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How Networked Markets are Transforming the Economy and How to Make Them Work for You
Geoffrey Parker, Marshall Van Alstyne, and Sangeet Choudary
Universities sell you (expensive) packages - their one-size-for-all bundle of admin, teaching, facilities, research etc requires you to buy whole bundle so that you can get the valuable certificate at the end. All that has to happen is for an alternative certification that employers will accept to be developed. Then students will be a lot more selective about which parts they are prepared to pay for.
Conventional valuation of Uber started with the size of the taxi market, how big a piece Uber could get, and then calculated the value of revenue which that would accrue. But this ignored network effects. As more drivers sign up, more cars are available, so more passengers choose Uber instead of other alternative transport options, so there is less downtime for drivers, so they can make same profit in shorter time, so they can afford to lower fares, and so on.
So, in 2014, the value of the taxi market in San Francisco was $120 million, according to conventional measures. But by Uber's own figures it was already 3 times that, and growing steadily.
In the past, companies have grown big from economies of supply - the more you produce, the less each unit costs. But C21 companies like Uber are growing on economies of demand - the bigger the network, the more valuable it is to each member.
(perhaps the greatest salesman ever was the one who sold the first phone, which was completely valueless - at first - with no-one to connect to)
Threadless has a frictionless business model. Each week people submit tshirt designs for others to vote on. Threadless offers the most popular designs for sale, then prints exactly that number of shirts. They even outsource the printing. So no design costs, no marketing or promotional costs, and no inventory. The business arose by accident. They originally started as a consulting business; launched their Tshirt site as a promotion (an idea they copied from another website), then dropped the consulting side once realised how scalable the Tshirt part was.
OkCupid problem that more men than women seeking dates. So any A-class woman who registers gats bombarded with requests from B-level guys. The A-level woman dissatisfied because doesn't want any of the guys offered, and abandons the site, and the guys dissatisfied because they don't get any replies. And the few A-level guys that enrol don't find matching women.
To get round this, OkCupid runs an algorthm to determine the guy's attractiveness (based on other members' reactions to him). If he is rated as B or C level, then he only gets presented with women who aren't "out of his league."
A trait shared by the fastest growing and most disruptive companies in history — Google, Amazon, Uber, AirBnb, and eBay—is 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 an 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 it would have missed out on the opportunities to collect rent from everyone and benefit from the diverse crowds that the tenants attract.
Apple learned this the hard way in the 1980s 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 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 percent 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 that 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.
In a paper in Harvard Business Review, Kellogg School of Management professor Robert Wolcott illustrates the problems that Netflix founder Reed Hastings had in 1997 in building a platform. Hastings had always wanted to provide on-demand video, but the technology infrastructure just wasn’t there when he needed it. So he started by building a DVDs-by-mail business — while he plotted a long-term strategy for today’s platform. According to Wolcott, Uber has a strategic intent of providing self-driving cars, but while the technology evolves it is managing with human drivers. It has built a platform that enables rapid evolution as technologies, consumer behaviors, and regulations change.
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.
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