What is a platform company anyway? Why the hype?
Being a platform company has become the making it to big deal status in the modern era of business. Most elevator pitches espousing strong value props all include one word before its conclusion regardless of sector: platform. We learned from Andrew McAfee and Erik Bynjolfsson that pipelines and manufacturing products are now analogous to the bygone era of the industrial revolution days — so two centuries ago. And yet, if you ask around to find out what does a platform company or business model mean, I am sure only few people have any understanding. No surprise that many in charge are talking the talk–meanwhile most of us reside in this mass state of platformization confusion. While I know it is normal to conflate a bunch of buzzwords into a cocktail and get away with being somewhat in the right busy wordle zip code, there are some important issues to pick apart.
On this topic, I have some questions and perhaps you have some answers.
Is a platform company or business model only about being a multi-sided market place? Can non-technology companies be platform companies? Why are we so enamored with achieving a successful platform?
Let’s start with the confusion: maybe you are like me and the first few times you heard the word platform presented as the new holy grail, you were confused trying to remember what type of private equity strategy does or does not bundles companies in a platform. Or even worse, I am far from a technologist and therefore I become frozen trying to remember which aaS, are we referring to this time…platform as a service? There are so many! Given how generic the term is and the many pre-existing connotations, I’ll offer up some borrowed definitions.
According to this Economist article: “Platforms are a way for companies to create marketplaces that allow both sides of the transaction to flourish—while the firm, as gatekeeper, enjoys a tidy revenue stream.”
Or, according to this HBR article: “Products produce a single revenue stream, while platforms—which we define as intermediaries that connect two or more distinct groups of users and enable their direct interaction—can generate many.”
So far, is it me or could these definitions apply to a marketplace in Alexandria or Athens in their heyday? So many of us are DAILY customers of the exceptional examples of platforms darlings and our new industry titans: Apple (app store/itunes), Netflix, Google, Uber, and you know the list goes on and on. While an exchange between multiple parties that creates value is not a unique element, the degree and manner in which technology has collapsed boundaries is unique. The interdependence of the parties involved and the creation of the community around them are the new and interesting elements. Customer service has always been important. Now via an ever-present microphone publicly updating the world of a companies’ screw ups in a virtual community thanks to social media, consumers have new weight real-time. Well designed platforms create communities that allow users to react and add value that improve performance/delivery. Now that the consumers have power, building repositories to organize and analyze the feedback loop has taken on a higher level of importance often tripping up traditional companies attempting to make the conversion. In addition, companies are spending a lot more time focusing on measuring “client experience” and other metrics that are not merely financial metrics.
It is difficult to answer the question posed as to whether this concept best aligns with multi-sided businesses. I would suggest most firms with outsized ambitions cannot afford to be narrowly focused and not optimize across competing interests/parties in their ecosystems. For example, even a traditional car insurance firm has to provide a product offering and experience that feels seamless to multiple parties with competing interest. If we compare alongside Airbnb, yes, the company has designed an interface that serves the needs of the hosts and the needs of the guests. If we look at Airbnb versus a car insurance company through the prism suggested in this HBR article, we may add even more depth to our perception of a platform.
According to Mark Bonchek and Sangeet Paul Choudary, the success of a platform strategy is determined by three factors:
- Connection: how easily others can plug into the platform to share and transact
- Gravity: how well the platform attracts participants, both producers and consumers
- Flow: how well the platform fosters the exchange and co-creation of value
For connection, on the car insurance side and in comparison to Airbnb, there is a good amount of friction to plugging into the platform – most of the time. I’ll also assume my personal negative experiences with Airbnb hosts in Italy are exceptions and not the rule. Even with gravity, legal requirements demand providers and consumer must connect for car insurance. Yet, I would still argue for extreme situations like finding a car insurance provider or a place to rent for 1 week in Fiji, an Airbnb host and guest are more likely to make a match in a shorter time-frame. Finally, flow, where the power of the people formerly outside the chain of command is no longer dismissed and can unlock exponential value. Flow is the reason for all the hype. Flow makes everyone want to unlock thinking and actions to shift a culture of how we interact with producers and consumers.
So for the final question- can non-technology companies become platform companies?
Maybe all companies are technology companies now. Whether decision makers accurately allocate the resources required may determine their trajectory up and to the right or out into obscurity…