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The promise of multi-sided businesses and the platform paradox

The is the first part of a two-part series exploring the significance of platforms in today's digital economy.

The term platform is hopelessly overloaded. You could be looking at a platform for an opinion; a suite of products integrated to create a platform for the next stage of the business; a smartphone is a platform of apps to augment your daily activities, and your phone might interact with some body sensors making you a platform. The cloud, another platform, provides a technical infrastructure and a set of services that promise to get you to market more quickly. We live in a platform world.


In this article, we’ll explore the business models that have grown on the back of the technology and the platform build out considerations that most companies have to comprehend. Business platforms from technical platforms, if you will. We’d like to carve a quick path over the last 10 years: from when e-commerce evolved into digital, and more recently into network and platform economies.

Back in 2007, Nokia had a market share of 49% of the smartphone market globally, a product across every customer segment and at every price point. Customers loved their phones and Nokia had a strong hold on suppliers and customers. It was the most dominant brand in the industry by far. Then, Apple’s iPhone launched. By 2013 Nokia had less than 3% market share. The decline was swift.

What had changed? On the surface, the iPhone offered what any number of competing handsets provided: mobile voice calls.
 
More recently, we’ve seen other examples such as Uber and many more on-demand businesses emerge. The effect is that previous incumbents are becoming disintermediated or challenged by fast growing competition — technology again. Phones become smarter, apps more pervasive and linked to money. Complacent or slow moving companies have felt the shock.

Enterprises have traditionally used technology to ‘enhance’ their existing market offerings. This has primarily been to either add new features to products or find new channels into markets and enhance customer experience and retention. These have often resulted in incremental results and opportunities.

As in the Nokia example (and there are many others), the last decade has seen a radical change in the way companies engage with consumers.

Digital business models have emerged and are disrupting traditional industries. Digital business models involve new ways of creating, delivering and capturing value. Successful companies also use these business models to defend their value proposition against competitors.  

Digital has already upended established industries such as telecoms, where Whatsapp and Wechat now rule; transportation has been reshaped by Uber; and Google and Facebook have changed the rules of advertising and media. These are just the early casualties; digital disruption is coming to every industry.

This disruption is fundamentally driven by new the rise of digital business models that create new ways of connecting with users, creating demand, interacting with the supply chain and finding new partners and markets.

The businesses that embrace digital are often referred to as ‘multi-sided’ (or ‘nonlinear’) businesses; they are enabled by the rise of the ‘platforms’ which connect various players in unique ways.

Linear markets imply a single dominance of the consumer base. However, non-linear business models aren’t just about a new route to market. In many cases in means that you are a part player in a bigger picture where cooperation is the name of the game.

Platforms and the era of networked disruption

These business models would be ineffective without the emergence of enabling technologies.

There was a time that a web presence was all that was required; now we see technology creating new business opportunities — ones that would otherwise be just pipe dreams. This is where real opportunities lie: at the intersection of technology, business and society.

Business platforms
Amazon often get quoted as an example here. To a developer, AWS is a rich set of services that allow you to develop scalable offerings, that happens to be built on the same technology that disrupted the book industry and now retail more widely. As a business, we can engage with Amazon as a marketplace: it lets us fast-track our digital presence; we might even use it for the fulfillment part of the supply chain. Amazon gives everything we need to create a scalable technology platform in a fraction of the time and cost associated with traditional enterprise IT.

Likewise the Apple ecosystem and iOS platform — where users, app developers, telcos and accessory makers all come together and interact in various ways. The network effect between device makers, the app developers, users and telcos and their interaction creates exponential value for all of them. And again, as a developer I can use the features of the device as a ‘platform’ for evaluating my life, whether it’s health, managing my social impact or just getting around. We’re seeing this functionality grow significantly away from a communication device to a lifestyle hub. Newer devices are now using machine learning and augmented and virtual reality features. There is clearly an arms race between the larger brands all attempting to retain their consumer base through expansions of the software and hardware capabilities.

These network effects might create not just exponential value but also tremendous barriers of entry for new entrants. First mover advantage and economies of scale create a very uneven playing field.

You need to become a technology company

At ThoughtWorks, we have watched companies mature digitally and evolve their business models. Often, we’ve been a part of their attempts to create non-linear and multi-sided businesses.

