Platforms are the future—but not for everyone

May 19th, 2016  |  Source: The Economist

“INTERESTING thesis, but don’t use the word ‘platform’ in the title. No one knows what it means.” That was the reaction of a professor at MIT in 2000 upon reading the dissertation of Annabelle Gawer, now co-director of the Centre for Digital Economy at the University of Surrey. She ignored the advice and kept the title.

If anyone were to counsel Ms Gawer against using the word today, it would be for the opposite reason: overuse. Academic papers on the concept are now legion. Books are multiplying, too: after “Platform Revolution” in March, this month will see the release of “Matchmakers” (with the p-word in the subtitle). Rare is the startup that does not want to be a platform. A rapidly growing number of incumbent firms, too, are striving to build platforms. Yet the professor’s problem remains pertinent: confusion still reigns over what exactly platforms are. And this, combined with the hype, hides the fact that they are not for everyone.

Broadly defined, platforms are a type of marketplace where people and businesses trade under a set of rules set by the owner or operator. Among the first were the emporiums in ancient Greece, designated places near docks where traders could exchange merchandise. More recently, digitisation and the internet have given rise to a new type that is both marketplace and shared base. Operating systems are an example, such as Windows for personal computers and Android for smartphones; these programs provide basic services that applications developed by others need to run. Another version is e-commerce sites, including Amazon and eBay, which connect sellers and buyers (hence the title “Matchmakers”). Social networks, too, are platforms: they bring together consumers, advertisers and software developers.

These modern platforms have three things in common. They are “multi-sided”, meaning they have more than one group of customers. They exhibit strong “network effects”: a growing group of one sort of customer attracts more of the other, which again draws in more of the first and so on. And they are controlled by one company, which can dictate the terms of trade, such as what type of businesses are allowed on its digital property and what they have to pay for the privilege.

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