On The Very Idea of a Platform: Or Why Companies Should Be Looking Into Platform Models

Ever wondered how it is possible to get so much from the internet for free these days? Start with your free Twitter account and Google-searching. Think of your free bookings on platforms such as Airbnb. Then consider all these tech companies built on open-source concepts and extensive freemium offerings. And when it comes to actually having to pay for a service, it seems very much affordable. The answer: this is about the very idea of a platform.

The Internet Economy

Jean Tirole, the recipient of the 2014 Nobel Prize in Economic Science, says that this is due to a paradigm shift that favors a kind of thinking circling around concepts such as “platform” and “network effects”.

In the distant 2002, Tirole published the paper “Platform Competition in Two-Sided Markets” together with his colleague Jean Rochet. In Tirole’s classic example, we have consumers on the one hand and providers of goods or services on the other side of a platform. The platform, in this case, is the connective tissue that brings these two types of actors together and makes the exchange of services possible.

Classic examples include B2C platform solutions such as Airbnb. The exchange between two parties is being mediated by a platform that enables them to “meet” and facilitates the transfer of knowledge and services between them.

Platform Capital

In the typical scenario, the choice is between costly products with high-quality service or cheaper products with lower service levels. But supply and demand do not work that way in the economics of digital platforms and ecosystems. Platforms do not simply bring out products in a walled-off environment. They create a common environment for users to convene, generate, and consume value. This environment is based on various levels of interconnection.

Without the internet, therefore, we would have never been able to witness the emergence of platform business models. Needless to say, this is a huge shift away from business models clinging to an industrial-revolution-like mentality.

The classic platform model described by Tirole is a business model that generates value by facilitating exchanges between interdependent groups. Usually, these are consumers and producers or clients and service providers. To make these exchanges possible in large numbers, platforms create massively scalable networks of users and resources.

This model has led to the so-called Platform Revolution that puts an emphasis on non-linear value chains, networked markets, and the value created out of network effects. Users are empowered to craft their own products or solutions using platform services. The platform model, therefore, is one of enablement and facilitation.

From Owning to Using: The Rise of the Platform Economy

These developments have led to changes at another level. Platform users are not so much interested in actually owning a product but only in using an already existing infrastructure. In many cases today, the product is the service is the infrastructure. The overall tendency is to move from owning to using.

Resources and Infrastructure

Let’s take an online data warehousing solution as an example. In today’s market, a data warehousing solution would be available as a fully scalable SaaS platform. In its context, users benefit from cloud resources such as CPU, memory, and storage capacities. Usually, by making use of a platform solution, you are also leveraging the performance, security, and privacy of the cloud.

Many companies today no longer need to invest in huge IT departments or hire large consulting teams to build, say, a data warehouse for them. They can simply turn to a cloud data warehousing platform that comes with flexible compute and storage resources and make use of a flat pricing model where billing is based on the resources that they use.

Technically, companies do not “own” the data warehouse infrastructure or the cloud resources that have been made available to them, but they also do not need to. They are able to leverage all of the platform resources and “own” the results: the insights generated out of the data processed on the platform and the associated business outcomes.

Interfacing Knowledge

The two-sided-markets scenario sketched out by Tirole is also diversified here.

Platform models such as SaaS take that platform scenario of facilitation on another level. Again, now the service is the platform itself. The offering, invariably, remains the structured environment — enriched by tooling and infrastructure — that enables different user groups to do work in new ways.

This is why many platform products are collaborative. The exchange that is facilitated is between different types of knowledge groups or know-how holders brought together on the platform. The platform provides the necessary infrastructure and the common ground for these knowledge groups to share tools, convene, and communicate.

A platform allows multiple participants to connect to it, interact with one another, create, and exchange value. Each platform consists of a logical cluster of activities and associated technology that provides business results. It is, therefore, run “as a service”. Emphasizing virtues such as autonomy, speed of delivery, and the enhancement of collaboration has made platforms synonymous with the very idea of service:

“Platforms focus on business solutions to serve clients … They operate as independent entities that bring together business, technology, governance, processes, and people management and are empowered to move quickly.”

