In this class, we review the basics of digital platforms, which is one of the key learning goals for Level 2.
Here is some good reading on the subject.
Concepts for this class:
- Pipelines vs. Digital Platforms
Companies for this class:
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.
Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today is why are digital platforms the super predators of business? Now this is a shorter lecture, should probably be 20 minutes, and it’s just basically a review of some of the things we’ve talked about on digital platforms. And it goes along with learning goal two, for those of you who are in the class, on the list of sort of. 10 key learning goals for what we call level two. Number two on that list is this idea of digital platforms. And I’ve talked about it a bit, talked about Alibaba a bit, and this is gonna be a bit of a review. Okay, but first, if you haven’t signed up, please do that, do so. You can do it at jeffthousand.com, or you can also click along with iTunes, but if you wanna get the sort of full information, the course schedule. and really most of the content going forward, that’s gonna be for subscribers, which you can do at jeffthousand.com with a free 30 day free trial. Okay, let’s get into the subject. So there are, I mean, there are a couple big things happening here within sort of digital intersecting with business. And I think if you kind of separate them in your mind, it’s easy to sort of keep straight what’s going on. The first thing is this idea of just software, digital. data technology, people use different terms for it, AI. It’s just the fact that this is a very powerful thing and it’s changing a lot of things and sometimes it’s a total game changer, which I call digital superpowers. And other times it’s just sort of a normal tech upgrade. Okay, we used to order coffee by walking in the store, now we order it on our phone. Fine, business advances all the time, technology’s always advancing, it’s just normal. Okay, that’s sort of one which… I talked about in the last talk about, you know, sort of the economics of digital and why it’s so powerful. A separate category is this idea of digital platforms. And I think you have to really look at this as a different phenomenon. That when software emerges or starts to become more significant in a business, what something that can happen from time to time is you will see digital platform, which is a business model. emerge and these are just so powerful sometimes that it’s stunning. I call them the super predators of business. Or one of my students said that the Indominus Rex from that Jurassic Park movie, I get them all confused. One of the Jurassic Park movies they crossed a T-Rex with a velociraptor. It was that one that was crazy looking. and it broke out of the cage and it ran around the island and it ate everything and no one can do it. Like it could turn invisible and all this crazy stuff I think. That’s kind of what these digital platforms are is they’re like the indominus wrecks of the ecosystem. They’re just running around and eating everybody. So, so much of the digital story when people say, oh, let’s talk about Amazon, let’s talk about Google, let’s talk about Facebook, let’s talk about Alibaba. you’re mostly talking about digital platforms as a business model in those cases. And that’s kind of its own phenomenon, which I think is separate than this idea of just, okay, digital software and all of that. All right. I actually think there’s a couple of huge things happening in the world these days. That’s one of them, which is why I focus on digital and business platforms so much. Now, another one on my short list, which is unrelated to any of this, is Asia. I think Asia is an amazing phenomenon, it’s huge. It’s one of the, if you wanna write the top three business stories of our time, China Asia’s one of them. So, you know, it’s not completely random that I talk about digital China Asia. I’m basically sitting at the intersection there. Okay, anyways, that’s unrelated. All right, so let’s talk about what is a platform business model? And platforms are a business model. They can be physical platforms, they can be people-based platforms, and they can be digital platforms. Lots of different types, but it’s a business model. And that’s, I think people mix up these terms a lot. They say platform, platform business model, ecosystem, networks, social networks, blah, blah, blah. The way I look at it is the ecosystem and networks are things that exist out in the world. The savanna in Africa is an ecosystem. There’s animals, there’s all crazy things happening. A street could be an ecosystem, a city could be an ecosystem, your circle of friends could be an ecosystem. Within ecosystems, which is, you can define that any way you want, there are sometimes networks, which are connections between various things. That’s what a network is. It’s a connection. It’s a series of connections. A railway system is a network. A telephone. physical landline system like AT&T was a physical network. So these things can exist in the real world on their own like social networks or people can build them like phone systems. Okay, I consider both of those things just the world outside the door. Now against the world outside the door you can build business models to sell things to provide services and products and these can be simple like a store or they can sometimes be a sort of network focused business model, which is what we call a platform business model mostly. And the big difference which I’ll talk about is traditional products and services are about serving one customer group. Platform business models are about connecting or enabling interactions between different customer groups. I’ll get into more of that, but that’s the takeaway. All right, so let’s say we just go back to, you know. 1900, 1850, there is this idea of what is a business. Well, it’s kind of a linear process. We think factories, we think tangible goods and services sort of created