What do Google, Facebook, Alibaba, Uber, Airbnb have in common apart from the fact that they are some of the most valuable start-ups of the recent years? They are all platforms businesses!
The success of these envied companies has made the platform business model the holy grail of business models.
But platforms do remarkably little compared to traditional companies. Often they merely connect two or more independent parties to interact with each other. Uber, AirBnB, Ebay, Alibaba and most other platform bring together service providers and service takers. But the platforms do not provide these service themselves. Other platforms connect sellers and buyers of products. But they do not sell the products themselves, they do not own the inventory, let alone manufacturing any of the products sold.
What are platforms anyway?
In business literature you will hear the term “multi-sided platform” as well as platform and platform business model. It means the same and I will use both terms interchangeably.
One of the defining characteristics of successful platforms is that they create indirect network effects that increase the platform’s value as it grows. Take Uber, if there were not enough drivers, Uber could not grow. Long waiting times for passengers would reduce the value of the platform and offering. If there were not enough riders, drivers would lose incentives to participate. This is why Uber follows a special process every time they enter a new city to get to a critical mass of participants on both sides (riders and drivers).
Today, I will cover a lot of examples and the various ways in which they connect two or more sides to each other. Next week, I will then use these examples to explain the details how the multi-sided platforms. Let’s get started!
Types of multi-sided platforms
Let’s look at different types of multi-sided platforms. I am using the categorisation proposed by the guys from Applico but have expanded on it (and slightly rejigged). Here is a mindmap with some common categories and examples.
Service platforms are marketplaces for service providers and service takers. The best-known examples are Uber and Airbnb. But there are many more.
Uber connects drivers and riders as an alternative taxi offering.
Airbnb – as you know – connects hosts and guests. Instead of staying in a hotel you can stay in someone’s home or apartment. Both Uber and Airbnb have now huge customer bases and are expanding into several adjacent areas from there.
But there are also many other service marketplaces. Here are some more examples:
Freelancer connects providers of services for online jobs. These can be virtual assistants or people who do any sort of computer work for you.
You enter a project description (you need to select at least one category that Freelancer knows). Once you post your project, skilled freelancers will be informed and provide a bid for your project. You can then choose from the bidders the one you prefer. This is a project-based, auction-based platform.
Airtasker is similar to Freelancer.com but in the “real world,” meaning you look for providers of hands-on services, such as repairs, cleaning, installation, renovation and so on.
- Individuals (and small businesses) aiming to get a job done with
- Individuals providing services
Hipages – for example – does a similar job, connecting
- Individuals aiming to get a job done with
- Small trades companies & individual tradies
As you can imagine, there are many similar platforms starting in a particular niche with the aim to expand from there.
The best-known product marketplace is eBay. They bring together buyers and sellers of goods. It started in the niche of used goods and was auction-based. But it has for a long time expanded into a full online shopping experience that brings together professional sellers and buyers in every category you can imagine.
eBay purchased PayPal (in 1999) and added convenience and security to the transactions among sellers and buyers and also added feedback ratings and as such dramatically reduced the risk for buyers. These are important design elements of a platform business which I will cover in more depth next time.
Amazon connects sellers with buyers on their marketplace platform and offers related services to sellers:
- Shipping (using the Amazon Prime 2-day delivery platform)
- Advertise your product on the Amazon web pages
- Payment systems (including some CRM elements)
- Training on how to sell on Amazon
Why is the “normal” Amazon not a multi-sided platform, you may ask. Because most of Amazon sells on their pages owns this inventory. They have purchased the inventory and if they don’t sell it, they will need to write it off eventually (or sell at a heavy discount).
The products Amazon sells through their marketplace are different. The inventory sold here is owned by the seller – no risks for Amazon involved. Amazon’s marketplace also allows service providers to sell their services (similar to Airtasker). Again, Amazon does not provide these services themselves.
The same holds true for most of the other platform examples. Uber owns no cars (other than few test self-driving vehicles) and yet commands a fleet of over >1.6m vehicles. A slight exception are game consoles that I will cover briefly later.
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PayPal connects various participants with each other. Here are some of most relevant connections:
- Buyers – sellers: mainly online
- Individual – individual: can transfer money to each other conveniently from their computers across countries. Used for personal purposes or on platforms like the ones above: Freelancer, Airtasker, Ebay (who own PayPal) and many more
- Businesses – developers: Developers can develop / set-up PayPal solutions in their online stores, apps and so on.
Visa, Amex, etc
Basically, all credit card companies are platforms, even in their classic form, i.e. before “online” even existed. They have brought together buyers and sellers on a payment transaction level.
Amazon’s payment platform (as well as Apple Pay, Google Wallet) are also multi-sided payment platforms (even though they don’t have – yet – as large functionality sets as PayPal).
Skype connects callers. There is no distinction as such into certain types of callers or the nature (e.g. business vs private) calls. On the surface, Skype is not a multi-sided platform.
The main source of its revenue are Skype credits. Calls are free so long callers have a Skype ID. But calls to people not on Skype, and thus on a phone number, require Skype credits. Skype has more than 40% of international call (in 2014). The other source of revenue are ads. And this is where it becomes a multi-sided platform.
