Silicon Valley has an advantage that keeps it ahead of the rest of the world. It’s a trait shared by the fastest growing and most disruptive companies in history – Google, Amazon, Uber, AirBnb, and eBay – it’s that they aren’t focused on selling products, they are building platforms.
The ability to leverage the network effects of a platform is something that the technology industry learned long ago – and perfected. It is what gives Silicon Valley and unfair advantage over competitors in every industry; something that is becoming increasingly important as all information becomes digitized.
A platform isn’t a new concept, it is simply a way of building something that is open, inclusive, and has a strategic focus. Think of the difference between a roadside store and a shopping center. The mall has many advantages in size and scale and every store benefits from the marketing and promotion done by others. They share infrastructure and costs.
The mall owner could have tried to have it all by building one big store, but would have missed out on the opportunity to collect rent from everyone and benefit from the diverse crowds that the tenants attract.
Apple learned this the hard way in the 1980’s when it created the first versions of the Macintosh. It built its own proprietary, closed, hardware, operating system, and applications. Bill Gates, on the other hand, realized that key to power and profit was the operating system and a thriving ecosystem.
He designed Microsoft Windows as an open system in which other players could provide the hardware and software. The more programs that ran on Windows, the more users wanted it, and therefore more developers created applications. Windows became a near monopoly in the 90s – while Apple came close to bankruptcy.
Fortunately for Apple, by 2007, Steve Jobs had figured out Microsoft’s advantage. He built the iPhone App store and iTunes as open platforms on which other players could provide content. The top five mobile phone carriers – Nokia, Samsung, Motorola, Sony Ericsson, and LG – had owned 90% of the industry’s profits. Yet Apple was able to leap ahead and capture literally all of this.
The power of platforms is explained in a new book, Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You, by Geoffrey Parker, Marshall Van Alstyne, and Sangeet Choudary. The authors show how platform businesses bring together producers and consumers in high-value exchanges in which the chief assets are information and interactions. These interactions are the creators of value, the sources of competitive advantage.
Apple was able to connect app developers with app users in a market in which both sides gained value and paid it a tax. As the number of developers increased so did the number of users. This created the “network effect” – a process in which the value snowballs as more production attracts more consumption and more consumption leads to more production.
Just as malls have linked consumers and merchants, newspapers have long linked subscribers and advertisers. What has changed is the technology has reduced the need to own infrastructure and assets and made it significantly cheaper to build and scale digital platforms.
Traditional businesses, called “pipelines” by Parker, Van Alstyne, and Choudary, create value by controlling a linear series of processes. The inputs at one end of the value chain, materials provided by suppliers, undergo a series of transformations to make them worth more. Apple’s handset business was a classic pipeline, but when combined with the App Store, the marketplace that connects developers with users, it became a platform. As a platform it grew exponentially because of the network effects.
The authors say that the move from pipeline to platform involves three key shifts:
- From resource control to orchestration. In the pipeline world, the key assets are tangible — such as mines and real estate. With platforms, the value is in the intellectual property and community. The network generates the ideas and data — the most valuable of all assets in the digital economy.
- From internal optimization to external interaction. Pipeline businesses achieve efficiency by optimizing labor and processes. With platforms, the key is to facilitate greater interactions between producers and consumers. To improve effectiveness and efficiency, you must optimize the ecosystem itself.
- Value the ecosystem rather than the individual. Rather than focusing on the value of a single customer as traditional businesses do, in the platform world it is all about expanding the total value of an expanding ecosystem in a circular, iterative, and feedback-driven process. This means that the metrics for measuring success must themselves change.
Companies such as Walmart, Nike, John Deere, and GE are working towards building platforms in their industries. John Deere, for example wants to be a hub for agricultural products. But not every industry is ripe for platforms because the underlying technologies and regulations may not be there yet.
Building platforms requires a vision, but does not require predicting the future. What you need is to understand the opportunity to build the mall instead of the store and be flexible in how you get there.
Read Article (Vivek Wadhwa | washingtonpost.com | 03/31/2016)
Technology is advancing at an exponential rate, inevitably the day will come when even millennials will be unfamiliar with the latest technology. It’s up to each individual to get a little Tech-savvy for their own wellbeing and that of their loved ones.
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