in this linear process. You build a big factory, the goods come in on trucks on one side, they go to the loading dock, they go to the factory, we do a bunch of stuff to them, they go out to the other side, they get shipped to the distributor, the retailer, so it’s a very linear process. And I think that it’s products, but it could also be services. We’re gonna be a consulting firm or a hospital. We hire a bunch of people, we put them in a building, we give them consumables, which doctors use a lot, and patients show up and we treat them. So we tend to think about business as this linear process of creating value that is then delivered at the end of the process or the end of the pipeline, as a good or service that is worth more than when it entered the process or pipeline. So people call them products and services, they call them pipeline business models. I think we just tend to think that way because it’s easy to think in terms of physical goods and manufactured goods because that’s kind of where business began. But when you start talking about information in digital, you realize that’s really not that common that you think about things differently. And that’s, I think platform business models are a more natural approach to digital. Okay, but. The key distinction is a traditional business, usually it’s one customer group. Now it could be multiple types of customers, you know, a lot of different people walk into the Walmart and buy a lot of different things and you’re selling them things, but you basically have one group of customers, which would be the consumers. We call these types of businesses pipelines, product businesses, traditionally vertically, they call them VI’s or traditional vertically integrated businesses. Restaurants manufacturing consulting so-and-so, but basically it’s a linear process that you sort of tightly control Assets usually through contracts and employment to create value Okay, fine And you can you can imagine a car moving down the assembly line as a sort of way to think about this Or you can think about Michael Porter The value chain Michael Porter used to talk about you know Business is really about a series of activities that create value and you put them in a chain the value chain, and it would be maybe R&D, and then design, then manufacturing, then manufacturing, marketing and sales, then customer service, and so on. And usually a business is very strong at a couple key points in the value chain. But again, it’s a linear process. Okay. If you’re running a pipeline business or a traditional business, a typical question would be, should we buy or build this asset? Should we buy the factory? Should we build it ourselves? Do we hire staff? Do we contract them out? Am I bringing people on full time? Am I gonna find them on Fiverr or whatever? And how do we grow this business over time? Well, generally we have to accumulate more assets. We’re concentrating assets because using those assets, which can be people, tangible goods, IP, whatever, that’s how we create value. And over time we have to sort of grow those. And… That is most of how business is thought of. Okay, now platform business models are different. Platform business models, the first distinction is you’re not serving one group of customers, you’re serving more than one. So platform business models, people also call MSPs, multi-sided platforms, could be two user groups, two customer groups. It could be people who read newspapers, the consumers, the buyers, and it could be advertisers who put them in the newspaper. That could be a two-sided MSP. It could be something like eBay, Alibaba. You have two groups. You have people who buy stuff and people who sell stuff. Retailers and merchants on one side, consumers on the other. Now, the key thing about the platform business model is your primary activity is enabling interactions between the two user groups. You’re really in the business. We also call them sometimes ecosystem orchestrators. where you’re in the business of connecting and enabling the connection and supporting the connection between various groups in an ecosystem. And it’s, you know, most business models like this, the first thing you ask is, what is the core interaction you are enabling? Buying and selling a good, reading an article, going on Twitter and reading something that was written by someone else. Twitter is not creating any content. Twitter is enabling the interaction between people who… create content which could be articles, it could be posts, it could be memes, whatever, and people who read them. And basically it’s a much more complicated business model because being successful with one business, I’m sorry, with one customer group, like people who come into your store, is actually pretty hard. I mean, most businesses fail. Well, this is more than that because you have to make two different groups happy at the same time. And their interests may be different. People who sell on Amazon want different things than people who buy on Amazon. And you have to balance their interests and come up with this sort of magical equation that makes both sides happy to come on your platform and interact. But if you give one side everything it wants, like say consumers, consumers want lots and lots of options for free. Merchants want no options. They want consumers to only be able to look at their product. and high price. So you have to sort of learn to balance the interest on both sides. This is why most MSPs fail. It’s also the reason why first mover advantage, people always talk about, oh, I’m first mover advantage. It tends to be in platforms, it’s not the first mover who wins. It’s usually the second, third or fourth player that figures out the magic equation to balance both sides. So the first group that created credit cards was not Visa, American Express, or MasterCard. It was Discovery. And then, what, Diners Club? Diners Club or Discovery, I think it was Diners Club. And then Amex came later, and then MasterCard and Visa didn’t come till like 10 years later. Facebook was not the first social network. It was like third or fourth. So it’s usually the first mover doesn’t get it because it’s actually pretty hard to figure out that magic equation of balancing interest. And then pricing is a whole nother thing because one of the big strengths of a platform is, even if it doesn’t have a network effect, is you can charge to different groups of people or users. So you can shift pricing from one side to the other, which is a very powerful move. This is why there’s ladies nights at bars. You go into the bar and the women get their drinks for free. Why? Well, because if you… subsidize their drinks and charge the men, then the women show up, then the men show up. You can do stuff like that. Everything on Google is free to you because they’re charging other user groups on the platform so we get Gmail for free and Google search for free. That’s pretty powerful, especially if it’s going against a traditional business that can’t do that. So if you’re trying to sell content as a magazine, you are competing with a world of free content now, which is. very very difficult. That’s really why I’m not in the content business. I’m in the teaching business which is a much better business because it’s harder to do for free. But if you’re just out there producing content and trying to get paid you know you’re competing with a world of free. That’s not good. Okay so let’s think about user groups for platforms and these don’t have to be software companies. A shopping center is a platform. Right there’s two user groups the stores, these are renters that take the space, Coach, Zara, Starbucks, and then there’s the consumers who walk into the shopping mall, and the person who owns the platform is the shopping mall operator. That’s a physical platform business model, a street market, which have been around for thousands of years. That’s one, a bar, which I just mentioned. Bars tend to be, not always, but bars tend to be multi-sided platforms, because it’s a lot about meeting people. Not always, but sometimes. That would be physical platforms. Now we could also talk about people-based platforms. M&A bankers, they’re platform business models. M&A bankers serve two user groups. They serve people who are, companies who are looking for money and then people who have money that want to invest in companies. And they sit between those two user groups and they charge crazy fees and they do quite well. Matchmakers. know traditional matchmaker that set people up in villages a thousand years ago those are platform business models. More current example might be newspapers you have advertisers on one side you have readers on the other it used to be had sort of where you could do listings and sell things there so that would be sort of two-sided as well people selling cars people buying cars credit cards which I mentioned. So there’s lots of them. Those are getting pretty close to information-based business models. Like credit cards are kind of information-based. So you’re getting closer to digital. Okay. Why is this powerful? One of the reasons platforms are powerful is because of pricing, which I mentioned. Oftentimes a platform can scale much easier than a traditional business. You can get bigger faster. Used to be if you wanna double your factory, you have to build another factory. You have to find more customers. You have to open more stores. You have to open more restaurants, all of that. So you have to basically double, not double, but. significantly increase your internal resources. But if you’re a platform business model, your growth doesn’t come from internal resources, it comes from external resources. That you wanna get twice as many people selling in your market. You wanna get twice as many people showing up to your bar. Your growth comes from external resource growth, not internal resource growth. Because you’re basically in the business of connecting an external network. Okay. Now, once we get to digital platforms, well, let me make one side point here. There’s a couple of powerful advantages that come from a platform. The one everyone talks about is network effects. This is what everyone dreams about. The idea is that there’s a lot of advantages in this world, share of the consumer mind, switching costs, economies of scale, all of these things. A lot of those are fading, but… Network effects seem to be fairly powerful and durable. It may be that and government granted advantages may be the best advantages you can get. Now network effects are basically feedback loops. I think that’s an easier way to think about it. I mean, technically you could say, look, it’s a network externality. There’s a lot of different terminology. It all means the same thing. That. Let’s say there’s a market externality. That means you’re doing something in your business that has an impact beyond your business. That’s a market externality, like pollution. That’s a negative externality. You’re doing something in your business, you’re pumping stuff into the air. That negative externality would be the pollution in the air. It doesn’t show up on your income statement, but it’s an impact. Could be positive, could be negative. If everyone in Silicon Valley knows how to code in Python, you get a positive externality because it becomes easier to share, becomes easier to work together, so you can get positive and negative externality. Now, when they relate to a network, then we call them network externalities or network effects. It’s all terminology. I just think about it as positive and negative feedback loops. That’s easier to think about. If you go to KFC and you have a chicken dinner, and then I go to KFC and have a chicken dinner, your chicken didn’t get any better. Didn’t taste any better, service wasn’t any better. Mostly the same. If you’re on Skype and then I get on Skype, your Skype just got better. Me joining the platform, joining the business, suddenly you have more people that you can call. So the more that people use