Since Microsoft has acquired Skype in 2011, they are integrating it into their (various) platforms. Many uses can be imagined, e.g. more systematic use of Skype for education, thus connecting educators and students. You can imagine a vast amount of options to connect the two sides of information providers and information consumers (for commercial or non-commercial purposes). It would be one of many cases where platforms add additional sides (independent parties) to their business.
WeChat (the app-of-apps)
WeChat is fascinating. Seemingly, it is just another messaging app connecting people. But it is more. It is also a portal platform and almost an operating system platform (though still based on the Android AOSP).
There are two sides, so called official accounts (service providers, retailers, restaurants, doctors, health care providers, etc) and normal accounts. WeChat’s city services offer various functionality to connect these two sides to each other.
- pay bills,
- book doctor appointments,
- get bank statements,
- send money,
- check-in to flights
- and much more.
Most of this happens through WeChat’s “app store” for lightweight apps. This saves some providers the trouble of providing a standalone app and offers those who have a standalone app and entry-point into it.
Thus, WeChat falls into several of the above platform categories and – in my mind – will have imitators in the West (Facebook and others). Undoubtedly, it will form the basis of a new type of very powerful platform.
On the surface, Facebook brings people together who interact (hopefully) socially with each other. But it would not be the commercial success that it is if this was all. It would also not be a multi-sided platform.
The users generate the content for free amid which Facebook adverts are placed. Unlike media companies, who pay their journalists to create content to then advertise within this content, Facebook has no production cost for the content. Plus the content created by your friends is well-targeted and relevant for you (well most of it is anyway – even that crazy cat video, provided you watch it).
So, Facebook does not bring you and your friends together. But you and advertisers. That makes it a multi-sided platform.
Development platforms are fascinating. They too are platforms. Take the case of game consoles. They connect game developers and gamers. Take the first gaming platform, the Atari VCS 2600. Atari opened their platform to game developers. Once the console became popular, some developers who wanted to make a quick buck, flooded the market with low-quality games. Consumer got annoyed and stopped buying. The consequence was the famous “video game crash” within a short year revenues collapsed by 97% contributing to Atari’s bankruptcy.
From there on, other game console and computer manufacturers introduced a number of measures to protect the affected side (consumers) from similar occurrences. I will talk more about next week on the important design elements of a platform.
Other development platforms are smartphones via app stores, Windows, Linux, Salesforce and many others. Note that smartphones and game consoles are one of the few platforms where the platform owner manufactures hardware.
Sharing economy platforms
There is – as you may have realised – a massive overlap with the sharing economy. I have covered the sharing economy in a previous article. You can go back and find more examples how those platforms connect two independent sides to each other.
And many others
- Google is a search platform that monetizes on the advertisements related to the search queries. Google has many embedded, more specialised, platforms. E.g. Google competes with eBay on connecting consumers with online retailers though their shopping results and with brick-and-mortar retailers / service providers in their maps platform. Facebook, Amazon and most of the larger platforms above have more specialised platforms within them. Like many, Google did not start off as an advertising platform. They started as a pure search service and only later realised that they can provide a powerful advertising platform through very targetted ads close to the topics that the user is searching for at that moment. Google makes it difficult (as in very expensive) for advertisers to show their ads when it does not closely align with the user’s search, thereby not compromising the user experience.
- Platforms are not new, e.g. shopping malls connect consumers and retailers. But a marked difference to the online platforms is that the shopping mall companies actually own the mall. It is an asset that is on their balance sheet and it is subject to the whims of commercial real estate with its boom-and-bust cycles.
- And there are niche platforms who aim to expand once their conquer one niche, but run the risk to become obsolete the moment one of the large platforms enters their niche. Here are a few:
- Ticketmaster: event venues and consumers
- Fandango: cinemas and consumers
- Menulog: diners and restaurants
- Foodora (Deliveroo): restaurants and diners – they are not just a delivery service but you can also order food from various restaurants on their pages.
- And thousands more
What does this mean for you
Most established companies are one-sided businesses. Ask yourself how you could add another side to it thereby creating value for both sides. E.g. Google added advertisers to their already existing side of search users. Google does this without sharing any user information with the advertiser. Facebook does the same. The advertiser does not know which users have seen their ads unless the user clicks on the ad. Is there any information of your users that a new side may be interested in?
Steve Jobs refused to open up the Apple Lisa for 3rd party apps in 1983. Then the refused to open up the iPhone 1G for 3rd party apps. He opened it up only for the iPhone 3G with massive success. If you are owning a platform of any kind, could opening up your platform for 3rd party offerings be an option to provide more value or to utilise your assets better, etc.?
Uber, Airbnb and all sharing economy platforms help to increase the utilisation of already existing assets. Can you help the utilisation of already existing assets in relation to your industry?
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And answer these questions:
- Which one of the above types of platform is closest to your industry / company?
- What can you learn from those companies that are closest to your company? Which sides are they connecting and how? What value are they adding to both sides?
- What are opportunities for your company in terms of the sides you could connect and the value you could provide?
Remember, we are only starting on this subject this week. Once you do these exercises and take notes and research examples you can learn from, you will be reading the next article on this topic with much better understanding. So, best to get started right now.
Take about 15-30 mins for this exercise.