Digital platforms and their ecosystems are on course to intermediate a third of all revenues by 2025, disrupting major industries along the way. So what does this mean for existing businesses? Benoit Reillier was recently interviewed by Roman Kirsanov, Founder of Partner Insight, to talk about digital platforms and their ecosystems. You can view the video and read the transcript below. Thank you to London Business School for hosting us in the beautiful Sammy Ofer Centre’s Boardroom.
In your book Platform Strategy, you have a very interesting argument about true platform businesses vs platform-enabled businesses. Can you please elaborate on this?
It’s a very important question because it’s about definitions, and you’ve got many definitions of platforms to start with. For us, a platform is an organisation that creates value by attracting, matching and enabling people to transact. And it’s very different from the traditional organisations, where you’ve got a value chain, and where you have to buy raw materials and then transform them into a product. Platforms are more like an ecosystem, they are more open and that’s a new way of creating value. You see lots of pure platforms creating value like that – eBay, Uber, Airbnb.
But increasingly we see the rise of what we call platform-powered ecosystems. These are businesses that basically combine business models. So if you think of Apple, for example, you need a value chain model to produce mobile phones. You have to buy raw materials and transform them to manufacture Apple phones. But at the same time the reason why many of us have an Apple in our pockets is because of all the app that are available. For the App Store to offer so many apps you need a platform, you need to attract app developers and people buying apps. It’s therefore the combination of the App Store platform with the hardware that is manufactured traditionally, that makes up Apple’s platform powered-ecosystem.
And it’s the same with many other large firms. Amazon has got a marketplace. It’s a platform attracting people, matching them with sellers and enabling them to transact. 96% of the inventory on Amazon is offered by the marketplace. These are not products that Amazon sells itself. Rather they enable sellers and buyers to sell and buy. And Amazon also has its e-commerce operations, the traditional business online. They buy things—they started with books- and sell them online. They combine these two businesses into a platform-powered ecosystem.
Do you see more platform-powered ecosystems these days or more pure platform businesses. How would you stack them against each other?
We’ve seen lots of pure platforms in the early days. Increasingly we see platform-powered ecosystems emerging for various reasons. One is because you see traditional platforms needing to differentiate themselves. To differentiate yourself, you need to invest in unique attributes, things that are valuable, rare, difficult to imitate and in some cases these things are not available in a pure platform model. So maybe you need to be very good at logistics. Maybe you need to be very good at offering complimentary value added services. Therefore we see businesses trying to develop these capabilities and combining them to become platform-powered ecosystems.
The other thing we see is that many traditional businesses are being disrupted by platforms in their markets. As a result they’re thinking about how they can develop a strategy to counter the threats of platforms. One of the things that we see people doing—many of our clients are thinking that way-, is adding a platform capability to the existing business. So if you’re a retailer and you’ve got lots of shops, you don’t want to just turn yourself into a platform. But what you can do is add a long tail of products with an online platform to your existing stock, like what Amazon does. You may also want to add a platform of complimentary services.
So when IKEA acquired TaskRabbit, with lots of taskers to help you assemble your furniture, that is a complementary service platform. Or you can even add a content platform. People can contribute to videos and content relevant and complementary to your product. So traditional businesses try to add a platform and combine it with their core business.
How many platforms actually should be out there? Is it a winner-takes-all market? For example, if I’m Lyft and I see Uber emerging in my market, should I completely forget about doing business in this part of the world? Or should I try to differentiate myself in terms of geography, customer segments, etc.?
That’s a great question. At the heart of platforms you find “network effects”. So what is a network effect? It’s quite simple, every time a new participant joins your community, everybody else benefits. So if you’re joining eBay you’re buying and selling clothes, you add value to the platform, because you added inventory. You may be selling some clothes and maybe you’re buying as well. So you’re adding liquidity because you add demand to the platform and everybody benefits from you joining. And when business is about network effects they tend to be big, because everybody benefits. So the more people buying and selling things on the platform, the larger the platform. These businesses are big not because they’re evil. But by their very nature, they tend to become very big.
Having said that, what we see is that they tend to be very big, but they become horizontal. So eBay does sell lots of different things and that gives space for new entrants to come in and compete and target a vertical. So if we look at, as I was talking about, clothing what you find is that suddenly you find people targeting their platform just for clothing, and just say for teenagers. And suddenly you see Vinted, you see Depop, you see Farfetch selling brands, and even Zalando developing a platform. So when you focus on one vertical, one market, you can be differentiated enough to a very focused platform that becomes quite successful. What I would not recommend though, is just try to displace Amazon in one go, because they’re obviously very powerful. It’s a big task.
Do you think every established business should have platforms on their mind when they start thinking through their next strategy? Or if I’m a startup, how do I go to market, and should the platform model be on top of my list?
Yes is the short answer. Roughly it is estimated that a 1/3 of all revenues will be intermediated by platforms and their ecosystems by 2025. 2025 is “tomorrow”! That’s a huge part of the economy that is going to be “platformised” in just a few years.
Businesses cannot afford not to develop a platform strategy. Now that doesn’t mean they need to turn themselves into a platform. But it means that they need to understand what a platform is, how it creates value, what it means for their market. And therefore what it means for them, and what the strategic options available to them are. These strategic options could be about how to use platforms. About which platform ecosystem do we join or partner with? Or maybe which platforms do we add to our existing business? We see a lot of businesses, again, adding complementary product platforms, service platforms, content platforms to an existing business to create these platform-powered ecosystems that we talked about.
So yes, established businesses absolutely need a platform strategy.