Platform Revolution: How Networked Markets Are Transforming The Economy--And How To Make Them Work

211 Pages·2016·2.73 MB·English

by  Geoffrey G. Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary

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
1
TODAY
Welcome to the
Platform Revolution
In October 2007, a tiny item appeared in an online newsletter aimed at industrial designers—men and
women who shape the appearance of everything from coffee makers to jumbo jets. It referred to an
unusual housing option for professionals who planned to attend the upcoming joint convention of two
industrial design organizations, the International Congress of Societies of Industrial Design (ICSID)
and the Industrial Designers Society of America (IDSA):
If you’re heading out to the ICSID/IDSA World Congress/Connecting ’07 event in San Francisco next week and have yet to make
accommodations, well, consider networking in your jam-jams. That’s right. For “an affordable alternative to hotels in the city,”
imagine yourself in a fellow design industry person’s home, fresh awake from a snooze on the ol’ air mattress, chatting about the
day’s upcoming events over Pop Tarts and OJ.
The hosts for this “networking in your jam-jams” opportunity were Brian Chesky and Joe Gebbia,
budding designers who’d moved to San Francisco only to find they couldn’t afford the rent on the loft
they shared. Strapped for cash, they impulsively decided to make air mattresses and their own services
as part-time tour guides available to convention attendees. Chesky and Gebbia attracted three weekend
guests and made a thousand bucks, which covered the next month’s rent.
Their casual space-sharing experience would launch a revolution in one of the world’s biggest
industries.
Chesky and Gebbia recruited a third friend, Nathan Blecharczyk, to help them make affordable
room rentals a long-term business. Of course, renting space in their San Francisco loft wouldn’t yield
much revenue. So they designed a website that allowed anyone, anywhere, to make a spare sofa or
guest room available to travelers. In exchange, the company—now dubbed Air Bed & Breakfast
(Airbnb), after the air mattresses in Chesky and Gebbia’s loft—took a slice of the rental fee.
The three partners started out focusing on events for which hotel space was often sold out, scoring
their first big hit at the 2008 South by Southwest festival in Austin. But they soon discovered that
demand for friendly, affordable accommodations provided by local residents existed year-round and
nationwide—and even internationally.
Today, Airbnb is a giant enterprise active in 119 countries, where it lists over 500,000 properties
ranging from studio apartments to actual castles and has served over ten million guests. In its last
round of investment funding (April 2014), the company was valued at more than $10 billion—a level
surpassed by only a handful of the world’s greatest hotel chains.
In less than a decade, Airbnb has siphoned off a growing segment of customers from the traditional
hospitality industry—all without owning a single hotel room of its own.
It’s a tale of dramatic, unexpected change. Yet it’s only one in a series of improbable industry
upheavals that share a similar DNA:
• Smartphone-based car service Uber was launched in a single city (San Francisco) in March 2009. Less than five years later, it
was valued by investors at over $50 billion, and is poised to challenge or replace the traditional taxi business in many of the
more than 200 global cities it operates in—all without owning a single car.
• China-based retailing giant Alibaba features nearly a billion different products on just one of its many business portals
(Taobao, a consumer-to-consumer marketplace similar to eBay) and has been dubbed by The Economist “the world’s biggest
bazaar”—all without owning a single item of inventory.
• With over 1.5 billion subscribers visiting regularly to read news, look at photos, listen to music, and watch videos, Facebook
garners an estimated $14 billion in annual advertising revenue (2015) and is arguably the world’s biggest media company—all
without producing a single piece of original content.
How can a major business segment be invaded and conquered in a matter of months by an upstart
with none of the resources traditionally deemed essential for survival, let alone market dominance?
And why is this happening today in one industry after another?
The answer is the power of the platform—a new business model that uses technology to connect
people, organizations, and resources in an interactive ecosystem in which amazing amounts of value
can be created and exchanged. Airbnb, Uber, Alibaba, and Facebook are just four examples from a list
of disruptive platforms that includes Amazon, YouTube, eBay, Wikipedia, iPhone, Upwork, Twitter,
KAYAK, Instagram, Pinterest, and dozens more. Each is unique and focused on a distinctive industry
and market. And each has harnessed the power of the platform to transform a swath of the global
economy. Many more comparable transformations are on the horizon.
The platform is a simple-sounding yet transformative concept that is radically changing business,
the economy, and society at large. As we’ll explain, practically any industry in which information is
an important ingredient is a candidate for the platform revolution. That includes businesses whose
“product” is information (like education and media) but also any business where access to information
about customer needs, price fluctuations, supply and demand, and market trends has value—which
includes almost every business.
So perhaps it’s no wonder that the list of fastest-growing global brands is increasingly dominated
by platform businesses. In fact, in 2014, three of the world’s five largest firms as measured by market
capitalization—Apple, Google, and Microsoft—all run platform business models. One of these,
Google, debuted as a public company in 2004. Another, Apple, nearly went bankrupt a few years
earlier—when it still ran a closed business model rather than a platform. Now incumbent giants from
Walmart and Nike to John Deere, GE, and Disney are all scrambling to adopt the platform approach to
their businesses. To varying degrees, platform businesses are claiming a large and growing share of
the economy in every region of the world (see Figure 1.1).