Semantics of Multi-Sided Business Models – Part 2

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In continuation to the last blog, I cover Platforms and Ecosystems in this post.

Platforms

You come across the term quite often and might have heard at least once in the last 30 min. It is used and interpreted liberally. So what’s unique about Platforms? Platform has two connotations: as a business model and as a technology infrastructure.

In the book “Invisible Engines”, a digital platform is defined as a foundation of self-service APIs, tools, services, knowledge and support which are arranged as a compelling internal product. It is an assemblage of software frameworks, delivery infrastructure, APIs and architectural remediation, self-service data, customer experience infrastructure powered by advanced analytics engines. Simply put, it is an operating environment with a group of technologies that are used as a foundation upon which other applications, processes or technologies are developed. A platform creates a stable centre of gravity for your tech stack.

From a business perspective, it is a holistic multi-sided business model that creates value by bringing together consumers and producers; not just a piece of technology stack. To put in plain speak, just like shopping malls with multiplexes or a city with a prime tourist attraction, a platform is an environment where a strong core anchors and mediates the relationship between a wide range of symbiotics and end users. You can visualize a platform as a hub, with spokes connecting other products to its centre. The hub binds those disparate products together and orchestrates them in a common mission.

Bill Gates quotes “A platform is when the economic value of everybody that uses it exceeds the value of the company that creates it”. It is only possible due to the large, scalable networks of users and resources that can be accessed on demand. Platforms create communities and markets with network effects that allow users to interact and transact. Platforms don’t own the means of production – instead, they create the means of connection. All platforms obey the following three axioms:

  1. Network Effects (Metcalfe’s Law and Reed’s Law)
  2. Near-zero marginal cost of production and distribution
  3. Expenses (for scaling) level off logarithmically

By that definition, all marketplaces and market networks are platforms built on platforms!! The converse of it need not be true. Platforms are the fundamental markers of 21st century market society and have inverted all the dynamics of business we have known till date. Below is a table that summarizes its uniqueness

Platform in a Nutshell
Why platform firms scale so fastSifting production outside, they can have zero marginal costs. Uber, Airbnb and Facebook do not own cars, rooms and content respectively. Not incurring the costs of production, they can scale as fast as they can add partners.
Why platforms beat productsNetwork effects imply that platform value appreciates through use whereas product value depreciates through use. An increasing value proposition, based on positive feedback, overtakes any static or declining value proposition.
Why platforms have high market capitalization but so few employeesThey harness users as producers, representing an external labour force, not counted among the traditional workforce.
Why the shift in executive mindset is so hardExecutives familiar with managing vertical integration must transition to managing open orchestration, from resources they control to resource their partners must volunteer

Ecosystems

Emergence of digital Ecosystems is a triumph of collaborative economy and a real celebration of “The Age of You”. Rather than relying either on the buyer or to buy a bundle from a single source, where a firm acts as a system integrator, Ecosystems allow final customers to have some choice but pick from an expandable menu, which is in turn curated and managed by an ecosystem orchestrator. Therefore Ecosystems become new ways of organizing complementary goods and services that involve a network of interacting producers, suppliers, innovators, customers and regulators collaborating and competing to offer a collective outcome of a complex good or services

Digital ecosystems consist of interacting organizations that are digitally connected and enabled by modularity, and are not managed by hierarchical authority (as in supply chain). In ecosystems, organizations come together by co‑specializing with each other, creating bonds that engender collaboration, without excluding competition with customers at its center. On the B2B side, ecosystems integrate disparate cross-sector or cross-industry platforms, products and services to deliver solutions that matter to the business. In the context of this blog, an ecosystem can be framed as a superset of platforms that successfully serves the needs of a broad number of adjacent verticals.

It is vital to understand this is a metaphor and is a borrowed term from the ecology. The fundamental principles such as interdependence, network patterns, partnerships, feedback loops, and self-organizing their way to sustainability via diversity and innovation hold good for the digital ecosystems.

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