Compound Platform Effect
People talk about the miracle of compound interest because when an investment is given enough time then you see an acceleration of the value from the compounding effect.
I’m taking the word compound to describe this acceleration effect as it relates to multiple platform strategies that interrelate and support each other. Luckily the miracle of a compound platform effect can be seen without the need for a lot of time or a lot of patience.
A platform is something that you create that others can build on top of or connect to. A platform strategy is when a business is setting out to create a platform to create more value (for the company, the user, and many times other companies). We want to keep a broad view of what can be included in using the term platform strategy.
An automotive company may describe a platform strategy that would consist of shared components, engineering, and manufacturing processes where different models of cars can be part of the same platform. This is a strategy that is done at almost all the automotive companies so it no longer acts as a competitive advantage on its own. Here is an example: Nissan’s FM platform created the Nissan 370z, Infiniti M, Infiniti FX SUV and the Nissan FF-L was used for the Nissan Altima, Nissan Maxima, and the Nissan Quest Minivan.
From Google’s Ngram Viewer we can see that the term platform strategy became more common in books through the mid 90's. This probably aligns to the growth of digital platforms made available by the internet.
Many companies now think with a platform strategy in mind vs. just selling a product or service but the reality is that it isn’t good enough anymore. At a certain point in a company’s growth, everything strategic in a company should be viewed through the lens that any investment or project needs to strengthen a platform or help build a new platform or else the opportunity cost is too great. Companies need to move from a singular platform strategy to leveraging a compound platform effect. Like a network effect, the compound platform effect becomes more valuable as more platforms are created that have some type of positive interrelation.
Amazon established a platform to sell goods and allow other companies to sell goods. Apple iTunes was established as a platform to sell music, and Facebook was invented as a platform to create a social network etc… The key learning though is that even though these companies created a leading or dominant platform they didn’t just go into a product improvement cycle. They continued to make new platforms that were strategically linked. A compound platform effect allows the value created to by multiplied by the different platforms where independent platforms are just additive.
A lot of traditional business tools like to look at products and services in isolation and don’t encourage analysis of a compound platform effect. It is a way to divide an old company from a new company where old and new don’t have to relate to the age of company but it relates to their strategic approach to the business. As well not all new platforms that these new companies create are successful, but that is okay as long as they continue to try new platforms because the compounding effect when a new platform is successful is very powerful.
So let’s take a look at a few companies that use a compound platform effect strategy.
Amazon.com Inc. ~ $250b market cap and ~1000% stock price increase in last 10 years. Amazon in many ways is the poster child for a compound platform effect strategy. They use a very open but aggressive approach where they are very comfortable allowing others to compete with them on their own platform. The platform being dominant and successful is more important than leveraging the potential to get higher margins in the short term. Amazon originally built a digital platform to sell books and this then extended to selling many types of goods. From that beginning they added many complementary platforms that compounded the value and the leverage. Here are a few: They created a recommendation platform (to recommend other books or goods that might be relevant), an easy and seamless checkout process platform, Kindle ebook platform and ebook readers, warehouse and distribution platform, they opened their platform up to other sellers (in many cases as competition to themselves), created a cloud services platform (that also lowers their own operating costs for their services), an advertising platform, an OS platform etc… They also have a family of other business like Imdb, Audible, and Goodreads which are platforms in their own right that they connect into Amazon where it makes sense.
Not everything is successful but again that is okay. Their largest failure is that of the Fire Phone and the reason it was a failure is that it is too transparently part of their compound platform effect strategy. The Fire Phone uses Amazon’s Fire OS that allows them to put their services and advertising engine integrated in the platform, the downside is their ecosystem of applications and services isn’t as large as an iPhone or a Google supported Android phone. The Fire Phone was designed to hit the sweet spot of the market in size, style and price but also with a few new technologies namely Dynamic Perspective and Firefly. The tech is good, unfortunately the purpose of the tech is to get you to buy more stuff from Amazon and showing that so explicitly to customers is off-putting. It is a compound platform effect strategy that is too aggressive. The right strategy needs to give the benefit to the end user and then the platform strategy can come along for the ride. Instead Amazon should be making the best phone for reading Kindle books and watching Amazon Prime video which would also happen to be good for using other Amazon services as well.