O. Bossert and D. Desmet

Making the Leap: Shifting to a Platform Model

Only 3% of companies worldwide have actively adopted a platform strategy. Yet more than 30% of global corporate value — with some $60 trillion in annual revenue to be redistributed across the economy over the next five years — will be accounted for by ecosystems and platforms by 2025, according to McKinsey.

And B2B platforms have a significant role to play. An Accenture report looking at digital B2B platforms estimates that platform-driven interactions are expected to enable approximately two-thirds of the $100 trillion value at stake from digitalization by 2025.

The McKinsey report “Winning in Digital Ecosystems” defines platforms as software and hardware, which may include an operating environment, security, computing power, storage, a set of development tools, and a variety of common functions. Also, platforms support various smaller application programs.

“Platforms are helpful because they abstract a lot of common functions away from the specific application logic.”

Digital McKinsey Insights, Issue 3

Today, companies have the chance to create their own platforms or become part of another platform ecosystem. According to Simon Torrance, the executive producer of the Platform Economy Summit, however, corporations are slow to change: “… while 90% of corporate leaders are saying — anonymously in surveys — that they know their current business model is not fit for the future, very few are acting fast enough to create platform strategies that can meaningfully impact their performance.”

Corporations: Becoming Connected within Old-Economy Structures

So how can corporations become more connected and geared towards collaboration and innovation? Torrance has the following advice to corporations seeking to adopt platform models within a pre-established structure: “Don’t try to develop a platform strategy entirely within the existing corporate structures … Create a separate unit to invent the future, allow it to work in a different way, and, crucially, have it report directly to the CEO, not the core, otherwise any innovation will be stifled and killed.”

One way for corporations to have a share of the platform model is to form joint ventures with tech entrepreneurs, according to Torrance: “Big corporates are very slow to change their internal culture and can’t move very quickly … So it makes sense to create a portfolio of joint venture ‘speedboats’ with successful entrepreneurs to grab new ‘white space’ market opportunities fast. This model is relatively new but proving very popular.”

Working with Startups to Accelerate the Shift to a Platform Economy

In a recent interview, Torrance said that corporations do not seem to have a clear strategy on how to leverage entrepreneurial talent and harness third-party innovation. One of the best methods to collaborate with startups is to create joint ventures with tech entrepreneurs. Today, an increasing number of tech entrepreneurs are out there to share their experience of creating and scaling platform business models and developing platform products.

Within this framework, the entrepreneurs will leverage the corporation’s assets but will not actually work for the corporation. And vice versa, the corporation will leverage the entrepreneur’s assets but will not actually “own” the entrepreneur.

One such joint venture can be strategically relevant for the corporation and will take place on an equal footing. It will not be confined to asymmetric partnerships or asymmetrical models of collaboration such as an investment. It will, fundamentally, be based on the exchange of know-how for the benefit of a product or a solution.

Platform Products: On Making Sense of IoT Platforms

According to the McKinsey report, to get value from the Internet of Things (IoT), it is helpful to work on platform products that enable you to create and manage applications but also to run analytics, as well as store and secure your data. Similar to an operating system for a laptop, a platform performs a variety of tasks in the background. In doing so, it makes life easier and less expensive for users, developers, and managers:

“Application developers just want to focus on the specific problem they are solving and use common capabilities for computing power or storage or security. A good platform dramatically reduces the cost of developing and maintaining applications.”

Digital McKinsey Insights, Issue 3

In the context of the Internet of Things, platform products are designed for the development and deployment of applications. These applications collect data, manage, monitor, and control connected IoT devices. Such platforms tackle issues such as establishing connectivity and extracting data from a large number of different endpoints.

A viable IoT platform covers the ability to connect to and manage IoT devices at scale. It also facilitates platform integration with services that harvest data from these devices, process, and analyze that data. Further, it enables the creation of apps under consideration of that data and deploys these back on the IoT devices. Finally, it improves on the apps and models on the basis of newly harvested data.

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