How Did Alibaba Beat Everyone? Products vs. Digital Platforms. (Tech Strategy – Podcast 4)

This is the fourth episode of my Asia tech class. It is an introduction to Alibaba and platform business models.


  • For a shopping mall, credit card and conference (or convention), decide who are the core users, what is the type of interaction, and what is the frequency of interaction? Write it down.

You can listen here or at iTunes, Google Podcasts and Himalaya.

This is part of Learning Goals: Level 2, with a focus on:
  • #3: The basics of Alibaba’s marketplace platform

Here are some notes from the book Platform Revolution.

Concepts for this class:

  • Pipelines vs. Digital Platforms
  • Digital Superpower: Enables a platform business model.

Companies for this class:

  • Alibaba

Photo courtesy of Alibaba.


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

—–transcriptin below

Welcome, welcome everybody. This is Jeffrey Towson. I’m a professor at Peking University and this is my Asia Tech class. Now this is the fourth of these lectures slash podcast. And for those of you who are just joining in, which is most people, this is not a podcast. This is a course, which means yes, there is a, a lecture aspect, which is the audio, I guess, podcast part, but no, there’s also assignments, there’s homework, I’m going to push you to be active and not just sort of lay back and think, oh that’s interesting. As much as I would like to think that me lecturing and talking is helpful, which I hope it is, you’ll learn ten times more everything you try and do yourself. So I’m going to push you to be active and to do that. If you’re at the gym, awesome. That’s just the right kind of mindset. If you’re kind of laying on the sofa. Please sit up. If you were laying in class, I would probably do something. Wake up, sort of turn yourself on, and we’re gonna power through kind of a lot of material today, pretty important stuff actually, and it centers on the question of how did Alibaba basically beat everybody? Now this is about a week from Singles Day 2019. Singles Day is the massive. Alibaba sales festival. It happens on November 11, 11, 11, which is, you know, it’s kind of why it’s called Singles Day or Double Sticks Day because it’s 1111. And it’s a, it was a sort of an obscure Chinese holiday for single people who didn’t celebrate Valentine’s Day. And Daniel Zheng, about 10 years ago, thought he would turn it into a sales day. Daniel and running the show now that Jack Ma has departed. And Singles Day went from an obscure holiday to the biggest sales event on the planet by a tremendous margin. Last year, 2018, in a 24-hour period, they sold $30.4 billion worth of goods, which dwarfs anything in the US. It dwarfs Digital Monday or the Amazons. Nothing’s even close. It’s absolutely insane. That is about a week from now. And I’m going to be heading up to Hanjo and do some behind the scenes stuff with the Alibaba management. So I’ll probably blog or vlog or something about that. But anyways, in sort of spirit of that, I thought we’d tee up the big question, which is how did they beat everybody? How did they go from an idea Jack Ma had in 1998, 1999, a guy who really didn’t have any experience, not really. No tech ability, no software ability, but he had the single greatest idea, which was we are going to do e-commerce in China. It turns out that’s all you really need to become a billionaire was to have that idea at that moment in time and then execute reasonably well. Okay, so we’re going to talk about this. The idea that underlies all of this is the idea of platforms, digital platforms versus traditional product, linear businesses. It’s really incredibly important. Like if you want to make a list of the most important ideas shaping commerce, business today, this idea of platform business models has got to be in the top three. It’s incredibly powerful. All the major companies you hear about all the time, the Alibaba, the Tencent, Facebook, Google, Microsoft, they’re all platform business models for the most part, or at least they’re network focused business models and mostly platforms. So we’re gonna talk about what this means. Some of you will know this, especially those of you who have been in my class at PKU or SIBs. For some, this will be the first time. Either way, I think it’s, well, hopefully it’s really valuable if you haven’t heard this before. But even if you have, I think every time I go through this, I find details I didn’t catch before. This is one of those, there’s a handful of ideas you just wanna hit over and over again, like every year. because they’re so important. This is one of them. Like, it’s worth studying this every single year. And it’s also, it’s a little bit complicated. So that’s what we’re gonna talk about. Platform business models and, you know, then in the process answer this question of, you know, how did Alibaba win? And I’ll also be publishing a couple articles in the next day for those of you who’ve signed up to this class, which you can do at is I’m going to be sending out some articles about Alibaba with a lot more detail and a little sort of more advanced thinking. But, you know, I’ll come at this multiple ways over the next week in preparation for Singles Day. Okay, let’s get into some theory. Every one of these classes, I’m going to give you some company information. So hopefully you’ll get smarter and, you know, have better understanding of these major companies, China, Asia, tech giants. And I’m also going to cover a couple sort of big concepts, frameworks for thinking about these companies and taking them apart. And I’m going to reiterate a lot. I’m going to repeat myself. Hopefully I’ll just keep repeating so much. You’ll just know it because you’ve heard me say it 20 times. The first episode, we sort of talked about mobile bike and bike sharing. And I talked about Clayton Christensen, jobs to be done. I talked about access versus owner business, owner businesses. I talked about demand purification. This idea of convenience. low price. In episode two, we talked about similar ones. I also teed up the idea of digital superpowers, that there’s certain digital tools use cases that are so powerful that if a business adopts them, it can be pretty much game over. The one I talked about was transforming the consumer experience. Well, today we’re going to do another one. Another digital superpower is if you can launch a platform business model in a business that has not traditionally had those. you usually win, the platform usually wins. We also talked about money more, we talked about fast scaling versus blitz scaling. The two ideas I wanna talk about today are one, this sort of second digital