Discussing platforms at the World Economic Forum (with Airbnb, Youtube, Cisco, Accenture and NYU)
As many of you know, the latest Davos World Economic Forum ended a week ago. During 3 days of intense talks, champagne and all, 500 leaders and thinkers have been discussing “The Fourth Industrial Revolution”.
Among all these debates, one especially caught my attention, because it specifically deals with our current scope of research: “A new platform for the Digital Economy”. A subject discussed by Youtube’s CEO Susan Wojcicki Cisco’s CEO Chuck Robbins, Accenture’s CEO Pierre Nanterme, Airbnb’s CTO Nathan Blecharczyk and Arun Sundararajan, professor of Business at NYU Stern. All this moderated by Jonathan Zittrain, professor of Internet Law at Harvard.
Here’s what we learned from this debate, along with my two cents on critical questions like the nature of platforms, their differentiating strengths and their rapid expansion to all industries.
If you’re short on time, a little summary below:
- There are two types of platforms: the physical infrastructures (Cisco, telecom operators..) and the “retail” platforms (Google, Facebook, Airbnb…) that are build on top of the first type of platforms.
- The second type platforms don’t provide the end-service, they’re facilitators
- All platforms are not the same. Some are closer to traditional companies depending on the service they provide and the terms associated (setting prices, customer support…).
- Platforms build their market power with network effects and trust. Trust is built through 3 layers: trust in the brand, trust in the company & trust in the community.
- Platforms concentrate markets, and the winner is often the first “settler”: the first platform to reach critical mass.
- Platforms are going to spread to all industries, leveraging their captive consumer base and reputation.
I- On the nature and role of internet platforms
1- Two main types of internet platforms
What do we call platform anyway ?
According to Techopedia, “a platform is a group of technologies that are used as a base upon which other applications, processes or technologies are developed.”
For the panel, this broad definition seems to be encompassing two complementary and interdependent types of platforms:
- Platforms acting as foundations to basically anything digital such as the internet, represented by actors like Cisco or telecom operators. Basically, the physical infrastructures.
- Platforms built with a retail conception on top of the foundational platforms, acting more like guides and interfaces to facilitate connections between people, objects and information. They are the ones that are most talked about: the GAFA (Google, Amazon, Facebook, Apple), Airbnb, Netflix, Alibaba, Uber…
The second type of platforms has been able to emerge thanks to the first one.
“We built the platforms that enable these platforms. […] We created an ecosystem of value exchange.” — Chuck Robbins, CEO Cisco
2- Platforms are mainly facilitators
What is their added value?
A lot of the second-type platforms are not the providers of the end-services. Youtube doesn’t create the content it feeds you. Airbnb doesn’t own the rooms you rent and doesn’t provide the hospitality service. Instead, what these actors have built are platforms to allow large distributed groups of people to either get access to demand or to offer, depending on the side of the market you’re looking at.
“Essentially, we’ve built a platform to facilitate payments, reviews, search. […] I like to think hosts are micro-entrepreneurs and we give them a hospitality tool kit.” — Nathan Blecharczyk, CTO Airbnb
This is becoming less and less true when looking at Netflix producing movies or Uber looking into self-driving cars.
3- Some platforms are more Old-School than others
Can’t you see they’re not all the same?
Depending on the services they provide to users and on the terms of these services, some platforms are closer to traditional companies’ model than others.
- Etsy is a marketplace where users and producers face each other directly, merely using the platform as a place to meet. It is close to a “pure” marketplace.
- Airbnb is a marketplace too: it lets people merchandise, set prices, control inventory. But it provides certain things a traditional company would provide: a face to the consumer, it is the guarantor of a quality standard and provides 24/7 assistance.
- Uber is also a marketplace: it puts in contact drivers with potential clients. But one main characteristic makes it more of an Old School company than others: Uber sets prices.
“We are still in the process of experimenting these firm-market combinations. Later in the 21st century, we will have converged on a few standard platform models that will mediate a significant fraction of the world’s economic activity.” — Arun Sundararajan, Professor at NYU
So let’s not assume all platforms are the same. The distinctions developed above are just examples of the many nuances that differentiate platforms. Therefore, questioning Uber’s model doesn’t equate questioning transportation platforms as a whole like criticizing child labor in factories doesn’t equate criticizing factories per se.
