One of the core responsibilities of a platform company is to constantly change to reflect the evolving needs of its partner ecosystem, by recognizing reinvented technology and incorporating it into the platform. In addition to arms moving, the platform itself must also adapt.
This is the second in a three-part series on managing platforms for massive growth. Part one explored what comprises a platform; here, we take a look at growth strategy and network effects. Read part one: “What Comprises a Platform,” and part three: “Getting Started, Best Practices.”
As shown in figure 1, a successful platform will grow over time, relieving its partners of the burden of reinventing the wheel.
Myth: Platforms are static.
Reality: Platforms must constantly evolve, incorporating new functionality otherwise duplicated within their ecosystem.
Following this model, Microsoft has found hundreds of thousands of ecosystem partners worldwide — 100,000 in the U.S. alone in 2016, according to the Redmond Channel Partner magazine. In the fourth quarter of 2017, Apple made US$8.5 billion from its app store, compared to US$29 billion from iPhone sales.
The truth is that the bulk of platform revenues come from the “pull through” generated by the ecosystem market. You can’t buy on iTunes without an Apple product.
Successful platforms create revenues from pull through to underlying platform revenues, and by opening access to massive “long-tail” markets, where volume rules the day. Indeed, the revenue under the area of the long tail of platforms generally exceeds big revenues from a few customers that are accessible without this model. And those rare products are the primary focus of the buyer, the seller, and you, because they represent a market that is untouchable in any other way.
Myth: The long tail is dead.
Reality: There is massive opportunity at minimal marginal cost from using a platform to offer services to a long tail of diverse buyers and sellers.
Double-Sided Metcalfe Network Effects
The successful platform story goes considerably beyond the picture above. A doubly interlocked Metcalfe Network Effect growth curve, along with churn-reducing lock-in, supercharges the winners.
This sounds complex but can be understood by visiting the clock radio aisle of your local department store.This dates back to the dot-com bubble in 1999 where “grow big, grow fast” was the mantra. Regardless of their business health, companies engaged in building networks of users that in a way could lead to exponential growth through word-of-mouth marketing — you tell your friends, they’ll tell theirs, and so on (see figure 2).
But the dot-com boom contained a fatal flaw: As soon as many companies caught on to this game, competition meant that webvan.com customers would jump to myshoppingcart.com. Then competition drove down prices, and business models failed under the weight of their costs.
What’s different today? Why are platforms such as Android, .Net, and iTunes as successful as they are? The reason: There are now two spirals, as shown in figure 3.
The best place to understand the two-sided spiral is likely at your local department store. Wander into the clock radio aisle, and you’ll see iPhone adapters in many of them. Now imagine: you’ve bought that clock radio for your iPhone. Are you likely to buy an Android now? Add to that, you’ve bought a dozen apps for your iPhone. And why did you buy that Apple in the first place? Because you knew it had thousands of apps available. You’re locked in.
A similar pattern happens to developers. Imagine you’re a new software company building a mobile app. You will probably choose to deploy on Android or iOS, the Apple operating system. Why? Because there are thousands of potential customers there.
The customers in turn are attracted to a platform due to the number of potential apps built by the developers and these two trends reinforce each other and create a lock-in effect. The Metcalfe spirals grow with the ever-expanding user and developer network. And once a company dominates a space, it’s nearly impossible to break these locked-in users.
In addition, the value is in the two networks. Facebook has open sourced much of its code, as revealed in a Techworld.com interview with Red Badger CEO Cain Ullah in 2015. And Apple could do the same, without losing substantial value.