superpower, which is build a platform. And then this idea of pipes versus platforms. Now, you’ll hear different versions of this, people use different terminology. Platforms, they will often say multi-sided platforms, or MSPs for short. Pipelines, they will often talk vertically integrated businesses or VIs. Sometimes this discussion gets sort of mixed in with the idea of network business models, that certain businesses are inherently networks like telephones. Everyone has a telephone. All the telephones in the country together form a network. And platforms and networks, I don’t consider business models. Networks, I consider things that exist in the world phenomenon. Everyone’s got a phone line into their house, social networks, people know each other, physical networks, information networks. I think those things exist in the real world. I think a platform business model is a business model built on top of networks. Um, it was. That’s probably a little bit confusing. I’ll go over it multiple times, but these ideas do tend to get mixed together a lot. I’m gonna sort of tell you how I break it down. Okay, but for today, the idea I really just want you to focus on is this idea of platforms versus pipelines or MSPs versus pipelines. And the big difference that matters, the simple question you can always ask yourself if you’re not sure is, does this business serve one group of users or multiple groups of users? Now most businesses serve one group of users, usually we call that the customer. Or in the case of a B2C business, we call it the consumer. We have a restaurant. We serve one group of people, which is the customers, the consumers. They come in, everything sort of leads to that. Retailers the same. If we’re a B2B business, like a consulting firm, we have clients, those are our customers. There’s generally one user group that you’re serving. And this idea of a pipeline which came out of this book, I think Platform Revolution, there’s a great book called Platform Revolution which I will link. I think they came up with the idea of pipelines, that traditional businesses are kind of this linear process where you bring something in, let’s say on the left side of the page or at the end of the pipeline, supplies, wood, materials, energy, labor. And as the product or service moves down the pipeline, you add value. Maybe you, you manufacture something, maybe you create a project, maybe something. And by the time it comes out the end of the pipeline, it is more valuable. And that’s what the consumer or customer pays for. So let’s say you buy a hundred dollars, $50 worth of goods. You spend $50 on labor. And at the end, your product is worth 120. So the pipeline process has created $20 of value in a hundred dollar product. And that could be for a product like making cars, right? You can literally see the assembly line like a pipeline, right? The car moves down the assembly line, people keep adding things to it, refining it, adding the doors, adding electronics. Finally, it comes off the end of the sort of conveyor belt or factory line, and it’s a car. And then you put it into the dealership and there’s sales. So there’s other things that go on in the value adding process. but it’s kind of this linear process. So people call it a pipeline, they call it vertical integration, they call it linear value add, there’s a lot of terms. But the defining factor is there’s one group of users, in this case, the customers. Okay, and you could see that in services as well, if you’re working at a consulting firm like a McKinsey or a Boston consulting group. You know, you have a group of clients, they have a problem, so what do you do? Well, you… You rent an office space, you buy a bunch of laptops, you hire a bunch of people, you train them, and you bring them in-house, and they are the group that does the value, and then you do marketing and sales, and maybe data science, stuff like that, and that’s what creates the process. So it’s still a pipeline, it’s just a pipeline for a service, as opposed to a product. Usually the linear process, it came out of the fact that the industrial age came before the information age. So we tend to think about business from an industrial point, like a factory floor, a linear process, where you concentrate and control the assets so that you have this very efficient process of value creation that’s a pipeline. Okay, that’s kind of how you create value in this linear process in a pipeline. Now, if you are running one of these pipelines, if you’re the CEO of VI, a vertically integrated business or a pipeline, The typical questions you would ask yourself is, okay, we need a physical asset like a factory. Do I buy it or do I build it? Do I bring it in-house? Or can I contract it through the marketplace? Maybe, do I hire people or do I just contract them when I need them? Do I build an intangible asset like a patent or a movie franchise or do I license it from someone else? But there’s always this idea of like, Do I bring something into the firm in my value creation process such that I own it, or is it out there in the marketplace and I just access it when I need it? Some consultants bring people on whenever they sign a contract. Other people hire them full time and train them. So it’s kind of the same idea. And You know, traditional vertically integrated businesses are usually about bringing assets, capabilities, activities inside a business and then using that to create value for one user group. Now you can actually have multiple types of customers and you can have multiple types of products, but you’re sort of all focused in one direction. Okay, that’s pipelines. Platforms. Now platforms are just different animals. The question you always ask is, Am I serving more than one user group? I don’t use the term platform. I usually call it an MSP, which is multi-sided platform, which basically means on each side of the platform, there’s another user group. And what’s interesting about platform businesses is you’re not just serving two different user groups, like, oh, I’m selling this group apples and I’m selling that group oranges. No, no, that would be a pipeline. The platform is help, the main job of the platform is to enable the two different user groups to engage with each other. You’re facilitating a transaction or an interaction. And that’s actually kind of complicated. Example, you know, this is not a new business model. You go back to ancient Rome, ancient Greece, you go downtown to the forum, I guess they call it downtown. You go to the forum and you’re going to see a bazaar or you’re going to see a marketplace. That’s a platform. That’s a platform business model. The person who sets up the bizarre downtown