses?

The common belief is that platform enterprise is the domain of tech companies. However, this is no longer strictly the case. The underlying technology which powers an enterprise platform is vitally important for that platform’s potential success, so getting that aspect of the equation right is fundamental.

Companies looking to disrupt industries and create new platform businesses might have once been put off the task because building enterprise platform software is not for the faint-hearted – it takes serious time and resources to do well. But those same companies now have the opportunity to access the expertise, knowledge and experience of Marketplacer, a company which has built a world-leading enterprise marketplace platform.

As Marketplacer managing director Jason Wyatt explains, taking care of the technology side of the equation frees entrepreneurs to concentrate on the other vital aspects of building a platform business.

“We saw a genuine need for people who wanted to create marketplaces. They don’t have to be technologists, they need to be community managers, so we wanted to de-risk people investing into marketplaces,” says Mr Wyatt.

With the technological barrier now lowered, many more businesses will be exploring the possibilities and potential of creating platform businesses fit for the 21st Century.