Apple Inc. ~$660b market cap and ~1700% stock price increase in last 10 years. Apple is also very aggressive with a compound platform effect strategy, however, they take a very different approach from Amazon by using a more closed or curated approach where they maximize their margins without causing damage to their brand or reputation. They either completely control their platforms or take a significant cut of the margin (such as their appstore). This allows them to control their brand image and experience very tightly. This approach would be hard for other companies to duplicate but it is incredibly powerful for Apple. Apple also can release a technology and have the patience to wait until the critical mass is high enough to leverage it as a platform. This can be seen with Touch ID, which was released as a device password technology but is really a strategic platform for Apple Pay. Next up, is Force Touch which is on the Apple Watch and the MacBook trackpads but will become a user interface platform once it sees a critical mass on iPhones. Apple Platforms are extensive from iTunes, iMessage, Apple Pay, custom connectors, iCloud, Apple Stores etc…
Google Inc. (or now Alphabet) ~$460b market cap and ~375% stock price increase in last 10 years. Google is clearly also a company that uses a compound platform effect strategy. Google’s mission to organize the world’s information and make it universally accessible and useful helps guide them to create new platforms that can gather more data. Some of the obvious platforms that build upon each other are Search, Maps, Gmail etc… But one example that is critical to almost everything they do is optimizing their hardware infrastructure for cost and speed. This platform advantage allowed them to take an approach where they want to collect more and more data where other companies would need to try and justify the hardware and overhead costs of collecting large amounts of data. Google+ is an example of a platform that Google has created that hasn’t seen the success that they have hoped for. Google+ was a platform that was born out of fear of the data that Google wasn’t capturing that Facebook was capturing. Once a platform is established, in this case Facebook, it isn’t enough to just copy it out of fear, you must remain focused on creating platforms that provide some unique end user benefit.
These three examples represent some of the largest companies in the world and obviously it is always easy in hindsight to just pick out some common attributes of very successful companies. My goal with showing these companies is just to help you understand the concept of the compound platform effect.
Lets look at few examples that highlight other aspects of a compound platform effect. Facebook fits the model well with platforms of social networks, gaming, advertising, login authentication and others. Where they provide an interesting example is in the acquisition of WhatsApp. Facebook bought WhatsApp for roughly $22 billion dollars. The price doesn’t make sense when looking at WhatsApp on it’s own but WhatsApp is a large successful platform (that loses money) and the value of the company comes from the synergy around a compound platform effect with Facebook’s other platforms. It isn’t clear yet what the strategy is on how Facebook will leverage the WhatsApp platform with Facebook’s other platforms but there is definitely a compound platform effect strategy at play. When an acquisition has a valuation that doesn’t seem to make sense on the surface then it is valuable to think of it as what could the added value be with a compound platform effect.
Another place to look for a platform in the mindset of a compound platform effect is where a company creates a way to bypass a constraint in the market. This is not necessarily a platform in a traditional sense but it fits in well because it provides the same effect as a new platform does when fitting into the compound platform effect. Tesla has done this by eliminating dealerships where other car manufacturers are structured in a way where they can’t do the same. Uber and Airbnb can operate without the regulations and licenses of taxis and hotels respectively. This elimination of a constraint acts as a multiplier in the compound platform effect (like adding a complementary platform). The traditional competition in these established industries view these constraints as barriers to entry, but once these constraints are bypassed the barrier turns into an anchor that stops the established industries from being able to compete.
Another place where Tesla has been effective in a compound platform effect is leveraging platforms across different companies. Tesla gets solar charging for their Superchargers from SolarCity and they provide the powerwall battery pack that pairs up well with solar panels from SolarCity for an effective home energy solution. Tesla really shows how the compound platform effect can also apply to what seems like more established industries. They make great use of the knowledge from the connected network of their cars, they have established a charging platform of Supercharger stations, and they are driving the costs of batteries down through volume by creating other products to help consume batteries. When people analyze each one of these elements individually then they are missing the point of the compounding effect.
Where I am leading with this is to help highlight the timing that makes sense for a company’s primary strategy to switch off of a platform growth strategy to a compound platform effect strategy. Once a company has established its strategic platform as a leader or once focused investment in their strategic platform starts to show diminishing returns then it might signal the timing to make an aggressive switch to a compound platform effect strategy. I will follow this up by looking at a few companies that are in the growth phase where a switch to a compound platform effect is the right approach and what that might look like. I’m thinking Netflix and GoPro are two good examples to discuss but if anyone has other suggestions feel free to add them into the comments section.
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