Platform Revolution: How Networked Markets Are Transforming the Economy---and How to Make Them Work PDF
Preview Platform Revolution: How Networked Markets Are Transforming the Economy---and How to Make Them Work
PLATFORM REVOLUTION HOW NETWORKED MARKETS ARE TRANSFORMING THE ECONOMY— AND HOW TO MAKE THEM WORK FOR YOU Geoffrey G. Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary To the memory of my mother, Mary Lynn Goodrich Parker. For my A., my X. and my E. For Devika, for always being there. CONTENTS PREFACE 1. TODAY: Welcome to the Platform Revolution 2. NETWORK EFFECTS: The Power of the Platform 3. ARCHITECTURE: Principles for Designing a Successful Platform 4. DISRUPTION: How Platforms Conquer and Transform Traditional Industries 5. LAUNCH: Chicken or Egg? Eight Ways to Launch a Successful Platform 6. MONETIZATION: Capturing the Value Created by Network Effects 7. OPENNESS: Defining What Platform Users and Partners Can and Cannot Do 8. GOVERNANCE: Policies to Increase Value and Enhance Growth 9. METRICS: How Platform Managers Can Measure What Really Matters 10. STRATEGY: How Platforms Change Competition 11. POLICY: How Platforms Should (and Should Not) Be Regulated 12. TOMORROW: The Future of the Platform Revolution ACKNOWLEDGMENTS GLOSSARY NOTES INDEX ABOUT THE AUTHORS PREFACE Platform Revolution is our attempt to provide the first clear, complete, authoritative guide to one of the most important economic and social developments of our time—the rise of the platform as a business and organizational model. The platform model underlies the success of many of today’s biggest, fastest- growing, and most powerfully disruptive companies, from Google, Amazon, and Microsoft to Uber, Airbnb, and eBay. What’s more, platforms are beginning to transform a range of other economic and social arenas, from health care and education to energy and government. No matter who you are or what you do for a living, it’s highly likely that platforms have already changed your life as an employee, a business leader, a professional, a consumer, or a citizen—and are poised to produce even greater changes in your daily life in the years to come. Over the past two decades, we have come to recognize that powerful economic, social, and technological forces are transforming our world in ways that few people fully understand. We’ve dedicated ourselves to studying those forces and how they work—how they are disrupting traditional companies, upending markets, and altering careers, and how they are being leveraged by startup businesses that are using them to dominate traditional industries and launch new ones. Realizing that the platform business model is the leading embodiment of these forces, we began branching out from our academic and corporate backgrounds to work closely with companies that are deeply engaged in creating platform businesses, including Intel, Microsoft, SAP, Thomson Reuters, Intuit, 500 Startups, Haier Group, Telecom Italia, and many others. We’ll recount their stories in the pages that follow. Our goal in writing this book is to solve a number of puzzles posed by the rapid rise of the platform model. These puzzles include: • How have platform businesses such as Uber and Airbnb managed to disrupt and dominate vast traditional industries within just a few years of their own launch? (We address this question throughout the book, and focus on it especially closely in chapter 4.) • How can platform businesses outcompete traditional companies while employing just a tiny fraction of the number of people the incumbents employ? (See chapters 1 and 2.) • How has the rise of the platform transformed the principles governing economic growth and business competition? How do platform businesses resemble the industrial giants of the past—and how do they differ? (See chapters 2 and 4.) • How and why have specific companies and business leaders soared to the heights of success, plummeted to the depths of failure—or both—as a result of their use, or misuse, of platform business methods? Why did Blackberry fall from 49 percent market share to 2 percent in just four years? How did Steve Jobs fumble his company’s platform-model choices in the 1980s … and then get them dramatically right in the 2010s? (See chapters 2 and 7.) • How do some companies solve the challenge of attracting producers and consumers to a new platform simultaneously, while others fail miserably? Why is free pricing sometimes a brilliant business move, and sometimes a fatal error? (See chapters 5 and 6.) • Why do competitive markets flourish in some platform arenas, while in others winner-take-all markets dominated by a single platform swiftly emerge? (See chapter 10.) • As platforms grow, they are subject to abuse: customers shopping on eBay can be defrauded, women seeking dates on Match.com can be assaulted, homes rented on Airbnb can be ransacked. Who should pay the price? And how should platform users be protected? (See chapters 8 and 11.) In answering questions like these, we’ve sought to create a practical guide to the new economy that is reshaping the world in which we all live, work, and play. Platform Revolution is an outgrowth of three careers that have been spent immersed in studying and unraveling the mysteries of the platform model. Two of the authors—Geoff Parker and Marshall Van Alstyne—became interested in the emerging network economy during the dot-com boom of 1997– 2000, when both were PhD students at MIT. Those were heady times. The NASDAQ stock index spiked by more than 80 percent as venture capitalists poured investment