Ponder for a moment: what type of company are Amazon, Apple or Google? All of them would say that they are a technology first and foremost. Does this feel alien to you? If it does, that’s the gap between your mindset and those that are harnessing technology to great effect and eyeing your market share.   

The platform paradox 

One mistake businesses make at the moment, is seeing network economy opportunities as simply another channel. Let’s dig into this a little: we said earlier that a company simply needed to understand it consumers, of course this remains a truism. But if your products find their way into a separate marketplace, then your business has multiple opportunities to grow. Or indeed you have multiple sides that face the market. Indeed a multi-sided platform is one in which businesses and consumers can interconnect and henceforth do business either forevermore or just a single transaction.

This is where we find a paradox. You might be visionary enough to identify a market niche and have a technology strategy that helps you create that ecosystem. In doing so you might either own the entire space, so clients trade through you, or you may simply be associated heavily with its creation. In which case, you create and own some or all of the activity. But what if it didn’t work? What if you have invested so much time and effort into building, branding and promoting the ecosystem but the world doesn’t come to you?

The paradox is do you jump and reap all the rewards but at the expense and risk of doing so, or sit back and hope someone else doesn’t get there first.

We have seen this happen — primarily where new business models are implemented using old and mismatched methods of operation, such as trying to rebuild a new leaner organisation with legacy structures and hierarchies. We also see it where companies try to mimic platform implementations and business models that work elsewhere. Some of them are built to fail, given no two industries or ecosystems work alike.

We see two essential ingredients to a successful strategy: an ecosystem beneficial to all to some degree and building and testing your way into the ecosystem regardless of whether you are the creators are participators — no big bangs.

It’s all about the ecosystem

Let’s take a look at nature. Biodiversity and evolution teach us that while competition occurs, so does symbiosis. Organisms work together in communities where win-win scenarios are commonplace. We foresee the same happening to parts of industry. There are a number of recent market types that have popped up:
  • The ‘gig economy’ needs a platform that manages short-lived arrangements between producers and consumers.
  • The ‘intention economy’ turns the marketplace upside down, where the buyer asserts their needs and service providers bid to supply.
Both require the technical platforms to manage, facilitate, enforce or reject the interactions.

Therefore, an effective business platform is a set of cooperating participants who benefit from each others presence as well as competing.

In a perfect world, you don’t have to be the platform creator to take the full benefits. We see platforms moving from ‘winner takes all’ to a model where either creation or participation in networked marketplaces works well. Fast follower participation can still get brand equity from being associated with the platform in question. This leads to a far more democratic and distributed ownership and benefits for all who participate.

Of course, brand dominance will always be key. There’s only one eBay although other auctioning platforms exist; there’s only one Facebook but other social networking platforms exists; only one AirBnB and so on. One difference is that younger consumers are far more connected than ever before. As a result, changes in trend direction can happen much more quickly.

Big business is still learning how to engage rather than simply connect with Gen Y and Millennials. Many of these platforms have deep relationships with that generation and tech savvy people — physical in the case of a smartphone, virtual in the case of Facebook, and a blend of the two in the case of Amazon (software plus cloud infrastructure). Therefore loyalty is becoming very different now, fashion, trend, association to other public figures such as celebrities drive the virality in that first surge to market share. So to build the platform is a technical, business and social challenge.

In review, we’ve looked at how technology has created certain types of routes to market. Technology has created different types of platform from the smartphone or home hub, through to marketplace software such as Amazon, eBay, AirBnB and so on and finally the technology platforms themselves — the cloud, the devices that link together. When everything is internet connected our lives and business boundaries blur — for good and bad.

Whatever the platform is, they provide new and diverse routes to market. This is they key to being multi-sided. Build or engage with the platforms you need and then move into new markets. But never underestimate the consideration of new market consumers. To succeed you need to go viral — that’s not technology or even good marketing, that’s genuine social impact.

In the next article we will discuss the following:
  • Do you start building a platform with all stakeholder ecosystems in mind?
  • Do you build one design keeping an end state of a platform in mind?
  • Does a platform emerge organically or is one created from scratch?
  • Lastly, do you design to attract a particular kind of user base or design for broad-based adoption across the value-chain?
We are looking at just one form of market disruption here, but of course we are seeing new opportunities all the time that are enabled by either new — or new uses of — technology.