and ancient Rome is not opening their own stores such that they’re a retailer, they buy their goods, they hire their staff, and then they sell to customers. That’s not what they’re doing. They own a space that then other people come to use to enable interactions. And their two user groups would be merchants who set up stalls. and consumers who come to buy at the stall and the person who owns the platform would you know they’d own the square or they’d own you know the structure and then the trick with this is you have to get both groups to come and you have to keep both groups happy at the same time which usually means balancing their interests. If you want all the merchants to come and set up their stores okay you have to give them certain things they want. electricity, well in that case candles I guess, you know a nice facility, a good location, the ability to advertise maybe bathrooms nearby, maybe security guards, you have to end a location, you have to enable, give them the things they want that they’ll come. But you also have to get the consumers to come and they want different things. They want more stores, they don’t want high prices, they want a nice safe environment. You have to make both groups happy at the same time and it usually makes, it usually each group everything they want. Now that’s different if you’re a pipeline. Your job as a pipeline is to make your customer totally happy in every way you can. Usually when you’re doing a platform, you’re balancing their interests and it can actually be pretty tricky. And pricing actually turns out to be very tricky. Because here’s like the single probably biggest strength of a platform is I can make money on both sides of the platform. Pipelines don’t have this ability. And this is one of the reasons pipelines always get, not always, but almost always get beat by platforms. Because if you are a retailer and you are selling things in your store and you’re charging a certain price based on your cost, your inventory, your cost of goods sold, your staffing. If I am a platform and I have multiple stores within my structure, I can make my money on either side. I can maybe offer discounts to the consumers and then just charge the merchants more on the other side. So suddenly you’re competing with someone who can shift their pricing from other sides. I can subsidize one side of the platform with the other. This is why you go on Google and everything’s free. This is why you go on Facebook and everything’s free because they’re shifting their costs to someone else and they’re making their money on the other side. So if you’re a traditional media company and you’re competing against a Google, they can basically offer stuff for free and you can’t. It’s pretty devastating, this ability to sort of shift your prices from side to side and use one side to subsidize the other. Okay, let me give you some examples. So I gave you an example of a street market. That is a traditional physical platform business and that platform we’d call it a marketplace. There’s lots of different versions of these. I track them, I generally put them in one of six buckets of platform types. But physical platforms, that could be a shopping mall. Even today, a modern shopping mall is usually a platform. The real estate developer owns the building, they put in bathrooms, they put in guards, they put in air conditioning, they put in toys for the kids to play with. And then the merchants, the Starbucks and the Zara’s and the H&M’s take space. That’s one side of your, that’s one user group. and then the customers show up. That’s the other side of your user group. What’s another one? Local bars are kind of, sort of people-based or almost real estate-based platforms. Bars usually have, well, depending on what kind of bar you go to, usually you have two user groups, which is men and women. You can have other types, but that’s a pretty common type. And… You know, this is one where you have to keep both sides happy. If you go to a bar and it’s all guys, generally the guys don’t like that. And if the women go to the bar and it’s all women, I think that’s probably more acceptable, but still generally, no, you generally want both groups to show up. And again, you can subsidize prices. You can say ladies night is Thursday. All drinks for women are free. Now, how did they get away with that? Because they charge the other user group, the men more. So you, that’s a price subsidy across the platform. There’s various versions of this in online dating and other stuff. Okay. So that’s kind of a physical platform based on structure. You can have platforms based on people. Matchmakers, same thing, whether it’s a matchmaker for dating or marriage or whatever, this is usually someone who has two groups of customers and they’re putting them together like investment bankers or matchmakers. They have one user group which would be people with money and then they have another group which is people with businesses who need money. And they just operate between these two groups and they’re in the business of facilitating and making markets and enabling transactions and things like that. Information-based platforms, there’s a lot of these. Newspapers have always sort of traditionally been an information-based platform. On one side you have the readers, on the other side you have the advertisers. Although that one’s a little bit trickier. Credit cards, credit cards are like this. You know, on one side of the platform, you have all the restaurants in town. And on the other side, you have all the people who wanna buy stuff. So you’re enabling these groups such that when someone goes into a restaurant, their card will be accepted and they can pay for it. But you need both sides. A credit card that’s not accepted at restaurants and stores is of no use. and a credit card that a restaurant accepts that nobody uses customer-wise is of no use to that group. So there’s sort of different variations of this. Now as soon as you say platforms, people immediately start thinking network effects. I’m not really going to talk about this because in this lecture we’ll have lots of talks on network effects. But not every… more usage of a product, the product itself becomes better. You know, if I go to KFC and have chicken, and then you go to KFC and have chicken, my chicken didn’t get any better. It didn’t taste better, you know, wasn’t, maybe it was a little cheaper, but not much. I mean, it didn’t really change the process. If you go on WeChat or Skype, and I’m already on WeChat or Skype, you joining just made it more valuable to me because I can now contact more people. And if 10 more people join, it just got more valuable for all of us. The value of the product or service, they’re usually services, increases with the usage of it. Either the number of users or the frequency of usage, the level of engagement. So they call this sort of demand side economies of scale or network effects or things like that. There’s a lot of different names for this. A lot of people who get into the platform business, this is what they’re after. Like say the credit card one I just said, okay fine. If the more people that carry this credit card makes it more valuable to all the stores and the more stores that accept the credit card make it more valuable to all the people that have the card. Same thing. Skype and PayPal and WeChat are all network-based businesses. Okay, the point here is, and don’t worry about this too much right now because I’m gonna go into this a lot later. The main point is not all platforms have network effects. And you don’t need, and there are some cases where businesses with network effects don’t have platforms. They aren’t mutually synced up these two things. And you can have advantages as a platform without having a network effect. The example I just gave you was the ability to subsidize pricing from one side to the other. You don’t need a network effect to do that. Okay. Let’s, I’m not going to get into that too much today because it’s a whole another topic. Okay. Now. When you start to build platforms, there are all these types of competitive advantages that you can build into it. Some of them are pretty hard, like very strong competitive advantages. Others of them are more soft. I’ll probably go into that on the writing about Alibaba this week because that’s a little more detailed. But hard advantages, which I would consider competitive advantages, are competitive advantages You’re doing something that other people can’t do. It’s a barrier to entry. Network effect is a type of competitive advantage, but there’s other types. But you can also have soft advantages, like the ability to accumulate data, the ability to subsidize pricing on different sides of your platform, what they call the chicken and the egg effect, which is it’s actually very hard to get a platform going because often to get the merchants to come to your downtown marketplace. you have to have customers. Customers don’t want to come, or like the merchants don’t want to come if there’s nobody there. And similarly, if you want the customers to come, you have to have merchants. Customers don’t want to go down to an empty marketplace with two stalls. So when you get these things going at the beginning, there’s a bit of a chicken and an egg problem. To get the restaurants to use your credit card, you have to have customers. To get your customers to carry your credit card, you have to operate the restaurant. And that tends to be a nice barrier to entry. It’s actually pretty hard to break into one of these. So there’s lots of sort of softer advantages like that. Okay. That’s kind of the first topic for today is this idea of platform business models which have been around for a long time, very successful in many ways. What has really happened in the last 10 to 15, well, I mean, it really starts with Microsoft, but. really in the last 10 to 15 years has been the emergence of digital platforms. I gave you a couple of examples of a physical platform, a people-based platform, and an information-based platform. What a lot of these giant companies, you know, that has really rocked them up. It’s the emergence of digital platforms. That’s the, that’s the super predator that has emerged into the ecosystem. That’s eating everything else. They’re a new type of animal. They’re a network-based business model that is just incredibly powerful and pretty much everyone they go against, not everyone, but lots, traditional businesses, pipelines, it’s like a lion just got into your farm one day and it can eat everything and there’s nothing that can stop it. That’s kind of how these digital platforms they look like. Okay, quick assignment. Now, if you are walking or at the gym, I assume you’re listening to this probably on your phone or maybe your computer, but probably on a phone. Here’s the assignment, which you can do right now on your phone. So after I explain it, just pause it and take five minutes and type it out in the notes section of your smartphone or something like that. But I want you to think about three different types of platforms, which you definitely engage with often in your life. a shopping mall, a credit card, and a conference. Now those are all platform business models in the physical real world, not digital. Now within those, sort of write down, think of ones you’ve actually been to, like in your neighborhood, in your town, a card you use, a conference you’ve been to. Think about three questions and write down the answers. Question number one would be, what are the user groups that this platform is serving. Now user groups does not necessarily mean different people. Oftentimes it’s one group of people, but within that group, people can take on different roles. People who watch YouTube can suddenly become creators of YouTube. People on TikTok who watch videos can start to use the phone and create videos. So it’s the same person, but. Users often means roles. So it could be the same people, but they’re shifting between different roles, or maybe they have pretty set roles. So think about that. Who are the users slash roles that this platform is enabling to interact with each other? That’s question number one. Do it for a shopping mall, conference, credit card. Number two would be, what is the frequency of the interaction? A lot of these platform business models, people think it’s about how many users you have. It’s more often than not, it’s about the frequency and the value of the interaction. So it’s just something people use every five minutes, every five years. How often is this interaction lasting? And then, or frequency. And then the third one would be, what is the type of interaction? Is it commercial? Is it monetary? We’re buying something. It’s a transaction. Is it a social interaction? That’s an important types of interaction. Is it an information exchange? What is the transaction type or the interaction type that this platform is enabling to happen? So those are the three questions. Think about the user roles and roles think about the frequency of interaction and think about the type of the interaction for three businesses, shopping center, crop and center, sorry, shopping center, a conference and a credit card. Okay, pause the tape. Do that now, it should only take about five minutes. I guarantee you in like three months, that’s the part of this podcast that you’ll remember because you did it yourself. And once you’re done, you know, take a screenshot, save it, put it in a file, you know, start sort of building out files of concepts. And if you want, you can go to our forum, which we’re just sort of getting up and going, and you can post it there. And I’ll post my thinking up there and we’ll have sort of examples and discussion. And you know, the more you can try and do this yourself, the more it’s gonna make sense. That’s just my experience. So now we get to the point, which is the emergence of digital platforms, or you could call them data technology platforms. And this is how you go from millionaire real estate people to billionaire tech gods. It’s usually about digital platforms. Now, the businesses that we looked at for the first couple episodes, Mobike, Luckin, Coffee, OFO, now I chose those on purpose because they’re basically pipeline businesses. One, they’re relatively understandable. You’ll buy a cup of coffee, everyone gets that. You’ll rent a bicycle, pretty simple. Those were examples of people using digital tools that are just emerging day after day to a traditional business and coming up with some compelling business models and use cases that really did work. Great. What’s really powerful, and this is sort of one of my digital superpowers. is when a digital tool or data technology, software, smartphone, things like that, when it emerges and enables a platform to be built in a business that did not traditionally have platforms. That is incredibly powerful. That’s Google, that’s Facebook, that’s Alibaba, that’s Tencent. These were all people that were in, you know, Alibaba was in retail. Lots of stores everywhere. Digital tools started emerging and they created a digital platform almost from day one. Alibaba has never been a retailer. They don’t buy and sell goods. They don’t have warehouses where they own their own goods. If you look at their balance sheet, there’s no inventory. From day one and even up until today, they have remained a pure play digital platform. They are in the business of connecting and enabling merchants and brands to interact with consumers. Now a lot of cases like Amazon and JD, they’re actually not pure players. They are platforms, but they’re also retailers themselves. So they’re kind of half and half, they’re hybrids. If you look at the gross merchandise value that like JD sells or Amazon, and you actually look at all the product that moves through their business, about half of them is going through the platform where they’re just enabling other people to do business and about half of it is… them selling themselves. So they’re a bit of a mix. Okay, digital tools, digitalization, digitization can every now and then enable the emergence of a platform. And that’s a big, big deal. When Alibaba and eBay, you know, when they both got started, they were basically bulletin boards. Alibaba was pretty much an online bulletin board when it started. It was a B2B business. It wasn’t doing consumer anything. It was… connecting Chinese manufacturers with, I don’t know, businesses in Japan and Asia and the US that needed to buy stuff. And it was literally a bulletin board where you could post up, I need, you know, so many of these cases, and then someone else would see that and connect with them. And they pretty much did, I believe they did all the first stuff offline then. They weren’t doing the transactions to Raleigh Bob at all. That’s just where they would connect. and then they would do it offline or whatever. So as this sort of digital stuff emergence, as smartphones emerged, as information got digitized, sometimes you can build a platform. Google was like this. I mean, Google was, you have all these people who are trying to find information on the web, and you have all these people that build web pages, and they’re having a harder and harder time finding each other because the volume of web pages is exploding. and consumers are growing. And so the search engine enables those two user groups to find each other, to interact, to connect. When GPS was added to smartphones, suddenly smartphones could tell you where you were. So it’s like location got digitized as a source of information. That enables things like DD and Uber. because suddenly drivers and riders can find each other because they’re all carrying smartphones that now suddenly have location. So a platform for ride sharing was, you know, enabled by those sorts of tools. And then Facebook, which is kind of a platform, it’s kind of a network depending on how you think about it. That’s about social interaction, so I’m not gonna go into that. But, okay, why are digital platforms so powerful? Well, they have some of the… strengths of traditional physical platforms like shopping malls and you know, well credit cards are actually pretty powerful but let’s say matchmakers. So they can subsidize one user group to another user group. They can have a sort of a chicken and an egg phenomenon where it’s hard to get going so if you’re dominant it’s hard to launch a new entrance has a hard time. But they do certain things that physical platforms could never do. Number one. They scale very, very easily. You have a shopping mall, you wanna double the amount of volume in your shopping mall, you kinda gotta build another shopping mall. On online bazaar, and that’s what Taobao really is, Taobao is an online bazaar. You can go from 10 stores to 100 stores, to a million stores, to five million stores. You can have a shopping bazaar that goes on forever. T Mall, which is… more like their shopping mall. If Taobao is a bizarre, like kind of a free for all with lots of independent sellers, T-Mall is more like a nice shopping mall with Zara and better stores. They can have store after store after store forever. Because it’s digital information, it takes advantage of the fact that it doesn’t cost anything to add code and for more people to join, and there’s no physical limitation. So one, they can scale infinitely. Well, not infinitely, but largely. They can often scale globally. You’re not limited by just being in China. If you have a good service like WhatsApp, you can scale everywhere in the world. Geography can be not a big deal. And when you do scale, it doesn’t necessarily cost you much money because once you’ve built software for another 10 people to use the software, it doesn’t usually have any significant cost. That’s just kind of the nature of the economics of information and data. So low marginal costs where you can add and add and add in your cost structure doesn’t go up. Ability to scale very rapidly, not a lot of upfront costs. You know, people can open stores on Taobao and Tmall like it’s nothing. Like I could open a store on Taobao. Well, the licensure is a problem, but you know, I could do that very, very quickly. I could become a seller on eBay in 10 minutes. It’s not a big deal. Um, and then. as we’ll talk about, they do have some particularly powerful competitive advantages, but typically network effects. And then there’s one that people don’t talk about very much is if I’m selling sports equipment in a shopping mall or store and I want to start selling groceries or I want to start selling furniture or I want to start selling appliances, I have to build another warehouse, I have to stock the shelves. Consumers get confused because they come into my sporting goods store and I’m selling chairs and that’s confusing. Digital businesses, especially e-commerce, it’s very easy to combine different businesses because it’s all on the same screen. You know, if you see me looking at a lot of skiing equipment on Taobao or T Mall, it’s not that hard to pop up another little window that says, oh, you know, are you going skiing? Would you like a plane ticket or a hotel? It’s very easy to sort of cross sell across categories because on a screen on your smartphone, it’s all kind of the same. So you can start to combine multiple businesses, which is what Alibaba is doing, right? They do e-commerce, they do appliances, then they moved into apparel. Now they’re moving into groceries. Now they’re moving into hotels, entertainment. I can watch a video in the side of the screen on YouTube while I’m shopping for stuff on the left side of the screen. I mean, it’s very easy to sort of mix these things together when you’re in a digital environment. So that helps you scale even more. Okay. So we see these digital platforms emerge. If you start looking at the most powerful companies, like top 20 companies in the world by market cap, now half of them are platforms now. Apple, Google, Alphabet, Microsoft, Amazon, Facebook, qualify Facebook. It’s not a platform. Some people don’t think it’s a platform. I do. Tencent, Alibaba, JD, WhatsApp, WeChat, platform, platform, platform. They’re just very powerful. They’ve become the dominant companies in terms of market cap in the world. When a platform goes against a product company or a linear business, a pipeline, very often the platform wins. If a three-sided platform goes against a two-sided platform, let’s say I’m an e-commerce site, I have consumers and I have merchants, those are my two user groups. And then I go against Alibaba, which has, let’s say three user groups, merchants and brands, users, consumers, and let’s say content creators, people who are making entertainment. That’s actually, you can start to subsidize different ways because you have multiple users. The more user groups you have, the more you can start to subsidize across your platform. You can start to play games. One of the things Alibaba will do next week at their big Singles Day thing is they’ll have, they’re trying to combine entertainment with commerce. So they have this thing they call See Now, Buy Now, where basically they’ll put on a gala, they’ll put on a show, Taylor Swift is coming. Anything you see on the screen you can pretty much tap and buy it So they’re kind of mixing entertainment and they have content creators and KOLs and there’s a whole lot going on in all of this but basically The platform usually beats a pipeline and a two three-sided platform beats a two-side and a four-side beats a three-side not always but pretty frequently Okay now we go back to this idea of What are platforms really doing? And the key thing here is what business are they in? There’s some folks at MIT, Marshall Van Alstine, I think that’s how you say his name, he’s got some videos online, very good thinker about this stuff. He was one of the authors of Platform Revolution. And his quote, and this is an exact quote, is platforms are quote, no longer selling products, but selling reductions in transaction costs. And he will talk a lot about this idea that when two parties, two users want to do a transaction, you have a chair, I want to buy your chair. How do we find each other in this world? Well, we have to have a search function because how can I find you if you’re in Shanghai and I’m in Shenzhen? How do I find you with your chair that I want? How do you find it? So there’s a search aspects. There’s a coordination aspect. Okay, we have to agree on sort of. price and how we’re going to get it shipped and you know what are the specs and all of that. There’s a negotiation aspect, what’s the price? Is there a warranty? Can I return it? And then there’s often an information asymmetry. You may know a lot more about that than I do and that will make me feel uncomfortable. There won’t be a lot of trust. A lot of transactions are about trust. You know the risk of being cheated if I think you’re good is fake. There’s a lot of issues in there that you would put under the title of transaction costs. The argument is these platforms are in the business of lowering those transaction costs. So that’s that I don’t have to go down to the mall to a major company like a Zara. I really like Zara, who I trust the brand. I know they’re there and I’m in a big expensive shopping mall. I can now go to a random person in a different part of the country or world and I can feel just as comfortable buying my chair from them as opposed to Zara Home because the platform has reduced these transaction costs. And that’s kind of the idea. And then there’s a bunch of stuff that goes into the theory of the firm and HAGL and all this and I’ll go into it another day. But you know, that’s what Alibaba is really in the business of doing. And if you read the comments by Daniel Jang, he had a very good… announcement in the last couple days about Alibaba and what they’re doing. What they will say very, very often is, we are in the data technology business, which means they basically do software. They are a platform company. That’s what they do. They build platforms and they create digital tools that enable small and medium-sized enterprises to do the things that traditionally only big businesses have been able to do. That’s basically lowering the transaction cost. They’re giving digital tools to a two-person company sitting in a warehouse in Chengdu where suddenly I’m as comfortable buying my chair from them as I am going down to the big Zara. So they’re using digital tools to lower the transaction cost and sort of level the playing field for SMEs. Now just a few last points on this because I’ve kind of been giving you a lot of theory today. One of the reasons these platforms are so powerful is in the nature of what they’re doing is they’re facilitating interactions between different parties, users out within the ecosystem. People get these ideas a little confused, ecosystem versus network versus platforms. Platform is a business model. A pipeline, a VI is a business model. The ecosystem is just something we all live in that, you know, a city is an ecosystem, industries are an ecosystem. This is just the chaos that’s going on out there in the world. Um, you know, by facilitating interactions between various entities within an ecosystem, there’s something actually very, very powerful in that, which is If you’re a pipeline, it’s all about concentrating assets. I got to build the factory, I got to hire staff, I got to get efficient. And then my physical assets are what create the production, which what produce the product that I then sell. The production is centralized. Usually the creation of the service is centralized and it’s dependent on the assets I have collected. Well, a platform is not really building its own assets. it’s sort of reaching out into the ecosystem and accessing other assets. You know, when when merchants go on, you know, if you’re going on Taobao or Tmall, you’re looking at shops, you want to buy something, everything you’re looking at, all those stores, all the information, all the products, Alibaba hasn’t created any of those. Those are created by the users. So the users start creating and doing all the production for you out within the ecosystem. So it’s like your small factory, instead of you having a factory, suddenly all the villages in town start making the goods for you and I’ll bring them to you and then you sell them. You know, it’s like the difference of building your own house versus the whole village getting together and building you a castle. You know, when you go on Facebook or WeChat, there’s a huge amount of information, content, lots of content news. Facebook doesn’t create any of that. Journalists create it, magazines create it, all these other companies create it, but then they bring it to you and it becomes part of your product. All those stores on T-Mall, Taobao, Alibaba doesn’t create it anyway. So you get a sort of distributed production and that’s pretty amazing actually. And it’s because you’re no longer sort of this concentrated firm pipeline. You’re sort of… reaching out into the ecosystem and connecting parties. So anyways, I’ll talk more about that, but it’s a pretty powerful thing. Okay. And it sort of does raise the idea of what is value and who creates it. Now there’s a couple of books I would recommend. This one, Platform Revolution, I think is a great read. Very good thinking on this. A lot of what I’ve been saying is sort of summarized from that. There’s another book I like, which is called Invisible Engines by David Evans. and a couple other people. There’s a guy, I always forget his name, Andre Hagio. God, I’m sorry if I’m pronouncing that wrong. And Richard Smalense. Apologies for the names I’ve just butchered. I’m gonna post this slide up there in the notes and these daily updates. I’ll send it out. I’ll sort of give recommended reading and such. Great reading, although it is a bit of, does take some time. So I’ll just summarize here. I’ve put together sort of two summary pages, which I will post in the daily update. What’s the difference between a multi-sided platform and a pipeline? This is from Platform Revolution. You know, a pipeline has one main customer group, a platform, I’m sorry, a pipeline has one main customer group, a platform has multiple user groups. Very important, but keep in mind, a user group doesn’t have to be people. It can be roles that people take. and the same party can operate in different roles at different times. You can be a producer of videos on TikTok and you can be a viewer. Number two, the asset value tends to increase as you move down a pipeline or the asset in terms of the product you’re selling. In a platform, the value is created by the interactions of the user groups on the platform. That’s where the creation happens by the interaction. Value is created in pipelines through a tightly controlled process or by contracts usually or ownership or employees Platforms tend to create an open architecture and governance rules You know You’re not controlling everything with contracts as much as you’re setting rules that let everyone come onto your platform and start to do things And they know what the rules are it’s a little bit more like building a government than it is like building a factory With the pipeline, the management tends to focus on increasing the efficiency and the return on the internal assets. In a platform, the management tends to orchestrate the ecosystem and the assets that exist in the ecosystem. You really do want to focus on assets outside of your company. You want to focus on that. Pipeline. You tend to scale by internal actions such as acquiring more assets, acquiring more customers. There’s a lot of supply side economies of scale in this business. In a platform, you kind of scale without effort. If you set up a good ecosystem, or if you set up a good system of rules and you’re orchestrating the ecosystem well, the growth and the scaling will be driven by the external participants and their activity, not by your activity. Let’s see, for pipelines, you tend to own or contract assets and products. You have very centralized ownership, profit and control. A platform is characterized by decentralized assets, decentralized production, and there tends to be a lot of risks because suddenly you’re not in control of everything. You’re having, you know, your product is to some degree determined by lots of people that don’t work for you. which is interesting. Facebook and all these companies are currently struggling with this issue because people are posting all sorts of content and they don’t quite know how to either control the content or to censor the content. Turning out that’s actually a bit of a problem. And last point, if you look at challenges for a pipeline business. That’s pretty much any annual report, any 10K. Look at the risk section. You’ll see the standard risks and challenges of running a traditional business, whether it’s IP, whether it’s management, whether it’s supply side, or whatever. Platforms, the challenges is within this platform where you’re sort of orchestrating a greater ecosystem, you have to decide where the points of control are. What are you going to keep under your control versus what are you going to let the participants, the users do wherever they want? And then what part of the platform all this activity do you monetize? You want to keep everyone on the platform. One of the biggest risks these platforms have is people leave and they stop posting and they stop being active. And that’s a real problem because the whole purpose of the platform is to encourage interaction. Oftentimes what platforms have done is they will bait and switch you on the rules. They will create a platform with one set of rules and everyone feels good and they all get active and start participating and then they change the rules. You’re posting, you’re posting, you’re posting and then Google changes the algorithm and suddenly you’re no longer in the search results. This is a big thing. People are getting pretty annoyed at a lot of these companies for this. There can often be a backlash against centralized governance. Um… And then there’s this bigger question, one last one is… Is the goal of the platform to enable transactions where you can build? Or is the platform just serving as a gatekeeper? Maybe the platform is not adding much value at all. They’ve just got themselves in a position of power and they’re charging you a fee to get from one side to the other. You want to reach your customers? You want to reach your readers on Facebook? You got to pay us. You know, there is this question of are they gatekeepers or are they actually enabling transactions and you can find good examples of both of those stories. Okay, yeah, but this is kind of a big subject and I’m gonna keep coming back to this over and over through a lot of these lectures. And there’s lots of different types of platforms and there’s lots of different types of strengths and weaknesses and some of them rise and some of them fall. And Alibaba is a very robust digital platform. Actually Alibaba has multiple platforms. They started out with an e-commerce platform which was Taobao. Actually, they started with a B2B company, which was, where they were only enabling transactions between businesses. You know, supply chain, you need to get something from a factory in China. And then when eBay entered China, they viewed that as a risk to their B2B business. Even though eBay was doing B2C, they thought that… If they did well in B2C, they would eventually move to B2B and threaten Alibaba. So Alibaba ended up jumping into B2C, which was Taobao and then Tmall. Tmall is Taobao mall. They did that initially as a defensive move, right? And then it took off like crazy. And now people, most people think of them only as a B2C company that like, they forget this was a B2B company and the commerce side was a defensive move. So they go into B2C, Taobao, Tmall. Then they get into payments to enable transactions. Well, payments have become another platform. Now they have a financial services platform. Then they built a sort of entertainment platform where you have people who create videos, you know, and people who watch videos. That’s another platform. Well, you could say it’s different sides on the same platform. You know, they’ve got several platforms that all sort of reinforce each other now. I don’t even know how many sites they have overall, probably seven or eight. And then there are probably seven or eight cited MSP at this point. It’s pretty powerful entity. Okay, that’s basically enough content for today. I gave you a quick little assignment there. If you haven’t done it, please sort of pause this now and go and do it, or maybe based on what I’ve just been talking about, go back and edit your answers. Go through it again, give yourself an extra pass. Every pass you do, you’re gonna get smarter and it’s gonna stick in your brain better. So go back to the notes you did and take another pass, rewrite them. If you feel like it, post them up on our discussion forum if you remember. If not, save them somewhere because I’m going to come back to them class after class and we’re going to keep doing this over and over. And I think that’s enough content for today. That was kind of a lot of theory. I try not to do that too much because it can all kind of run together. I like to shift back to real world examples, but there is sort of a baseline of theory. that we have to get through before we can start talking about complexities of these companies because they are pretty complex. Anyway, so I’m actually back in Bangkok. I jotted into China for a couple of days and then back to Bangkok, which seems to be my normal and which is kind of interesting is I get sort of stopped on the street on a fairly regular basis around Asia, which again, happened again as soon as I arrived in Shanghai because I’ve got a lot of… ex-students at this point. I’ve been doing this for kind of a while. So I probably have a couple thousand former MBA students or executives floating around, a lot of them in Asia, but a lot of other places as well. And it’s really kind of an amazing thing that happens if you teach for long enough where you see your students and you see where they start and then they go off into the world and then some keep in touch. A lot go off and you don’t hear from them, but a lot of them do. and you see the amazing things they’re doing three, five, seven years later, and it’s really, one, it’s really satisfying, and two, you get a good sense for how this plays out over time. So now when students come in, young MBAs, maybe execs, they like to introduce themselves, here’s what I’m doing, here’s my background, but more and more, I kind of look at them as like, here’s where I think you could be. Because you can kind of see it even though they can’t because you know, it’s hard for people at that age to see that far down the road. But if you’ve been doing this for a while, you kind of can. So as I’m talking to you here, that’s kind of what I’m thinking about is, you know, where could you be in five years? You know, if you become a real expert at digital strategy in your business, in your industry, you know, where could that take you? And it’s such a powerful thing to know now. I mean, it’s so important in so many businesses. And there simply aren’t that many people who can really see it all, you know, have real expertise in it. We haven’t even gotten to stuff like AI and, you know, all of that. So it’s going to get more complicated as we go, but, you know, it’s just such a powerful thing. And that’s kind of what I’m thinking about as I’m talking to you here is, you know, I’m talking to future you a little bit, not who you are now, but who you’re going to be in five years. And that’s really, I’m really excited about that, but, you know, if you’re not, well. Trust me, you know, I believe in you even if you don’t at this point. Anyways, I’m off to Hanzhou in a couple days so I’ll probably do next week from there. But thank you so much for watching. I hope this is helpful. Please do your assignments and I will talk to you next week.

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