Platforms are still a young species, and each of them is built with a personal philosophy that makes it distinct from others. It’s only through thoughtful and extensive analysis, that we, as a society, will support the emergence of the platforms that suit best our economical, social and political priorities.
The platforms we’ll settle on may not be born yet.
II- On the strengths of platforms
1- Network effects for the win
To how many people can I connect?
As discussed in previous articles, “platforms” are structured as networks, giving them four competitive superpowers: they’re magnetic (they attract externally created value), they’re infinite (scalable and produce at zero marginal cost), they’re intimate (personalized and customizable) and they’re real-time (adapting instantly to market changes).
The panel mainly highlighted the infinity power, pointing at network effects: the secret ingredient of platforms’ success and growth. Operating in two-sided markets, the more a platform gathers value consumers, the more it attracts value producers, which in turn attracts more value consumers. And the more users (consumers and producers) there are, the more efficient the platform is at matching demand with offer. Airbnb’s growth story helps us easily understand how network effects appear and work.
“Once we had 40 desirable properties in NYC, people from around the world started to book them and network effects started to take off. Host would tell their friends about the quality of the service. Meanwhile the traveler, goes back home in Paris or London, tells his friends, and it starts spreading word of mouth. As we start getting properties around the world, the Airbnb service becomes better and better.” — Nathan Blecharczyk, CTO Airbnb
And these network effects keep growing. In the past 8 years, Airbnb has served 70 million guests, with 40 million for last year alone. That’s growth !
Youtube’s CEO doesn’t want to talk about Network Effects maybe walking in Hal Varian’s (Google’s Chief Economist) footsteps, that dismissed them, trying to discard the idea of a Google monopoly. She prefers to talk about communities, which to Arun Sundararajan are the sociologist’s appellation of network effects. So yes, network effects for the win!
2- On Brand & Trust
How secure am I connecting to these people ?
On top of the services they offer, platforms have layered some branding and legitimacy that makes people comfortable to get a service from someone they don’t know. For real, could you have imagined entering a complete stranger’s car or renting him your furnished home for two weeks ?
This trust is built through three different layers: trust in the brand, trust in the company and trust in the community.
Trust in the brand: Platforms engage users on a nearly philosophical level, making them firm believers in the brand’s mission. Most of the time, “changing the world” is part of it. At Airbnb, the person in charge of developing trustful communities is Douglas Atkin, author of “The Culting of Brands: Turn Your Customers Into True Believers”. Or how to leverage cults’ techniques to develop trust and dedication to your brand. A very questionable but powerful strategy discussed in this very good article by Mike Bulajewski.
Trust in the company: Operating trust has to be built every day by platforms to ensure their own success. Overall security and integrity of the platform are the corner stones of this trust. Additional services like personal liability insurance for travelers and host in Airbnb’s case are also crucial to the mass success of the platform. Let’s note that Airbnb doesn’t even ask users whether or not they want to get an insurance, it’s mandatory.
Trust in the community: this last layer includes trust in the people from the community and the content produced by the community. First, if one thing can be found across services it is the concept of reputation: every single user is graded relatively to its quality as a host, music curator, driver, influencer, chef, etc… Enforced by the platform through rating tools, and fed by members through a peer-to-peer reviewing model, trust between members is crucial to ensure efficient market mechanisms on the platform.
“Transparency and expectation setting is critical”— Nathan Blecharczyk, CTO Airbnb
Second, platforms’ brand have to be maintained through careful monitoring and curation of activity inside their “Agora”. This is particularly true for content intensive platforms like Youtube:
“There are certain types of content that are not part of the community we want associated with Youtube.” — Susan Wojcicki, CEO Youtube
With more than 400 hours of videos uploaded every minute it’s difficult to keep violent, hateful or adult content out. That’s where the community chimes in again, flagging inappropriate content for Youtube to investigate and put down in case it goes against its content policy.
To wrap-up, a platform can develop trust from users by providing them with answers to three fundamental questions: “Do I believe in the brand’s mission? Am I safe transacting on this platform? Who are these people I’m dealing with?”
