WT* is a Platform?
Recently, we shared a series of definitions from the LEF 2017-18 lexicon around the term digital transformation, in the paper WT* is a Digital Transformation? We felt it was important to give a clear position on what the term means, largely because the rest of the market hasn’t, and that is getting in the way. In fact, we declared that term as clear as MUD (Multiple meanings, Unclear meaning, Digital-washing).
Next, we want to turn our attention to another term as clear as MUD: platform. ‘Platform’ is used in both a business sense and a technology sense. Business platforms are all the rage at the moment. Part of this is because technology platforms underpin and make business platforms possible, or at least much easier, by providing the connectivity, components and tools that platform players need, facilitating transactions, and enforcing platform policies and rules. In this paper, we focus on business platforms. Technology platforms is a whole other, big subject that we will write about (discussing application platforms, autonomic platforms, analytics platforms and platforms-as-a-service) in a subsequent paper.
Platform business models are springing up everywhere. We wrote a little about them in A Summer Contemplation: Digital Extensions and Platform Businesses, and Bill Murray and I are just about to launch a major LEF project around them, to be published in early 2018. But we wanted to share our lexicon
definitions with you right now. We’ve attempted to make the definitions as simple and clear as possible, ideally understandable by non-experts, and illustrate them with examples. We have also tried to clarify what each definition covers and what it does not by listing some of them in contrasting pairs or groups.
Clearly we don’t expect the whole world to use LEF’s definitions, but it helps if everyone in your company uses the same definition, and even better if your customers, partners and other stakeholders do too. Our business platform definitions are below. As we did with our definitions related to digital transformation, we are locking these in until the end of 2018, and will revisit them after that.
A traditional, linear business takes in raw materials/components, creates finished products/services and sells them to its customers. Examples include Netflix, Ford and Philips. A linear business owns its own inventory. In contrast, a platform business facilitates value exchanges between two or more interdependent groups, usually consumers1 and providers.
Platform businesses can be physical (e.g. a stock exchange, a nightclub, a market) or virtual/digital (e.g. eBay/Alibaba, an online stock exchange, a search engine). Examples of platform businesses
include credit card companies (connecting consumers and merchants), software platforms (developers and users), stock exchanges (buyers and sellers), advertising-supported businesses (advertisers and consumers), and online dating sites (men and women). Platform business models are equally valid in B2B and B2C markets and the public and private sectors.
The basics of platform businesses are not new and they do not have to involve technology. For example, a nightclub that acts as a venue for men and women to meet is arguably a platform business. However, today’s highly digital, connected world means that platform business models may be applied much more easily in many more places, at much greater scale and geographical scope, and in real-time. Also, platform businesses that operate digitally can adopt more sophisticated, dynamic business and operating models, and have more opportunity to monetize the platform transaction information.
Platform businesses exist in a platform ecosystem. In its simplest terms, an ecosystem can be broken down into five elements: the value exchanges that are taking place; the space for conducting platform business; the players who participate; the rules by which platform business is conducted; and the tools which are available to those players. It is helpful to think of three generic roles of the players in a platform ecosystem: orchestrator, provider and consumer1.
Consumers and providers can move in and out of the ecosystem, and operate both inside the platform ecosystem and outside at the same time, subject to the orchestrator’s rules for entry, conduct and exit. For example, eBay plays the role of the platform orchestrator. A person selling their old furniture on eBay is a provider, and the person buying that furniture is a consumer. eBay creates the space, sets the rules and provides the tools.
This set of roles and ecosystem components applies to platform ecosystems in B2B and B2C, public and private sector, and product and service businesses. But note that actual platform roles can be more complicated – for example, orchestration responsibility may be split amongst several players, participants can be simultaneously consumers and providers, and can sometimes swap between the two roles. And of course, companies can choose to operate within both platform ecosystems and traditional linear business models at the same time.
A defining feature of platform businesses is that the orchestrator does not typically own the means of production (making products), but instead the means of connection (bringing providers and
consumers together). This often makes orchestrator business models very attractive to investors: since they are curating rather than owning, they may be able to oversee a very high volume of business with very few assets. At the time of writing, there are endless articles about how big, fast-growing and asset-light Airbnb is compared to a conventional hotel chain like Hilton.
Depending on the context, the orchestrator might provide a very lightweight set of services – perhaps just a physical and/or virtual space to meet – or heavyweight – which could include creating and evolving sophisticated filtering and matching algorithms (to help the right players meet); building and providing powerful components and tools to help the participants play (for example, we can think of a computer operating system like Microsoft Windows as a platform, with tools to make it very easy to develop a Windows app); and/or underwriting transactions to remove risk for participants.
Platform economics is the study of the different economic models and value flows that make platform businesses work. This recognizes that economics in a platform ecosystem has different characteristics.
Platform businesses are said to be two-sided businesses, in that providers both get value from and give value to the platform, and consumers do the same. Platforms can have many more than two sides. For example, Facebook has at least four: it connects users, third-party application developers, advertisers and third-party websites. In general, we talk about n-sided platform businesses, where the letter n refers to the number of different groups of stakeholders involved. Note that the different groups of stakeholder do not refer to a needs-based segmentation of the stakeholders, but instead stakeholders playing different roles.
Businesses and individuals participating in a platform ecosystem benefit from network effects where the value of the platform goes up the more participants use it. Each participant benefits from direct network effects (value from more of the same type of participants) and indirect network effects (the value that participants from one stakeholder group – e.g. credit card providers – get from the platform increases with the number of participants from other stakeholder groups – e.g. consumers).
