These days, it seems like every digital company is looking to transform itself into a “platform.” It’s the new buzzword and, without a doubt, the direction of future growth. So, what exactly do people mean when they talk about creating a platform and what is it that makes platform development so compelling at this point in time?
In reality, commercial platforms have been around for a long time. When you think about it, a department store is a platform for clothing and household goods, the radio is a platform for musicians, and auction houses are platforms for sellers of fine art. So why all the fuss now? The answer is that thanks to the Internet and the corresponding opening of global markets, the potential of the digital platform to connect participants is truly unprecedented and given the direction in which markets are moving, you either are the platform, are on the platform, or you may ultimately face irrelevance.
So, what exactly is a “digital platform and how is it different from traditional business models? In general, a digital platform has a digital component at its core which enables its users to take advantage of internet connectivity. Ultimately, it helps make resources and participants more accessible to one another on an as-needed, low friction basis. Platforms tend to create value in two ways. They either facilitate transactions between parties that would otherwise have difficulty finding each other (i.e. Uber and TaskRabbit) or, they create an environment where innovators can come together to develop complementary services and products (i.e. Salesforce or Apple’s App Store).
The key to a successful platform is what’s called” the network effect.” At the outset, a platform has to overcome the chicken and egg stage of user engagement by making sure both sides of the transaction are sufficiently represented. The key to success here is offering something that creates an efficiency, streamlines a process or eliminates existing friction. As more users engage with a platform it becomes more attractive to potential new users on both sides of the transaction. Ideally, your platform becomes “viral” meaning that it catches on to such an extent that parties are pulled to the platform without the platform company having to focus on marketing the platform itself. This kind of pull-based growth is unique to the digital world. Unlike traditional business approaches where product is “pushed” on consumers, the most successful platforms grow through the “pull” of the network.
All of this is not particularly new. Single role digital platforms have been around for a while and have been the fuel for the startup phenomenon. What is starting to become interesting though, is the rise of the “Octopus Platform” i.e. the platform that may have started by doing one thing but, once participation has reached a desired threshold, is able to hopscotch further and further away from its original, core business creating a more and more seamless experience for its user. The biggies are obvious. Amazon, formerly a bookseller is now streaming movies and selling all imaginable retail items. Facebook originally designed to link friends is now a disseminator of news. Most recently, Apple, maker of phones and computers, distributer of music and platform for all imaginable apps, with its $1 billion investment in Chinese ride-hailing service Didi Chuxing, seems to be moving into the ride share business.
Lower down the food chain however, the digital market has been quite fragmented. Filled with single-service platforms or apps which are not necessarily integrated. This is particularly true in the healthcare and HR space. There are thousands of apps and cloud based services many of which create small efficiencies but, individual and corporate consumers are overwhelmed by technological options that make fractions of their lives only a little more efficient. They are tired of creating new accounts, toggling between apps, URLs, and multiple vendors. They’re clamoring for the “butler” to manage the help. At the same time, smaller companies are starting to realize that they too, not only have the opportunity to stretch their tentacles but may have to if they don’t want to get left behind.
While some companies will continue to focus on organic growth, we are also likely to see an increasing number of mergers, acquisitions, and strategic alliance between former competitors, links of a supply chain, and participants in similar markets. The goal will be capitalizing on one another’s user base in order to add platform mass and spread the tentacles of their business a little more broadly. Some of the larger companies like Google, Facebook, Apple, and Amazon already have such dominant positions in certain parts of the market it’s hard to imagine small competitors making a dent. However, there are other markets, healthcare and HR, for instance, that continue to be highly fragmented. It is here where there is a race to the platform and that race is only just beginning to play out.