platform revolution: how platforms are reshaping whole

Barcelona, Spain • October 29-31, 2016

Marshall Van AlstyneBoston Universitymva@bu.edu

InfoEcon@twitter.com

Platform Revolution: How Platforms are Reshaping Whole Industries

MIT Leading Disruption

A structural shift in the economy is leading to gigantic firms.

This Internet era transition resembles the Industrial era transition

… but for the opposite reason.

Platform firms beat product firms in any market where both

compete.

@InfoEcon

Platforms are replacing Oil & Banking at the top

$4.8 T

$1.5 T

$1.7 T

Market Cap

Proportion of value from intangibles / tangibles has reversed

Source: http://www.oceantomo.com/intangible-asset-market-value-study/

Platforms employ an order of magnitude fewer resources

Firm Start year Employees Mkt Cap ($B) Ratio

BMW 1916 131,000 51 389,300

Uber 2009 16,000 76 4,750,000

Marriott 1927 177,000 39 220,300

Airbnb 2008 10,000 38 3,800,000

Walt Disney 1923 199,000 163 819,000

Facebook 2004 30,000 473 15,766,667

IBM 1911 350,000 125 357,000

Salesforce 1999 35,000 123 3,514,300

New York

Times1851 3,700 6 1,621,600

Twitter 2006 3,300 25 7,575,800

The Product Business Model is Broken

In 2009, BlackBerry had nearly 50% market share in U.S. mobile but fell to 3% in 4 yrs. Now 0.25% (including Windows mobile!)

2008 2009 2010 2011 2012 2013

Now 0.25% (including Windows mobile!)

1980-2000 Microsoft Platform Beats Apple Product

Apple launched the PC revolution but Microsoft licensed

widely, built a huge developer ecosystem, 6X larger.

How are these Related?

1: Each side attracts the Other2: They’re all outside

Android UsersUber RiderseBay BuyersXbox GamersAlipay ConsumersFacebook ReadersYouTube ViewersAirBnb RentersTesla Car DriversLinkedIn EmployeesUpwork FreelancersTwitter Followers

Android DevelopersUber DriverseBay Sellers

Xbox DevelopersAlipay MerchantsFacebook Posters

YouTube VideographersAirBnb Rooms

Tesla Charge StationsLinkedIn Employers

Upwork ProjectsTwitter Posters

10© Twitter: @InfoEcon :: mva@bu.edu :: PlatformEconomics.com

Network Effects: Users create value for Users

Source: Albert Cañigueral “Platforms are Eating the World” slideshare.net

@InfoEcon

The giants of the Internet era resemble those of the

Industrial era but for the opposite reason.

Giants of Supply Side Economies of scale

Standard Oil

Acklam Ironworks

Vanderbilt

Colossus of

(Rail) Roads

Electric

Dynamo

Ford Model T

@InfoEcon

Giants of Demand Side Economies of scale

Instant MessagingSocial Networks

Desktop OS Mobile

Merchant Mkts

Online Books

Online Video

Economies of Scale

Quantity

Demand

Supply

• Falling average costs

• Monopoly production

• Utilities, Semiconductors

Supply Econ of Scale

• Rising average value

• Monopoly consumption

• IM, Social Networks

Demand

Supply

Demand Econ of Scale

@InfoEcon

In any market with network effects, the focus of attention must shift from inside to outside the firm.

Reason: You can’t scale network effects inside as easily as outside.

@InfoEcon

Businesses shift from outbound messaging to inbound servicing

What Changes :: Marketing

Four Decades of Consumer Marketing

1980’s

Segmentation

Source: Rob Cain, CIO Coca Cola Company

Single

Message

1990’s

Individual

Targeting

2000’s

Virality / Social

Influence

2010’s

Four Decades of Consumer Marketing

1980’s

Segmentation Individual

Targeting

Virality / Social

Influence

Single

Message

1990’s 2000’s 2010’s

PUSH / OUTBOUND PULL / INBOUND

Warby Parker Try Five

Users get 5 styles at home, post to social networks to get votes on best look,

keep the one(s) they like. Users to the marketing to growth networks

Viral Marketing

Dropbox uses shared files, Instagram uses shared photos, OpenTable

uses shared dinner reservation, PayPal used $10 rewards

“…the path to profitable growth may lie in a company’s ability to get its … customers to become, in effect, its marketing department.”

Fred Reichheld HBR

Value creation shifts from internal to external servicing

What Changes :: Operations & Logistics

Value creation inside versus outside

DEMAND

PLATFORM

SUPPLY

Business Models Can OverlapPlatforms Scale More than Pipes

Coca Cola

Exxon Mobile

Samsung

Airbnb

Salesforce

Founded in 2008, Airbnb operates at global scale: 1M+ listings, 34,000 cities, 180 countries

Identify spare capacity, scale across boundaries

5,692 listings40,000 listings 8,105 listings

Berlin Sydney

Parker2016

“Uber, the world’s largest taxi company owns no vehicles, Facebook the world’s most popular media owner creates no content, Alibaba the most valuable retailer has no inventory, and Airbnb the world’s largest hotelier owns no real estate.’’