Importantly, there are new and different pricing considerations in a platform context. For example, one group may be charged loss-making prices, or even free or negative prices, in order to attract another group that brings value to the platform. (There are, of course, complicated anti-trust/regulatory implications of this.) One example is advertising-supported models: consumers get access to media, software or other products/services, often free or at a deeply discounted rate, but receive advertising messages. This may be a two-sided model (if the platform provides the content) or a three-sided model (where content creators, content consumers and advertisers all exchange value through/with the
platform). Many commercial TV stations and internet search engines (including Google) are supported by advertising. Similarly, the transaction information gathered by a platform orchestrator may be so valuable that it can provide deep discounts to some or all platform participants.
What is surprising and sometimes cognitively dissonant to those new to platforms is that often the most obvious transaction flows are not the main monetization mechanisms. Although subsidies and cross- subsidies are not a new concept, and not limited to platforms, there are more and more interesting pricing options emerging in the platform space.
Next, let’s think about the value of platform businesses. Why is it worth building/participating in a platform? To answer that, let’s compare it to alternative mechanisms for achieving the same thing.
Imagine you make DVD players, and you need electrical transformers to allow them to be plugged in to power sockets. You could try to make the transformers in-house. You could have a relatively fixed relationship with a maker of transformers, where you commit to buying your transformers from them, and they commit to making enough good-quality transformers at an agreed price for you. You could buy the transformers on the open market each time you need them. Or you could participate in a platform business ecosystem to source them.
Building them all in-house may make some sense, for example if they are easy to make and/or you are good at making them. In-house also means there are no trust issues, and there are no search costs finding a supplier. On the other hand, buying them outside allows you to focus and specialize on what you are good at/adds value. You may also get better quality transformers and more innovation from a specialist, and they may be cheaper since a provider making more of them can reap economies of scale.
If you buy the transformers through a relatively fixed relationship with a provider, the trust and search issues can be minimized, but you may get less cost and innovation benefits (because of the lack of competition), and be subject to risks from the supplier. Similarly, the provider gets the benefits of your commitment, but incurs some risks by committing to you.
If you repeatedly go to the open market to buy transformers, there is potential to get very good prices and access to the latest innovations, but the search costs are high and trust is low (an untried provider might let you down). Similarly, suppliers can make good deals with consumers, but they have to fight hard to be noticed and have no guaranteed business.
(Of course, between these extremes of fixed relationships and the open market there are a million shades of grey. One is oligopolies, where markets are dominated by a few players.)
Ideally, a platform business ecosystem is the best of all worlds. You get access to the benefits of multiple suppliers, but at much reduced risk. Ideally, the platform orchestrator de-risks everything by filtering out bad or untrustworthy players, and may even underwrite transactions. Matching functionality means that the time and cost of searching for a good provider/consumer is minimized. And in a standard and tool-rich platform ecosystem, everyone can benefit from using the same standards and building on components to make product/service creation quicker and better. Platforms also have the benefit of being able to use transaction information to learn and improve, and possibly monetize the information directly.
Platform business ecosystems are most obviously valuable in a market where there are lots of players, so it is hard to find the right ones and/or the ones you can trust. This type of market is often called a long-tailed market. A great B2B example of this is Alibaba’s original business platform, which helped foreign companies find Chinese manufacturing partners.
Although every platform is complex and unique, it is worth considering common patterns.
The value emphasis of a platform depends on its purpose. There are three archetypal platform business models commonly seen in the market:
- Exchanges. Value emphasis = filtering and matching. These enable buyers and sellers to meet. Dating agencies and online auctions are good examples. The value that is provided by the platform is the bringing together of the parties, helping them find each other, establishing the ground rules of exchange, and in some cases underwriting the exchange. Consequently, would-be participants may need to jump through some hoops to be allowed in (for example, criminal record checks, putting money in escrow and passing creditworthiness checks/audits.)
- Transaction platforms. Value emphasis = removing friction and de-risking. These are similar to exchanges but focus mainly on providing the mechanics for transactions to take place. In a very rudimentary sense, cash itself is a transaction platform; credit cards are perhaps a clearer example.
- Component and tool-rich platforms such as software platforms. Value emphasis = faster and higher-quality product creation. These platforms use standards to make sure everything fits together, and building blocks that can be used to quickly create a solution. The shape and size of railway rails is a good example of standards, allowing the train industry to work. Microsoft Windows was very helpful to developers when it came along because they didn’t have to create their own methods of displaying windows, managing mouse movements and so on. It was also very helpful to PC users, because it meant that anything written to work with Microsoft Windows would work on their Windows PCs. Home automation platforms such as Hive and Nest are great examples of component/tool-rich platform businesses, as are cloud models, blockchain-based models, and IoT models such as GE’s Predix and Amazon’s Greengrass.
Note that real-world platforms are a mix of these things, but typically have a value emphasis. For example, stock exchanges are a combination of the ‘exchange’ and ‘transaction platform’ archetypes above, although it might be argued that the fundamental value is exchange, bringing buyers and sellers together.
We hope that this round-up of LEF lexicon terms is helpful to you. Shortly we will be sharing clusters of LEF lexicon definitions around technical platforms, the cloud/the Matrix, 21st century human and Wardley mapping. Watch this space!
1 Note that the term consumers is used throughout to mean consumers of products and services. Consumers may be companies or individuals. (This is different to the common use of the word consumer to mean a person.)