Stefan Stern | 25 October 2017
Product businesses will never win against platforms like Uber or Amazon.
What if much of what is being taught at business schools is out of date? What if business models fundamentally need to change, and soon? What if apparently well-established incumbents are even more vulnerable to new entrants than they realise?
Scary questions. Perhaps even scarier before nine o’clock in the morning, which is when they were asked at a recent Eden McCallum presentation I attended, held in the smart setting of the lecture theatre at the National Portrait Gallery in London.
The speaker was Marshall Van Alstyne, Professor of Information Economics and Everett Lord Scholar at the Questrom School of Business at Boston University. Prof Van Alstyne had flown over to give a presentation on the ‘platform revolution’ to a large invited audience.
His central argument was clear, and dramatic. What he calls ‘platform ecosystems’ – businesses that build online networks and allow them to grow and flourish beyond the narrow confines of the corporation – have inverted the very nature of the firm. And the industrial model developed to near-perfection in the 20th century looks set to be replaced by 21st century platform businesses.
It’s a big claim, but there is evidence to support it. Uber, for example, with a tenth the number of employees as BMW, is valued more highly by its private equity investors than the stock market values the German carmaker. Airbnb, with its 5,000 employees and zero properties, is almost as valuable as Marriott with its global network of hotels and over 200,000 employees. Facebook is more than twice as valuable as Disney, with a tenth of its employees, and so on.
Van Alstyne pointed to the remarkable speed of value creation which platform companies can demonstrate. They also seem to need vastly fewer staff to do it. ‘These platform business models beat product business models every time,’ he said.
Based on Interbrand 2017 data, 12 out of the 30 most valuable global brands were platform companies such as Apple, Microsoft, eBay and Amazon. The top five companies in the world by market capitalisation are platform companies.
‘The product business model is broken,’ Van Alstyne asserted. Consider BlackBerry. In 2009 the company had a 50% market share in the US, down to 2% four years later. ‘That’s hard to do!’, Van Alstyne said. Its conquerors, of course, were Apple and Google. But Apple itself had been beaten in earlier decades by Microsoft, whose open software ecosystem had been preferred to Apple’s closed one.
But you don’t have to be a tech firm to build an ecosystem. Nike has built a community of loyal customers using apps and sensors in their shoes to supply data to runners hungry for stats on their performance levels. The spice company McCormick also exploits network effects to build community. Recipes are shared between customers, product advice feeds back to consumer packaged goods producers, and local restaurants can offer special menus to customers based on their taste preferences. Valuable information is shared. ‘Users are adding value to users,’ Van Alstyne said. This is a network effect. Products become more valuable through use.
Successful networks are two-sided – in other words, users and providers interact and reinforce each other. ‘Each side attracts the other, they’re both outside the core of the business, and they interact,’ Van Alstyne said. Examples are Uber drivers and riders, Android developers and users, YouTube video makers and viewers, Airbnb room providers and renters. Users create value for users and build value in the ecosystem.
This is an inversion of the industrial era firm. Then corporate giants achieved supply side economies of scale. They grew big, unit costs fell, they reduced prices, and beat the competition. Platform companies with network ecosystems achieve demand side economies of scale – bigger networks create more value, which attracts users to the network, which creates more value. They innovate faster because their open systems attract ideas from users to serve other users. And these can be winner takes all marketplaces. The rewards for success can be huge. This can be seen most clearly in the homophone (i.e., one main language spoken) markets of the US and China where the largest platforms have emerged; development of platform businesses in polylingual Europe has been slower.
The focus for business leaders wanting to build networks of this kind has to be outside the firm, Van Alstyne said. ‘You cannot scale network effects inside the firm as easily as outside the firm. There are simply more users outside the firm,’ he added. ‘To orchestrate that value, maybe business schools need to invert everything we teach.’
Marketing messages cannot simply be corporate push but must also be consumer pull. HR management also has to change: the emphasis shifts from employees to affiliates, and from internal experts to external crowds. Firms can access ‘cloud labour’ at individual and team level. Expert gatekeepers like travel agents and lawyers are replaced by crowds – e.g., TripAdvisor and LegalZoom.
Platform businesses are different in other ways. Uber owns no taxis, Facebook creates no content, Alibaba has no inventory, Airbnb owns no property. They have virtually a zero marginal cost of production. This makes platform companies hard to value with traditional measures. Network effects are harder to quantify, and their strategies differ from so-called ‘product firms’ in almost every dimension.
Instagram, with 13 employees, was sold for $1bn, not because of those 13 employees but because of the 30 million users it had. Facebook did not overpay, it seems. Maybe it was even a bargain, Van Alstyne suggested.
Platform companies orchestrate their networks and invite users to make their own contributions. As the venture capitalist Marc Andreesen has observed: ‘A platform is a system that can be…adapted to countless needs and niches that the platform’s original developers could not possibly have contemplated…’ MySpace failed partly because it failed to curate content quality and failed to enable an external developer ecosystem. At Amazon, Jeff Bezos insists that ‘all interfaces must be externalisable’, that is, open to outside use.
Prof Van Alstyne had travelled quite a long way to share his message, but it was one that clearly reverberated in an elegant lecture theatre just off Trafalgar Square that autumn morning. Guests filed out to consider whether their business could become a platform business, or whether they were themselves vulnerable to the emergence of another platform business which could yet destroy them.
Stefan Stern is former features editor of Management Today and author of Myths of Management.
This article was originally published by Management Today.