The Rise of the Platform Economy
What do we mean by platform? I particularly like this definition by MIT Professor Michael Cusumano: “A platform or complement strategy differs from a product strategy in that it requires an external ecosystem to generate complementary product or service innovations and build positive feedback between the complements and the platform. The effect is much greater potential for innovation and growth than a single product-oriented firm can generate alone.”
The importance of platforms is closely linked to the concept of network effects - the more products or services it offers, the more users it will attract. Scale increases the platform’s value, helping it attract more complementary offerings which in turn brings in more users, which then makes the platform even more valuable… and on and on and on.
Platforms have long played a key role in the IT industry. IBM’s System 360 family of mainframes, announced in 1964, featured a common hardware architecture and operating system, enabling customers to upgrade their systems with no need to rewrite their applications. The ecosystem of add-on hardware, software and services that developed around System 360 helped it become the premier platform for commercial computing over the next 25 years.
In the 1980s, the explosive growth of personal computers was largely driven by the emergence of the Wintel platform based on Microsoft’s operating systems and Intel’s microprocessors, which attracted a large ecosystem of hardware and software developers.
The 1990s saw the commercial success of the Internet and World Wide Web, driving platforms to a whole new level. Internet-based platforms connected large numbers of PC users to a wide variety of web sites and online applications. The power of platforms has grown even more dramatically over the past decade, with billions of users now connecting via smart mobile devices to all kinds of cloud-based applications and services.
What’s the current state and growth potential of platform companies? How many large platforms are currently operating around the world? What’s their impact on established enterprises? These are among the questions addressed in in a recent report, The Rise of the Platform Enterprise: A Global Survey led by Peter Evans and Annabelle Gawer and sponsored by the Center for Global Enterprise. The report is based on a comprehensive survey of the 176 platform companies around the world with an individual valuation exceeding $1 billion. Their aggregate market value was over $4.3 trillion.
Innovation platforms serve as the foundation on top of which developers offer complementary products and services. Innovation platforms enable the platform leaders to attract a very large pool of external innovators, in what is called an innovation ecosystem. S/360 and Wintel platforms developed such innovation ecosystems around mainframes and PCs respectively. More recently, Apple’s iOS and Google’s Android have established very large innovation ecosystems of app developers for their various mobile devices.
Transaction platforms help individuals and institutions find each other, facilitating their various interactions and commercial transactions. In the 1990s, the Internet led to the creation of e-commerce platforms, - e.g., Amazon, eBay, Ticketmaster, LL Bean, Lands End. The last few years have seen the emergence of so-called on-demand platforms, - e.g., Uber, Lyft, Airbnb, Zipcar, Etsy, - which enable the exchange of goods and services between individuals. These platforms are giving rise to a new class of on-demand companies, which are exerting considerable pressure on more traditional firms.
A few large companies offer the capabilities of both transaction and innovation platforms in their integration platforms. Apple and Google, for example, have established innovation platforms for their developer ecosystems, whose apps are then made available in their respective transactional platforms, - the App Store and Google Play. Similarly, Amazon and Alibaba serve as transactional platforms for their individual users, and as innovation platforms for the many vendors who also sell their wares on their e-commerce platforms.
Finally, some of the companies included in the survey are essentially investment platforms, who have invested in, and/or are managing a portfolio of platform companies. The Priceline Group, for example, is focused on online travel and related services, including Priceline, Kayak and Open Table.
While predominant in the US and China, platform companies have an increasing global presence. Of the 176 platform companies included in the survey, Asia has the largest number with 82, - 64 of which are in China. North America has 64, - 63 in the US. Europe is a major consumer of platform services, but it’s home to relatively few platform companies, - 27 spread across 10 countries, 9 of which are in the UK. Africa and Latin America have a number of small platform companies, only 3 of which have met the $1 billion valuation threshold for inclusion in the survey.
Asia has the largest number of platforms, but the US leads in aggregate market value. Of the $4.3 trillion total global valuation, US platform companies comprise over 70%, compared to Asia’s 22% and Europe’s 4%. The valuation of the 44 platform companies headquartered in the San Francisco Bay area alone represent over 50% of the global market value.
160 of the 176 companies included in the survey run transactional platforms, although since many of them are relatively small, their aggregate market value is around 25% of the total. The 5 platforms in the innovation category, - Microsoft, Oracle, Intel, SAP and Salesforce, - comprise 21% of the total market value. Not surprisingly, the 6 companies offering both innovation and transactional platforms, are the giants in the industry, - Apple, Google, Facebook, Amazon, Alibaba and XiaoMi, - with almost 50% of the global market value.
Platform companies are major drivers of innovation. The top such companies, - e.g., Amazon, Google, Facebook, Apple, - are setting the standards for the digital transformation taking place around the world. Traditional companies are challenged to keep up or risk being left behind. A number of such companies have been setting up their own platforms, - often through acquisitions and alliances, - offering a variety of cloud-based apps and services, many of which are aimed at business (BtoB) clients.
For established firms, managing a platform ecosystem raises a number of organizational and governance issues, including “who has access to the platform, how to divide value, and how to resolve a conflict,” notes the CGE report. “The goal is to arrange complementors and consumer rules to maximize ecosystem profits… All of this must be done recognizing that the platform leader is orchestrating free agents rather than directing employees in a hierarchical command-and-control structure.”
“Approaches to platform governance must also consider the way value is created. While traditional business models would incent managers to maximize the price of each product or services, different approaches are needed to manage platforms… Pursuing broader ecosystem profits over specific products and services may only be achieved with significant changes to managerial incentives and organizational culture.”
“There is clearly a rising platform economy shaping our global business landscape and affecting the lives of citizens worldwide,” says the report in its concluding paragraphs. “This new form of organization seems to be a robust - some would even say dominant - form of business enterprise in the digital economy… While significant challenges lie ahead, the opportunities that platforms reveal are enormous, tapping into an unprecedented level of global Internet connectivity, and a large supply of talent and software skills… to develop the platforms of tomorrow.”