money into startups boasting cool new technologies and names featuring the prefix e or the suffix com. With traditional metrics of business success seemingly rendered obsolete, several companies launched hugely successful initial public offerings (IPOs) without ever having made a dime in profit. Students and faculty alike were dropping out of school to launch fledgling technology businesses. Inevitably, the market came crashing down. Beginning in March 2000, trillions of dollars’ worth of paper valuations vanished in a matter of months. Yet amid the rubble, certain companies survived. While Webvan and Pets.com disappeared, Amazon and eBay survived and thrived. Steve Jobs, who had lost Apple to mistakes he made earlier, recovered, returned to Apple, and built it into a juggernaut. Eventually, the online world emerged from the depths of the 2000 downturn to become stronger than ever. Why were some Internet-based businesses successful while others were not? Were the differences a matter of random luck, or were deeper design principles at work? What are the rules of the new economics of networks? Geoff and Marshall set about trying to answer these questions. It turned out to be a harder challenge than they expected. They ended up having to develop a new economic theory of two-sided networks. Their Harvard Business Review article “Strategies for Two-Sided Markets,” coauthored with Harvard professor Thomas R. Eisenmann, laid out what became one of the most widely taught theories of Internet business, one that is still taught in MBA programs around the world. Along with the work of other scholars, Geoff’s and Marshall’s insights helped to reshape mainstream thinking about business regulation. Later, at the MIT Initiative on the Digital Economy, they furthered their work with such firms as AT&T, Dun & Bradstreet, Cisco, IBM, Intel, Jawbone, Microsoft, Salesforce, SAP, Thomson Reuters, and many others. The third author of this book, Sangeet Choudary, was a high school student during the dot-com boom of the 1990s, but he was already fascinated by the immense power of the Internet—particularly its power to create business models capable of rapid, scalable growth. Later, while working as the head of innovation and new ventures at Yahoo and Intuit, Sangeet started digging deeper into the factors that spell success or failure for Internet startups. His research on business model failure, coupled with his conversations with venture capitalists and entrepreneurs, helped him identify the increasing importance of a new and massively scalable business model: the platform. In 2012, Sangeet started focusing on platform businesses full-time. His premise: as the world becomes increasingly networked, businesses that do a better job of harnessing the power of platform networks will win. Sangeet has offered guidance on platform strategy to a wide range of companies around the world, ranging from startups to Fortune 100 firms, and his popular blog (http://platformed.info) has been featured on leading media globally. In the spring of 2013, Marshall and Geoff came across Sangeet’s work, and we immediately realized the value of a collaboration. Our partnership coalesced in the summer of 2013 when we met for three weeks at MIT to work together on building a cohesive view of platform dynamics. Since then, we’ve cochaired the MIT Platform Strategy Summit, spoken about platform models at leading world forums such as the G20 summit, Emerce eDay, and TED, taught about platforms at the world’s leading universities, and collaborated on implementing platform strategy with business clients around the world. Now the three of us have written Platform Revolution, representing our first attempt to bring together our thinking on platforms in a cohesive, comprehensive fashion. We’ve been fortunate enough to have access to the ideas and experiences of some of the greatest firms in the world, having worked with more than a hundred companies in diverse industries on developing and implementing their platform strategies. At the MIT Platform Strategy Summit, leaders of organizations that are building platforms, managing them, or reacting to them, including edX, Samsung, Apigee, Accenture, OkCupid, Alibaba, and many others, have shared their stories with one another and with us. We have also benefited from working with a group of world-class scholars who have dedicated their careers to understanding the digital economy, and who participate in the annual Workshop on Information Systems and Economics (WISE) and the Boston University Platform Strategy Research Symposium, as well as some of the world’s leading thinkers in adjacent fields such as behavior design, data science, systems design theory, and agile methodologies. We have written this book because we believe that digital connectivity and the platform model it makes possible are changing the world forever. The platform-driven economic transformation is producing enormous benefits for society as a whole and for the businesses and other organizations that create wealth, generate growth, and serve the needs of humankind. At the same time, it is creating sweeping changes in the rules that have traditionally governed success and failure. We hope that Platform Revolution will help market upstarts, incumbent organizations, regulators and policy-makers, and engaged citizens effectively navigate the challenging new landscape of a world in which platforms win. GEOFFREY G. PARKER MARSHALL W. VAN ALSTYNE SANGEET PAUL CHOUDARY PLATFORM REVOLUTION
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