Increasingly, academics and experts are convinced that the major force of disruption in today’s economy is the business platforms that create network effects. Think again, says Haydn Shaughnessy, in the second article of our Ecosystem Thinking series.
A few years ago, marketing exec Tom Goodwin wrote an article that said of a few new tech platforms – Airbnb, the world’s largest accommodation provider, owns no real estate; Uber, the world’s largest taxi company owns no cars; Facebook, the world’s largest publisher creates no content…. etc.
That trope got a lot of traction despite its inaccuracies and the false notes that came singing out with it. For example, Booking.com dwarfs Airbnb and is usually, rightly, described as a booking engine rather a real estate company.
Something similar is happening around the idea of platforms. Every superstar company is suddenly one of them, a platform.
Probing the platform
The point is we fall in love too easily with a smart and snappy summary even when it’s wrong. In fact Goodwin was trying to tell a different story. That is, profits often lie with whoever owns the interface with customers rather than the one who owns the assets. Good point, and well worth debating, but lost in the trope.
Platforms are the 2019/2020 mega idea. Platform theorists tell us every major company, at least the real stars of commerce (Apple, Google, Facebook, Amazon, Alibaba) are platform companies. Their success is so pronounced and obvious that many companies are rushing to their consultants and saying: make me like that.
I beg to differ, or at least to introduce some important nuances into this star-struck debate. So, is Apple really a platform company?
Think Apple, think again
I have a vested interest in saying yes. I wrote one of the first books on the platform economy and labelled Apple one of them. But over time I’ve changed my mind, not just about Apple but about the whole idea of platforms.
If you are talking up the idea of being a platform think again. Think ecosystem, instead. But to the question, is Apple really a platform company, the honest answer is: to some small degree.
For most of its peak years, the company’s revenue and profit have been driven by the iPhone. Over the past five years the iPhone had under 20 per cent smartphone market share by volume but grabbed between 68 to 90 per cent of smartphone profitability. Hardware still makes up 80 per cent of Apple’s revenues and while services have grown (the bucket that the App Store falls into), it still accounts for only 7 per cent of revenue…
There’s no doubt the App Store (Apple’s platform) drives some portion of iPhone and iPad sales. But sleek design, exceptional retailing, extraordinary branding, integration between devices and numerous other factors are more important. Most apps were built by companies anyway to simplify customer experiences. In other words they are not part of a market. The idea that success hinges critically on the App Store platform bringing developers together with buyers of apps is wrong.
Right now services are becoming more important to Apple’s overall health. But the driver of increased service revenues looks to be entertainment rather than apps. And indeed Google, Apple, and Amazon are all headed Facebook’s way, that is to say they are becoming entertainment and content companies.
Do we really understand the platform?
Something weird then is going on in the world of platforms. Are we becoming addicted to the language and hyperbole over the reality or do we just not understand? My view is the latter. We’ve leapt at ideas that are in many cases inapplicable to the modern platform and ecosystem world.
A platform is supposedly a marketplace that attracts at least two parties to do business together: app developers, say, and customers. For companies that are looking to develop platform strategies the sage advice is to get the pricing right. Attracting developers and customers is a pricing issue (which of course is also a reward issue).
But just as there is a lot of overclaiming about the power of platforms, there is an overclaim around strategy and the importance of price. It’s argued, think back to Tom Goodwin’s point, that platforms have one side where the majority of the cost lies (hotels) and one side where the revenues lie (bookings). Strategy depends on figuring out who should bear the cost of attracting people in and at what price.
Newspapers: a case in print
Two examples we can use to illustrate this are newspapers and online dating sites.
Let’s start with newspapers. Cost comes from creating and distributing the news; revenue comes from advertisers. According to this logic, strategy should focus on pricing access to readers at a level that attracts advertisers.
Now, of course every business depends on pricing a service in excess of its costs. But leave that aside because there are nuances here. Newspapers are complex institutions rather than two-sided markets. For much of their lives they have had at least five sources of revenue.
One, certainly, is advertising. Another is paying customers who buy at the newsagent or on subscription. Yet another is patronage – many of them were kept going by a rich benefactor. Another source is specialist information. Newspapers sell reports. Reader offers (having a page that sells products on behalf of third parties) are another source of revenue.
Over time they have diversified still further. Providing training in topics like writing and business; gifting too (just take a look at the Guardian); cross subsidy from successful trade titles (the Guardian again); conferences; having companies pay so that they can have articles about them published..!
I make that ten sources of revenue and a very rich interplay of forces. Where newspapers have tried to become digital platforms they have tended to fail. In other words, when they try to become more like binary platforms – conduits for advertisers to reach readers – they find it very difficult to make ends meet.
Now on to dating, where I am no expert at all. The idea that dating is a two-sided marketplace is a common assumption in the platform literature. But the idea seems to me profoundly lacking in common sense.
A dating site is a melting pot for people looking to fulfil different interests related to things like age, kink, size, colour, education, gender fluidity, pride denominations, virtual rather than real presence – and so on.
Research also shows that these dating ‘wants’ are deeply segmented. Cities differ in their propensity to exhibit certain types of desire. Anomalies such as women with undergraduate degrees seeming to be more desired by more men than women with postgraduate degrees is just one of multiple taste cultures inside dating. Hence, there are now various apps for various types of hook-up as well as communities for every type of kink. Dating needs morph continuously.
Around all this on the sites themselves is a moat of content about sexuality, dating advice, eroticism, safety, self, appearance and so on. Not to mention beautification apps, make-up lessons and advice on photography – what to photograph and what not – as well as how to selfie.
It is this content rather than any network effects which attracts people into the market, guides them in learning appropriate behaviour and teaches them how to interact.
From people to profit
Here is my point, which is quite different from Tom Goodwin’s and from that of the platform theorists. I am an ecosystem addict. I love the sociology of the relationships that surround platforms more than dubious economic models that try to explain them.
The ecosystem is where society takes over from technology. It is where human relationships make a difference to profit.
By and large, humans are going to make a difference through what they say (or write, podcast, tweet, design etc.) The tools of human relationships are what make the difference. And they are expressed as content. Content attracts and engages us as long as it is relevant. And just like those newspapers of old, it engages us when it matches our interests and moods, corresponding to our preferences in lifestyle, sport, news, politics, and opinion.
It engages us by framing content according to our presence in a segment (sports mad, soccer loving, literate female, for example, at least on a Friday after work..!) or an emerging segment. Consequently, Apple and its band of super stars is recognising that the platform is dead, so long live the content!
In fact, Apple could just as well be called a content company as a platform with network effects. Increasingly it will be defined as a health company and an entertainment one.
We need to understand the ecosystems
There is always more than a grain of truth in the faddish language of business. And the idea of network effects has been around a long time. The problem with it is what we often see in business today is not a network effect. It is the effect of being on the first globally mobile communications network.
The behaviours this permits and the content that mushrooms up to support us as we engage in new online activities have not been seen before.
I think we grasp what platforms are. We can argue over how influential the network effect might be. But what we need now is to understand the ecosystems that are evolving around us in all their complexity.
Haydn Shaughnessy is the co-creator of Enterprise Flow, a framework and future operating model for companies undertaking digital or agile transformation. He has published widely on business issues, including at Forbes.com, the Harvard Business Review and on enterprise risk for The Global Association of Risk Professionals.
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