Platform thinking: how to succeed in the internet ageMay 2, 2015
How does a business succeed in the internet age? Think platforms, not pipes, says Sangeet Paul Choudary, an author, founder and CEO of Platform Thinking Labs, and co-chair of MIT Platform Strategy Groups.
Pipes, he says, have been around for as long as our industries. “Traditionally, the world moved in a straight line. I think of it as pipes.”
Companies create something of value, push it down the pipe, and people wait at the other end to consume it. The model is linear. Choudary further explains this is because traditionally, value was created within the confines of an organization. “In the past, the only way you could make people work together was by putting them inside an office, inside a factory, and organizing them in a straight line.”
Then the internet happened. It brought about a shift in the way the world works, and gave rise to platforms. “The internet no longer needs us to be in one place and coordinate all of our actions, working in a straight line to create value. New forms of value can be created when people are dispersed because now a central network coordinates all of their activities.”
So unlike pipes, platforms allow people to create and consume value or, in other words, “share” value. “In this model, the business acts as an infrastructure where external parties create value and external parties consume value. The business manages the interactions between these two sides […] it owns nothing,” Choudary points out.
Why did Nokia and Blackberry lose almost all their market share as internet access was democratized over the last eight years? How did Apple and Google grow to be tech giants? What did Facebook do right that Myspace didn’t, causing it to fail?
You see, Apple, Google, and Facebook are platforms where apps (in the case of the iOS and Android) and content (in the case of Facebook) are created and consumed. Nokia and Blackberry were pipes, while Myspace fell short of being a platform.
How platforms are disrupting traditional industries
So what are the characteristics of a platform, how do you build it, and what functions does it need to perform for it to succeed? Choudary cites “repeated” things that platforms do when they disrupt industries.
1. “They remove inefficient gatekeepers”
Platforms solve inefficiency by providing solutions that allow businesses to scale fast. They get rid of middlemen or gatekeepers who decide what the market wants. Choudary says a good illustration of this is Amazon. With Amazon’s ebooks, publishers don’t have to produce, store, and distribute physical copies. Authors can even self-publish on Kindle for free. Traditional publishing “works really slow,” notes Choudary, while Amazon “lets the market decide what the market wants.”
And it’s not just publishing; it happens in other industries too. “VCs (venture capital firms) have gatekeepers, that’s why crowdfunding is becoming so popular. The music industry has gatekeepers, that’s why Justin Bieber had to be [discovered] on the internet whereas the Beatles had to audition club by club,” he adds.
2. “They unlock new sources of value”
Industries are seeing competition from platforms that weren’t normally their competitors, because platforms are “creating entirely new value,” according to Choudary. He says some industries have privileged access to supply. The hotel and taxi industries, for instance, were the only ones that had control over accommodation and rides. But now, they are up in arms with the entry of platforms such as lodging website Airbnb and car-booking service Uber.
By letting anyone rent out a room, Airbnb is providing market access, notes Choudary. “Airbnb is not simply taking value from somewhere and moving it somewhere else. It’s crafting new value.”
3. “They aggregate fragmented and inefficient markets”
This is what LinkedIn did to recruitment or what TripAdvisor did to the travel industry. Choudary relates: “Before TripAdvisor, you asked your friends and family where to stay and what to do. Now you just go to the site and read the reviews over there. It created a rating system that’s not just a digital commodity but something that has real value in the real world.”
This brings us to the question: how do you build a platform? Choudary’s first advice: never start with the technology. He says some businesses think technology is the end-product. “It’s the easiest way to fail. What is important is to focus on interaction that you’re going to enable between users.”
He says Twitter’s technology, for example, doesn’t provide value in itself. The value comes from the content the community around it creates.
With this in mind, he urges startups to start by thinking of a core unit of value they want exchanged. On Airbnb, it’s a room listing. On Youtube, it’s a video. On Kickstarter, it’s a project. “Without this core unit of value, the platform has no value at all,” he says.
Carry on by designing how this interaction will happen on your platform. The important things to determine: who is creating value? Who is consuming it?
Then comes the time to think about technology. Choudary says the only part technology plays is it scales the interaction at a global level.
“But all go back to one central goal: enable interaction between producers and consumers.”
Once you’ve pulled together the two sides and enabled interaction between them, the challenge then becomes how to facilitate this interaction. “What kinds of people are allowed on the platform? How do we know what’s allowed and what’s not?
This is the area where Myspace failed terribly, according to Choudary. One of the biggest issues with Myspace was that it gave users freedom to tinker with their profile pages at HTML level. Users who did not know HTML would then copy and paste sets of codes from everywhere, making the social network – in Choudary’s own words – a nightmare. “People hated going back to Myspace.”
It also lacked the element of privacy – it failed to decide who could interact with whom. This is an area that Facebook has somehow perfected. “You should not just have the best technology, you have to ensure you have the right sets of rules to govern those interactions.”
Choudary says such interactions present platforms with the opportunity to collect data that wasn’t possible to collect in the past without the internet.
This data allows you to match producers and consumers and match consumers and value on a consistent level.
So if you’re thinking platform, Choudary says it must do these three things: “Pull, facilitate, and match.”
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Platform thinking: how to succeed in the internet age