Tom Goodwin, Sr. VP of Strategy Havas Media

Shift from valuing assets to valuing community

What Changes :: Finance

• Estimate global taxi market

• Estimate market share

• Est. risk adjusted cash flow

• Consider proprietary

methods, barriers to

competition

• Value: $5.9 Billion

Aswath Damodaran: NYU Finance professor,

Corporate Valuation author, Herb Simon Prize.

Bill Gurley: Venture Capitalist, OpenTable, Zillow,

• All true but overlooking

network effects.

• Prices decline expanding to

rental car market and car

replacement market and

delivery market.

• Oh, BTW, already 3x size in

2009 when Uber started.

• Value: $17 Billion

Source: David Sacks, COO PayPal, CEO Yammer

Mergers & Acquisitions

• Notable Acquisitions

• Often appear to overpay initially

• Valuing the external community: professional networks, photographers, developers, videographers, data scientists…

Verizon Cloud

$34BRedHat

RedHat

GitHub $7.5B

Kaggle

Instagram sold for

$1B not because of contributions from 13

employees but from 30 million users

Emphasis shifts from employees to contractors,

from internal experts to external crowds, and

from subordinate dictation to community persuasion

What Changes :: Human Resources

Upwork outsources even middle management

Firms are accessing “cloud labor” at the team and individual level

Hierarchy

Flat Freelance

Gatekeepers replaced by crowds

Advice from laymen & lawyers over lawyers on retainer

Advice from travelers over travel agents

Work from freelance crowds over staff

IT Support Shifts from Inside to Outside the Firm

What Changes :: Information Technology

IT Support Becomes Increasingly Outward Focused

Back-Office Systems

Front-Office Systems

Social Media

Out-of-Office Systems

Inventory tracking, Restocking,

Statistical Process Control. Product

Planning, Human Resources, Workflow

Management…

Lead Tracking, Taking orders, Point

of Sale Terminals, Price Quotes,

Customer Support, Returns,

Marketing Campaign Mgmt…

Community Building, Sentiment

Analysis, Inbound Traffic

Management, Content Scheduling,

SEO Optimization, Media Monitoring

1. All teams will expose their data…

2. Teams must communicate

through interfaces.

3. … no other form of interprocess

communication allowed

4. Interfaces, without exception,

must be externalizable.

5. Anyone who doesn’t do this will

be fired.

Bezos Platform Mandate

Source: Yegge Rant

Who is Getting More 3rd Party Value Add?

Source: P. Evans, CGE; CB Insights, Capital IQ, CrunchBase, 2015

Amazon growth over 10 years 2491% vs. Walmart (48%), Target (23%), Macy’s (-12%), Best Buy (-31%)

Logistics & supply chain squeezing have limits.

External value add is much less limited.

Three Most Important Technologies

Data ➔ AI ➔ Better Offerings ➔ …

Data & AI

All these technologies can be used to create network effects…

Platforms Open Themselves to Third Party Contributions

What Changes :: R&D and Innovation

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…”

It’s Working when Users do Something You Didn’t Expect

Hay Carrier

RacecarFlour Mill

Ford Model T

It’s Working when Users do Something You Didn’t Expect

Snowmobile

GoatCarrier

Sawmill

MobileChurch

− Open to .com”

Open to developers −

The Rise & Ignominius Fall of MySpace – Business Week 2011

Does Openness Work?

The Rise & Ignominius Fall of MySpace – Business Week 2011

‘‘We tried to create every feature in the world and said,‘O.K., we can do it, why should we let a third party doit?’ ‘’ says (MySpace cofounder) DeWolfe.

‘’We should have picked 5 to 10 key features that wetotally focused on and let other people innovate oneverything else.’’

Does Openness Work?

Most firms can only concentrate on most valuable apps

Profits increase when others add to platform’s Long Tail

You don’t need to own this

Platforms Get Enormous Value from 3rd Party Developers

▪ Consider product innovation alone

▪ Adding 3rd party resources, innovation occurs at a higher rate

▪ Even if a platform starts behind, its value overtakes the product leader

▪ Shed costs, keep 30% gains!

Why Platforms Beat Products

Goal shifts from control, entry barriers, and differentiation to more valuable market

exchanges.

What Changes :: Strategy

Only 7 Firms Controlled 99% of Handset Profits in 2007

Source: Asymco

Samsung

Sony Ericsson

Motorola

Famous Brands

Regulatory Protection

Economies of Scale

World Class Logistics

Global Sales Channels

≥ $40B twenty yr R&D by Nokia alone

In 6 years, all but one had ≤ 0 profit while 1 newcomer had 92%

Is it likely all 7 incumbents had failed strategies, run by clueless

management, lacking execution capabilities?

