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Platform business models create value through the exchange of services or content between two groups, producers and consumers. The exchange is enabled by a panoply of technologies, from cloud computing to data analytics, and in most companies with such platform business models, users are able to both offer and receive a product or service. Uber, YouTube, and Airbnb are some of the companies that have found success using these exchange-type platform business models.
At the recent MIT Platform Strategy Summit, Sangeet Paul Choudary, founder of the think tank Platformation Labs, was asked to describe the platform business model and how it differs from the traditional pipe business model. Read on to learn the core differences between the two, and how platform business models operate.
What is a platform business model and how is it different from a traditional pipe model?
[Platform business models] enable plug-and-play infrastructure into which producers and consumers can directly plug in, and they then govern the market interactions that ensue on top of the infrastructure.
Sangeet Paul Choudary: When I first thought about the platform business model, I wanted to illustrate how significant the shift is from traditional business models. So to illustrate that, I used the metaphor of a pipeline. The traditional pipeline business model is one in which the flow of value is linear from a producer to a consumer, and that's the model that we've seen in the industrial era where manufacturing, media, services, everything has followed a pipeline business model. What we've seen today in an age of connectivity and in an age of data and intelligence is that we're seeing vast amounts of network flows of value.
So you look at a hotel. It has a pipeline flow of value, but if you look at Airbnb, it has a network flow of value, hosts and guests interacting with each other. And platforms are the plug-and-play infrastructure that enable and harness this network flow of value. Platforms specifically perform two key roles. They enable plug-and-play infrastructure into which producers and consumers can directly plug in, and they then govern the market interactions that ensue on top of the infrastructure. And that's fundamentally what makes a platform business model very different from a pipeline business model.
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As the world has become increasingly connected and digitised over the past few decades, the business landscape has been evolving too.
Brands such as Apple, Google, Facebook, Amazon, Uber and Airbnb have come to dominate fields such as telecoms, broadcasting, retail, transport and hospitality. In doing so they’ve displaced many traditional players within these sectors, some of whom were totally blind to emerging outsider threats.
The success of these tech giants hasn’t merely been down to superior technology or the advantages of operating online. Their ‘secret sauce’ actually comes from the revolutionary business operating models they employ.
These are platform business models; radically different methods for conducting business that prioritise interactions over transactions. These methods have proved to be so successful that they’re transforming entire industries and challenging traditional pipeline business strategies which have been dominant for centuries.
By understanding what platform business models are and how they work, you too could tap into the power of platforms. And if you don’t start looking for your own platform play soon, the chances are you’re about to get disrupted by someone who has.
Platforms vs pipes
When explaining the operating models used by industry disruptors in comparison to the more traditional businesses they threaten, we usually talk in terms of platforms and pipes.
Simply put, pipe businesses follow the tried-and-tested model of selling goods and services directly to their customers. They typically take raw materials or service opportunities, apply processes, expertise or curation to transform them into something more valuable, and then sell them to people to appreciate that value. This can include everything from manufacturing and service businesses to retail, e-commerce, design agencies and broadcasting.
Platforms, on the other hand, create communities and spaces where people can exchange value directly between themselves. Often, this involves matching supply to demand – think YouTube creators and viewers, or Ebay sellers and buyers. Sometimes these models even create value exchanges between several parties in multi-sided platforms, such as the restaurants, delivery drivers and customers within Deliveroo. The creators of these platforms look for ways to monetise the transactions and interactions that take place within them.
There’s a wide variety of platform business models to explore, from marketplaces and app stores to aggregators, social networks and crowd-sourcing platforms. The crucial factor is that their value always comes from the networks they create.
No matter which specific model you explore, there are numerous advantages that platform businesses have over their traditional pipe counterparts.
Leveraging the network effect
The biggest advantage for businesses adopting platform models comes from the principal driving force behind the entire platform approach.
This is a phenomenon called the network effect, where a platform or community gains additional value as more people use it. The more people you attract to a platform, the more attractive it becomes to others, creating a virtuous circle that fuels continual expansion.
For platform players who can build a critical mass of users and then crack their monetisation strategy, this can quickly become a highly lucrative approach.
However, the network effect is notoriously difficult to kick-start. It can take a lot of time, investment and effort to build a critical mass big enough to sustain itself and many platforms never reach this point at all. This is an area where established pipe businesses which are transitioning towards platformisation have a distinct advantage over newer disruptors entering their field.
Connections over assets
Another significant difference in new platform business models is their lack of reliance on the sorts of assets that are crucial to traditional pipe businesses. Instead of seeking to control and monetise the means of production, they instead seek to control and monetise the means of connection.
This is potentially huge. Instead of having to invest in raw materials, retail inventories, premises, or vast production workforces to engineer value from the things they create, platform businesses instead facilitate interactions between others that do.
"Instead of seeking to control and monetise the means of production, platform businesses instead seek to control and monetise the means of connection."
Whilst platform building has its own costs and challenges, this approach can be far more economical over time. Take Uber – it’s the world’s biggest taxi firm and yet it doesn’t have to rely on building or maintaining its own fleet. This gives platforms an immense advantage on the scalability front, allowing them to expand more quickly and cheaply than traditional businesses.
Consider the hotel sector: Each time a traditional hotel brand wants to expand its provision to its customers, it has to build, staff, maintain and market a new hotel. Airbnb, on the other hand, just onboards a new property host at infinitesimal server costs.
The snowball effect
Once you’ve overcome the (not inconsiderable) challenges of building an audience, you have lots of additional advantages as a platform.
Firstly, the more users who interact, the more customer data and insights you can gather about them. This enables you to not only iron out frictions in your platform and build stickier propositions, but to quickly identify new opportunities to explore as well. That can create a snowball effect of value for you as a business, where the more people you attract and the more you learn about them, the more you can create new value for them, and in turn, attract others to the platform.
What’s more, once you have tech in place to power your platform, you can very quickly roll out these new propositions and market them to a ready-made audience. This can quickly enable the creation of new product and service lines or even allow you to make jumps into different sectors and audience segments. Launching a new proposition with a platform and audience already in place can be far easier than building it from scratch. Just look at how Google expanded from search into fields such as mapping, mobile phone hardware, and applications.
Defensive moats
Last, but certainly not least, is the sheer strength that a successful platform can command. Just like digging a moat around a castle, the more competitive advantages you can establish, the more protection you have from your rivals.
In the case of platform businesses, the stronger your network effect and the bigger your audience, the harder you are to compete against. This can often lead to the total dominance of a platform within an industry, fending off pipe businesses and smaller platforms alike.
And of course, the stronger your market position, the higher the potential rewards.
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In almost every industry, platform businesses are becoming the dominant players, creating massive disruption and significant threats for any incumbents they come up against. To put it bluntly, you really should be thinking about how to pivot your organisation towards a platform strategy right now, or you’ll soon find yourself being manoeuvred out of the game by somebody else who has.
The good news is that platform business models don’t just work for a handful of tech giants. Even the most traditional businesses could be sitting on untapped potential to revolutionise their industries and transform their operating models.
You just need to know how to spot the advantages you hold, and to understand how best to put them to work.