Platform Revolution – Part III

Some books are difficult to summarize. Platform Revolution is one such book because its descriptive content requires more. To follow up on my initial overview, I’ll provide a more detailed summary and wrap-up in this commentary of the key platform attributes described by authors Geoffrey Parker, Marshall Van Alstyne and Sangeet Paul Choudary.

Monetization refers to the process by which the platform captures the value created by Network Effects. It’s also one of the most difficult problems that any platform company must solve since monetization over the long haul is necessary for survival and yet, monetization could destroy the effects created by the platform.

To determine the proper monetization strategy, management should begin with an analysis of the value created on the platform, which falls into four categories:

  1. Consumers: Access to value created on the platform.
  2. Producers or third-party providers: Access to a community or market.
  3. Consumers and producers: Access to tools and services that facilitate interaction.
  4. Consumers and producers: Access to curation mechanisms that enhance the quality of interactions.

Network effects as measured by visitor numbers alone do not reflect platform value. Participant interactions must create significant excess value captured by the platform without reducing effects.

There are four ways to monetize: charging a transaction fee, for access, for enhanced access, and for enhanced curation. Deciding whom to charge is a balancing act. Options are: charge all users, charge one side while subsidizing another, charge most users full price while subsidizing stars, and charge some users full price while subsidizing those who are price-sensitive.

Design decisions can impact transitioning to monetization. Many platform founders begin by offering free services. The authors note that there are four key principles of platform design strategy that help ensure a successful transition:

  1. If possible, avoid charging for value that users previously received for free.
  2. Avoid reducing access to value that users have become accustomed to receiving.
  3. When transitioning from free-to-fee, strive to create new, additional value that justifies the charge.
  4. Consider potential monetization strategies when making your initial platform design choices.

These strategies should be contemplated from day one of platform planning and designs should keep as many monetization options open for as long as possible.

Openness defines what platform users and partners can and cannot use. Calibrating the right level is complex but affects usage, developer participation, monetization and regulation. Facebook overtook MySpace shortly after it opened its platform to developers to create apps. MySpace responded seven months later, but the tide of user popularity had turned.

Over time, platforms expand to include and increase interactions that create additional user value. Many of these new interactions are created by three kinds of developers. Core developers create the platform functions that provide user value and normally work for the platform sponsor. Extension developers add features and value to the platform for enhanced functionality and are normally outside parties. Data aggregators enhance the matching function of the platform by adding data from many sources. They may resell information about users to other companies, and the platform shares a portion of the profits.

Platforms also need to control producer openness, which is the right to freely add platform content. Being open creates the potential to provide as much high-quality content as possible. Absolute openness may concurrently create lower-quality content. Limiting openness through artful curation is a technique employed by Wikipedia.

Governance policies are necessary to increase value and enhance growth. The authors recommend three fundamental rules of good governance: always create value for the consumers you serve, don’t use your power to change the rules in your favor, and don’t take more than a fair share of the wealth. “Ruling the ecosystem wisely puts a premium on not ruling it selfishly.” The largest platform businesses resemble nation-states. Platform governance rules have to pay attention to externalities and focus less on shareholder value than on stakeholder value. Two principles of smart self-governance are outlined in the book: Internal Transparency and Participation.

Metrics are much more difficult to develop in a platform business than in a traditional pipeline business. Having a person’s name and email on a membership list doesn’t promise success. The number of satisfying interactions platform users experience is what matters. Platform managers need to focus on measuring positive network effects and on the activities that drive them. Creating value for all users strengthens the community and encourages continual growth of positive effects.

Once a platform reaches critical mass and users are gaining value, metrics should measure customer retention and conversion of active users to paying customers. Metrics should be developed that focus on key monetization issues. As the platform matures, driving user retention and growth requires innovation.

The authors provide guidance about how to create metrics during the startup, growth and maturity phases. While they state that a platform metrics dashboard can be complex, simplicity is a virtue when developing those metrics.

Strategy is important because platforms have the power to change the nature of competition. The authors state that for decades, the five forces model of competition proposed by Michael Porter of Harvard Business School has dominated strategic thinking. His model is dominated by resources and the authors note that in today’s technology-enabled world, “ownership of infrastructure no longer provides a defensible advantage.” Platform businesses have the potential to remake markets and to grow the pie by actively managing network effects. “Platform strategy resembles traditional strategy much the way three-dimensional chess resembles the traditional game.” At the first level of competition, one platform competes with another. At the second, a platform competes with its partners and, at the third, two unrelated platform partners compete for positions within the ecosystem.

There are six ways that platforms compete:

  • Preventing multi-homing by limiting platform access.
  • Fostering innovation, then capturing its value.
  • Leveraging the value of data.
  • Redefining mergers and acquisitions
  • Platform envelopment
  • Enhanced platform design

Policy discusses how platforms should (and should not) be regulated. Huge platforms like Facebook are pushing the edges for a need to design balanced internal governance systems and external regulatory regimes to ensure fair operations. The authors acknowledge that like every business, the rise of platforms “has the potential for harm.” Many will disrupt pipeline business that will lose market share and in some cases fail, leading to unemployment. While data shows fewer drunk driving deaths in communities served by Uber, there is the Monkey Parking app example where users were encouraged to auction off their public parking spots to drivers seeking them. Because of public reaction, the app was shut down.

The authors posit reasons for and against regulation of platform businesses. Their position is that no regulation is not a good idea but choices between government intervention versus self-regulation should be carefully considered. Data privacy is one of the major issues of platform businesses, along with tax policy and labor regulation between employee status and independent contractor. Manipulation of consumers and markets may occur when platforms are large enough to influence markets.

Platform Revolution concludes with “The Future of the Platform Revolution,” an insightful discussion of industries not yet influenced by platforms but prime for platform adoption. Two of these industries are education and government. While regulation may slow implementation of platforms in each, it’s only a matter of time. The value equation is slipping in each from the traditional pipeline business and platform technology has the potential to provide increased value to platform participants.

At a conference about platforms at Oxford University last fall, presentations touted successes by local and national governments in building platforms (think public transportation routes, libraries, construction permits, and licenses, among others). While developed country regulations may impact the progress of platforms in those countries, non-developed countries are demanding access to education and platforms may provide those opportunities at a lower cost to the government and at a huge value to participants. I’ve seen the power of platforms, many of which I use. After reading Platform Revolution, I’m convinced it’s only a matter of time before more pipeline businesses are disrupted, and thankfully, I have a list of options to consider in order to avoid that disruption.

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