Or was something more fundamental happening?

92% 8%

Source: Business Insider

Insight: Henry Tirri, former CTO Nokia

1. Goal is a protected market niche, emphasizing industry barriers

2. Categories are sharp

3. Weapon is cost leadership or product differentiation

4. Inimitable resources you own provide sustained advantage

Porter’s Five Forces & Resource Based View

Platform Strategy Differs

1. Goal is interactions that yield NW effects - partner to partner value. NW effects provide sustainability

2. Promote frictionless entry of partners (not barriers for competitors)

2. Promote frictionless entry of partners

3. Boundaries move as competitors can be complementors

2. Promote frictionless entry of partners

3. Boundaries move as competitors can be complementors

4. Competition is multi-layered, more like 3D chess.

At least 12+ products had sales erased by Android & iPhone

Garmin GPS TomTom GPS Canon compact &

35mm cameras

Nikon compact &

35mm cameras

Olympus voice

recorder

Sony PlayStation

Portable

Sony eReader Nokia Cellphone

Blackberry cellphone Microsoft Zune Cisco Flip video

camera

Jawbone fitness

tracker

Fitbit fitness tracker HP programmable

calculators

Timex watches Filofax day planner

• Boundary Problem: MP3 players, GPS devices, programmable calculators, day planners, 35mm cameras, and portable games are not obvious competitors. You can’t build entry barriers at boundaries you can’t define.

• Inimitable Asset Problem: Apple didn’t need to own the tech for mapping or programmable calculators or © for day planners. An ecosystem partner provided them.

Predicting Entry by features or community?

1. Dangerous entrants are those with stronger network effects. Can be producers or consumers.

2. Having the technology is unnecessary as an ecosystem partner can provide it

It’s easier to add a technology to a community than to add a community to a technology

Distinct: Buyers, Suppliers, Substitutes, Entrants, Rivals Market Forces

Scale Economies

Assets

Goal / Metric

Access

Overlap: Consumers ~ producers, competitors ~ complementors

Core Competencies Core Interactions

Supply Side Demand Side

Own Inimitable Resources Community as Asset

Cost Leadership / Product Differentiation

Engagement, Positive Spillovers, Just Governance

Barriers to Entry, Boulevards for Exit Permissionless Entry, Open Around Key Control Points

InnovationBy Firm By Firm and Ecosystem−−

Product Platform

@InfoEcon

▪ Finance

Shareholder Value → Stakeholder Value

Incorporate network effects

▪ Human Resources

Internal Employees →

External communities

▪ R&D

Experts & Specialized departments →Crowdsourcing & Open Innovation

▪ Strategy

Entry Barriers & Inimitable Resources →Ecosystem husbandry & Long Tail

▪ Marketing

Push → Pull, Outbound → Inbound

▪ IT

Back Office (ERP) → Front Office (CRM) → Out-of-Office (Social & Big Data)

▪ Operations & Logistics

Shed marginal costs

Uber: no taxis, Airbnb: no real estate, Facebook: creates no content, Alibaba: no inventory.

Network Effects & Inverting the Firm Changes… @InfoEcon

What’s Next?

Car as Platform

Block Chain & Finance as Platform

¥ £€ $ ¥ £

City as Platform

Internet of Things as Platform

Energy/Smart Grid as Platform

Architecture and BIM as Platform

Education as Platform

1. Demand economies of scale (i.e. network effects) are creating

giant monopolies like those based on supply economies.

2. Business models differ because network effects invert the firm,

shifting value creation across all major business functions

3. Platforms beat products every time – faster innovation, value

proportional to use, harness resources you don’t own

4. Information & Community are key resources. Add them to

create margins, innovate, add stickiness, and engineer

network effects.

@InfoEcon

@InfoEcon1. Introduction

2. Network Effects

3. Architecture

4. Disruption

5. Launch

6. Monetization

7. Openness

8. Governance

9. Metrics

10. Strategy

11. Policy

12. Future

Available on Amazon here.

THANK YOU

QUESTIONS & DISCUSSION

mva@bu.edu

Twitter: @InfoEcon

Find research HERE. Find blog posts HERE.

MIT Initiative on the Digital Economy

@InfoEcon

Available on

Amazon here.

Platform Ecosystems:

How Developers

Invert the Firm

Pipelines,

Platforms & New

Rules of Strategy

Barcelona, Spain • October 29-31, 2016

Marshall Van AlstyneBoston Universitymva@bu.edu

InfoEcon@twitter.com

Platform Revolution: How Platforms are Reshaping Whole Industries

MIT Leading Disruption

platform revolution: how platforms are reshaping whole

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