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Platform Economy: Evolution and Entity Interaction

Platform Economy: Evolution and Entity Interaction
May 18, 2020

Platforms have existed since ages. It means, something on which you can build a connection. Theatres provided a platform for artists to showcase talent. Universities provided a platform for the spread of pedagogy. Political organizations provided platforms for the spread of ideas. The rail/road network was created by acquiring private lands to provide a platform for nationwide connection and retail giants like Walmart and Macy’s have used their supply chains as platforms to connect manufacturers and consumers globally. Platform businesses like Alibaba, Facebook, and Coursera share distinct characteristics from each of the above entities. However, the present discussion on platforms has repercussions that are primarily economic in nature.

Technology empowered companies that provided platform for businesses to digitalize their processes and ease the flow of information. As these platforms got interconnected and interdependent, it led to the collective emergence of a platform industry. It is however, only in the 21st century when platforms were no longer encumbered into the technology industry but proliferated throughout all economic activities ranging from transportation and hospitality to asset management, and education thereby catapulting the platform economy. The transition of platforms from companies to industries and then to the economy was a blitz and this phenomenon will gradually foray beyond business to shape the DNA of politics, culture, and the society at large.

The platform economy is a new shift to our society, it does not undermine the earlier economies.

Platform Economy

The shift lies in economic changes enabled through business built on top of a technology platform that brings concurrent changes to society. The industrial age shifted our social life and made it urbanized where the cities played a predominant role in decision making and shaping the future of humanity. In a similar way the platform economy is converging geographies and societal differences to create more uniform demand patterns and service standards globally. The earliest references of this model may be attributed to Nobel Laureate Jean Triole and Jean-Charles Rochet in their work on examining pricing and competition where one business served two kind of customers. Their research described two parties often showing different price sensitivity and in an efficient market one side often subsidizes the other. This forms the crux of how platform businesses create value. For instance, in media platforms the advertisers subsidize the readers who in turn create the network for advertisers. Similarly, app-stores of Apple charges a commission from the app-developers but a number of apps on their store are free for users and no commissions are charged to the developer. However, the price paid during purchase of the device helps to run their app store. Compare these models to the traditional business value chain where the end consumer is the only entity providing positive cash flow and everyone else distributing the surplus.

The new thing about the platform businesses of the 21st century is the innovation in leveraging of technology to enable affordable connections that were never possible traditionally. This has raised the sophistication of the business model manifold and has opened new streams of value creation. Some of the fundamental shifts which digital technologies have created in the new platform economy are:

  • Platform businesses are low on inventory and fixed assets. Such businesses are more scalable than traditional businesses. Empowered through cloud computing, the determinant of scale is the ability to add computing capacity and extrapolate customer analytics exponentially
  • Instead of a linear relationship that typically flows through a supply chain, the platform businesses follow a network model by facilitating direct interaction between a distinct set of customers. E.g. YouTube has three distinct customer sets viz. video viewers, video creators, and advertisers. This leads to disintermediation and breaking silos of distribution, although, it also leads to the creation of a very large-scale intermediary often with monopoly power that can pose risk if not regulated with smart legislations
  • The platform with the most active customers is likely to draw more future customers. Each busineass competes not for market share but to become the standard and once this standard is established, the entire market aligns around the platform which has been identified as the standard

It might be intuitive to infer that the platform economies are a natural progression following technological advancement in a capitalist and neo-liberal economy. A fundamental characteristic that differentiates the new economy is the dramatic way in which it, not only alters the nature of business, but also the nature of the market, employment, and incentives. The intertwined flow of connected markets, open talent, and shared incentives create a distinctly new economy with its own societal repercussions that unravels as platforms gain more traction. Businesses that have a greater hold on emerging technologies and have access to customer data will invariably be the market leaders and dictate the terms of competition and resource allocation.

Social and mobile and the ecosystem of technologies around it has played a key role in determining the nature of connected platforms. However, proliferating and emerging technologies will keep redefining the parameters of successes and future disruption patterns. To understand this let us map out the entities in a platform business

Platform Economy

Considering the nature of the platforms, one entity might take up more than one role simultaneously. But what remains key is the sustained value flow within the platform which requires all these entities to co-exist. While, the role of app developers may seem to be identical to the parties who own the platform, as it scales it needs to feature multiple applications to proliferate engagement and ensure stickiness to the platform. Facebook and YouTube have a healthy ecosystem of app developers but consider a new platform like Uber. When it started was the platform owner as well as the app-developer but later it featured Spotify and now features Pandora as well. This is consistent with the platform’s vision where its future won’t be limited to cars. Both Spotify and Pandora are again platforms leveraging artificial intelligence and analytics to craft unprecedented music experience for its users. Tesla although, classified as a car manufacturer, is essentially a platform and based on the context may appear to be a utility player as well as a technology firm.

So, where should a brand position itself in the platform ecosystem? While it sounds lucrative to build a platform, it is not worthwhile for all businesses to become platform owners. Instead, businesses need to identify their own sweet spots by evaluating their customer value proposition, business strategy and technology capability.

Presented below is a framework to identify the sweet spot for a business to best leverage the benefits of a platform

Platform Economy

Figure 3: Business entity in platform ecosystem

Businesses can find themselves in overlapping roles among these entities but the approach to derive benefits from the platform should be taken up with a thorough research of existing capabilities, sources of funds, and ambition to scale.

Reason why platforms flourish is popularly known as the IKEA effect which is “people value things more which they have built themselves”. The platform economy is a new shift to our society, it does not undermine the earlier economies. As factories co-exist with agriculture, trade, services, and government enterprises, so would the platform economy. However, its role will become highly influential as more and more businesses equip themselves with the right set of technologies to unlock value.