III-On the future of platforms
Concentrating markets
On the “first settler” advantage
As discussed previously, platforms build two essential assets: reputation and a captive consumer base. These assets represent key ingredients for further expansion, and high barriers to entry for competitors. Indeed, the previously mentioned network effects give leading platforms a powerful and self reinforcing competitive advantage over new entrants. Competition doesn’t seem to be a plausible option in this “winner takes all” network economy. Why would you switch platform to find an accommodation if Airbnb has the biggest assortment of rooms worldwide and can be trusted for booking them?
“We are quite effective at providing demand for our owners or hosts, and there really isn’t a need there for a competing service .” — Nathan Blecharczyk, CTO Airbnb
Got it? There’s no real need for competition.
Another way to assess the impossibility of true competition when Network Effects have taken off is by looking at tech giants trying to expand in adjacent industries where platforms have already emerged. In 2005, when Youtube was created, its current CEO was running Google Videos. After seeing Youtube grow, the Google team realized the young platform was going to be the future of online video. So Google decided to simply acquire Youtube only one year after it was born. Why didn’t they just compete and crush them ? By Susan’s own admission, it’s because it may have been too late: Youtube had already built powerful network effects that would keep reinforcing its position of power, and Google was not willing to take the risk of losing this important market.
“We couldn’t compete effectively against Youtube. It had to do with the community.” — Susan Wojcicki, CEO Youtube, previously in charge of Google Videos
Better than anyone, tech giants know the power of network effects: the first platform reaching critical mass is virtually impossible to beat. The winner is not so much the first “mover”, but the first “settler”: the first platform able to establish a large enough network to prevent others form entering the market. This quest for the first settler status explains Uber’s cash burning strategy to expand worldwide before its competitors, planning on generating profit once its networks effects have become too big for anyone to beat. And if you can’t beat the first settlers, just buy them like Facebook bought Whatsapp and Instagram.
Platforms belong to a winner-takes-all world. One service, one platform. And the first settler has great chances of being that one platform.
Expanding to all industries
Will anything resist platformization?
Platformizations can be defined as the migration of an industry to a platform model of operation in multi-sided markets. The platform model has already invested many industries like transportation, banking, tourism. But will it conquer all of them?
For Pierre Nanterme, Accenture’s CEO, all industry captains are currently thinking about how to emulate this platform concept in their own businesses. It is still work in progress though. While 80% of executives say platforms are going to be key in their strategy, only 30% are actively building platforms of their own.
“Technology will fundamentally define differentiating business models and strategies” — Chuck Robbins, CEO Cisco
Pierre defines three types of platforms in respect to their scope: platforms within a company, within an industry or cross-industries; with a special emphasis on this last category as boundaries between industries are increasingly blurring: platforms have a tendency to expand to neighboring industries. Who would have thought Google and Facebook were competitors 5 years ago? And here they are, competing for every single slice of the cake.
In the same vein, Airbnb’s CTO was asked when Airbnb would start selling homes and it seems fair to believe they could. Airbnb is building the largest accommodation database worldwide with high quality photos, description, reviews about the neighborhood and about the accommodation’s exposure to external factors like noise or sunlight. And more than anything, Airbnb is trusted by its vast network of users. A treasure I’m sure Airbnb will know how to leverage to position itself in the aging real estate industry. And it might even help us buy the house of our dreams. According to its CTO, Airbnb could one day help users obtain mortgage loans by giving banks predictions on expected revenue from renting their property on the platform.
And if a platform like Airbnb enters the real estate market, I’d bet their network effects would crush any competition from traditional network-less companies. A scenario we should expect to see happening over and over again. Platforms’ guns are just too powerful for old school companies’ knives.
“Connections have vastly expanded the set of industries in which network effects are going to be prevalent.” — Arun Sundararajan, Professor NYU
Mimicking the GAFA (Google, Amazon, Facebook, Apple), platforms will progressively conquer all industries, connecting everyone to everything, leveraging their network effects and brands to establish their power and transform the competitive landscape for ever.
One platform to rule them all? Probably not. But not many more…
Platforms’ young leaders have reached Davos in less years than any industrial before. A powerful sign that legacy companies have to move fast if they expect to remain in place and hold an active role in GAFAnomics: a modern, networked, economic system spurred by the eponymic GAFA (Google, Amazon, Facebook, Apple) but also encompassing Unicorns, Chinese tech giants and all other companies changing our lives through technology.
How could they enter this new economy? You might find some useful answers in the next article:
