Platform-based enterprises dominate in their markets, beating non-platform competitors handily. Simply put, a platform is a way to avoid reinventing the wheel by consolidating shared functionality into a single place.
This is the first in a three-part series on how to manage a platform for massive growth. Here we explore what comprises a platform, review some myths related to platforms, and look at what constitutes a model platform. Read part two: “Platform Growth Strategy,” and part three: “Getting Started, Best Practices.”
Hidden beneath successful technology companies today is an “invisible engine,” a business model that when done right leads to winner-take-all market dominance.* For companies blind to this pattern or unwilling to change quickly enough, competitive pressures are becoming increasingly difficult to withstand. The reason? To make the magic work requires understanding a particularly complex interaction of building blocks. Employing part of the pattern without understanding the pattern, or how the pieces interact, will lead to failure. Designing it right will lead to success of the Microsoft, Apple, Salesforce, Facebook, or Uber kind.
Despite these magical properties, the pattern has a prosaic — and often misunderstood — name. It’s called a platform.
No doubt you’ve been part of a platform ecosystem at one time, either building some core technology or benefiting from some other platform, such as Microsoft’s .Net or SAP Localization Hub. Platforms Amazon and Etsy allow hobby sellers to make a living. Cloud compute platforms such as AWS and Azure have supercharged software-as- a-service (SaaS) business models.
You’ve probably been a platform end user too, buying an app for your Android, software for your PC, a book from Amazon, a song from iTunes, hiring a car on Lyft or Uber, or renting a room from Airbnb.
Platform-based companies dominate in their markets, beating non-platform competitors handily. Take Myspace, which was founded a year before Facebook, yet ultimately failed due to lacking a platform ecosystem.** In the Huffington Post, Amy Less quotes Myspace founder Chris DeWolff: “We tried to create every feature in the world and said, ‘Okay, we can do it, why should we let a third party do it?’ … We should have picked five to ten key features that we totally focused on and let other people innovate on everything else.”
What is a Platform?
Imagine the kitchen stove as a platform. All the dishes cooked on the stove share the same heat source. The same holds good for software, with the addition that the platform allows multiple companies to collaborate in novel ways.
eBay brings sellers and buyers together, Amazon allows authors to sell to readers. This model is exploding: At Twitter, a new plug-in to its platform is registered every 1.5 seconds.†
Yet getting a platform right can be a mine field, so understanding and avoiding platform myths is crucial. The Myspace quote above illustrates the first one:
Myth: A company can offer both a platform and products on that platform.
Reality: Building a platform and building a chain to market are fundamentally different skills, and history is littered with failed attempts to do both. An aircraft company is fundamentally different from an airline.
Amazon doesn’t employ a team of writers to author books. Uber doesn’t own cars. Apple doesn’t employ musicians for iTunes. The research laboratories of large companies such as AT&T’s Bell Labs and Xerox PARC are a shadow of their former selves.
Why is this so? As a general rule, the culture and skills required to create platforms are fundamentally different from those required to adapt to a market, to innovate effectively.
Markets have discovered that the ideal demarcation in the chain to market is to anchor one end in a platform and allow the other market-facing end of the chain to flex through the crucible of attempted sales and constant pivots. This provides both the scale economies of certain functionalities that are common to all applications while not sacrificing the flexibility needed for continuous market innovation.
Consider Yahoo, whose Internet auction site was in tight competition with eBay in 2000. Along with many other organizations, the company embraced the “two-sided market” idea, that it could charge both buyers and sellers. Although Yahoo’s auction site initially was free for sellers, it began charging them a fee in 2001, which led to its listings dropping by 90 percent.* And the rest is history. Verizon’s app store faced a similar fate in 2012.††
Myth: The benefit of a platform is charging ecosystem partners to join it, creating a new revenue stream.
Reality: Partners are usually expensive to obtain and support. Revenues come from pull-through.
The Platform Octopus
A successful technology business is one that creates a chain from a solution, developed at a low enough cost, to a problem so critical for a market to solve that it will not only pay a high enough price for the product but is also willing to change its behavior. You can solve one link in this chain, such as having a great idea, and you’ll never get to market unless the rest are complete as well.
There are two reasons for this gap:
- Great technologists are rarely immersed in a problem enough that they know which issues are not only problems, but also priorities.
- It’s constantly changing.
Amazon doesn’t write books and Apple doesn’t employ musicians. So per the first myth above, it’s often a mistake to attempt to offer the entire value chain. Yet it’s equally dangerous to swing far to the other side: Developers are rarely able to build all their technology from scratch, and so to remain cost-competitive and agile, platforms are increasingly essential.
Given the benefits of consolidating reused technologies into a platform, it would not be a good decision for a smartphone software shop to develop its own device or for a desktop application developer to build their own computer.
So, the ideal platform model looks like figure 3, where ecosystem partners build and rebuild, adapt, and pivot through constantly adapting value chains– imagine the arms of this octopus constantly moving — to adapt to market needs as they seek and re-seek product and market fit.
*Invisible Engines – How Software Platforms Drive Innovation and Transform Industries, by David S. Evans, Andrei Hagiu, Richard Schmalensee
**Myspace Collapse: How the Social Network Fell Apart, Huffington Post
† Your Strategy for Creating and Nurturing a Developer Ecosystem, UpWork.com
†† Verizon closing its app store for Android and BlackBerry devices in January, Verge