Networks and the Nature of the Firm
Tim O'Reilly
1.2K53

Great article laying out the shift in business design and the nature of the firm!

However, platforms are more than the internet era version of franchising. While they may seem similar, platforms leverage many additional factors to scale that make them fundamentally different and much more cyclical in functioning:

  1. Like franchises, they benefit from near-zero marginal costs of expanding supply as well as serving demand.
  2. More importantly, platforms benefit from network effects. More production invites more consumption and vice versa. This is made cyclical because platforms explicitly communicate feedback from consumers to producers, encouraging them to participate repeatedly. This is again way beyond the franchising model which largely relied only on point 1 above.
  3. Franchising worked on a model where the central brand acted as a plug-and-play infrastructure managing brand creation and disseminating learning and best practices. Platforms do this on steroids because feedback loops from the individual supply and demand nodes to the central platform work in real time, benefiting all connected nodes, much faster. These are network effects of learning. The more the nodes connected and active, the faster the platform learns from their actions and disseminates such learning to other nodes. This learning may be disseminated implicitly (in the way algorithms behave) or explicitly (in the way connected nodes are encouraged to behave).
  4. Platforms benefit from behavior design for both producers and consumers. Real-time feedback nudges all participants on the platform towards desirable behaviors and away from undesirable ones.
  5. Platforms also benefit from learning filters. The producer’s or consumer’s interface to the platform constantly learns and customizes itself to their individual preference. Franchises could never claim to the same effects. Platforms can create huge economics of scope because of these learning filters.
  6. Platforms benefit from virality. Virality allows platforms to spread faster to new users with usage by existing users. (In contrast, network effects ensures that greater usage by existing users makes the platform more useful to existing users).

All these factors together work to power scale on platforms in a manner that has never been seen in traditional business before.

I think of this distinction as the shift from pipes to platforms: traditional business worked in a model where a producer spewed value through a pipe to consumers, platforms act like plug-and-play infrastructures for producers and consumers to connect and interact. The platform needs to balance the conflicting design constraints of providing an open plug-and-play participative infrastructure with the need for curation and governance of interactions that ensue.

If you’d like to read more about this, do check out the blog Platform Thinking or sign up for a copy of the book Platform Scale that launches next week.

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