a service, either number of users, frequency of users, volume of sales, interaction, lot of different metrics here, but basically think usage. The more people use it, the better it gets for other users. That would be a positive feedback loop. Now, things people never think about or don’t talk about as much. Feedback loops work in both directions. They go negative as well as positive. So, if You’re on, let’s say, Didi, and Didi has some issues with violence in their cars in China, which they did a couple years ago, some really horrific stories. People got scared of being on Didi and they started to leave and not because they didn’t trust it. As soon as they left, the value to other riders or drivers in this case decreased. The feedback loop can go down as fast as it can go up. OK. Trust has a lot to do with these often. If you go on, dating sites have this problem a lot because if you create a dating site and there’s a lot of bad behavior, people leave very, very quickly and they crash very fast. You could see a lot of examples of these of companies freaking out. Like one company I’m keeping an eye on right now is Rotten Tomatoes, which is a, sort of they rate movies. And they kind of have a platform business model going But there is a lot of people in me including myself who think the ratings are no longer real We think they’re being manipulated or faked and they are starting to lose trust on the platform when that trust goes that platform Will crash very quickly So and it was one they go negative as well as positive to they don’t go on forever If anyone shows you an exponential curve of a network effect going on and I look they don’t go on forever It’s more like an S curve. It takes off, it starts to accelerate upward and then it flat lines out in most cases. No business model goes on forever. At a certain point, whatever positive feedback you have goes away or a negative feedback sort of comes at it from the other direction. So my standard thing is look, trees are actually a very powerful model. Trees are amazing. Like you plant a tree and it grows like crazy. The roots grow, it grabs more water, that lets it grow, it gets higher, it gets more sunlight, blah, blah, blah. Trees are a very powerful model, but they don’t grow to the moon. At a certain point, they stop growing. The other effects like gravity take over. Okay, so network effects. are not the same as platform business models. You can have a platform business model and no network effect. You can have a network effect and no platform business model. They tend to go together, but not always. They are different things. Some other advantages you can get, well, I’m not gonna go into these, but you can get a lot of advantages in terms of subsidizing pricing from one side to the other. You can get what we call data advantages. You can get what we call the chicken and the egg problem that it turns out to get a lot of… get a bunch of drivers on your platform, you need a bunch of riders, let’s say if you’re Uber, to get a bunch of riders, you need a bunch of drivers. That first step is actually pretty difficult. And that first step is incredibly difficult if there’s a dominant player already in the market. They can pretty much keep you out. Okay. So let’s go to digital platforms and that gets us to the super predators. Now, everything I’ve just been saying to you, you could say that about most platform business models. Could be physical, could be people, could be information-based. But now we get to digital and this is where the super predators emerged. Digital platforms, if you have a physical platform, you’re a millionaire. If you have a digital platform, you’re a billionaire. When these emerged because digital started to go into industry after industry, these digital platforms emerged and they’re just amazing. They’re so powerful because we’re basically taking everything I just said about platforms and we’re combining it with the last talk, which was about digital economics. Now think about it. Like the point from one of the points from digital economics, which was the last talk review one was there is zero usually zero marginal cost of production. That’s one of the interesting things about bits and bytes. You know, I can make a PDF, that takes me some time and effort, but copying it is Control C, Control V, it costs nothing. Well, a lot of what platform business models do are enabling interactions between users. So if these users are exchanging, let’s say, communication or content or PDFs, the cost of doing that for a digital good is zero. So they can do those interactions very, very powerfully. They also tend to have low distribution costs and they can scale very quickly. If you’re gonna go from one shopping center to 10 shopping centers, it’s actually pretty difficult. You have to buy the land, you have to build the thing, you have to get the stores. If you have a bunch of people chatting online, let’s say Skype, the cost of going from a thousand users to a million users is pretty much zero. Right, so you have this incredible ability to do interactions without cost and to scale without cost. That’s why these digital platforms go from, hey, we have an idea in China, it’s called TikTok, although they’re not really that much of a platform. Let me give you a better example, like, okay, Google search, to going from Google search in the US to Google search globally didn’t cost them very much and it happened very easily. So they can scale unbelievably quickly and without cost. All right, platform emergence is one of my sort of digital superpowers. I gave you a list of six digital superpowers. One of the ones I always look for when I see a new digital tool emerge, I sort of ask myself a question, is this a superpower? Is it gonna change everything? If I see a digital platform emerge, then I consider it a superpower, because that can really change a whole industry. So for example, you know, eBay. Let’s say Google. I mean, what Google really did was once everyone started building web pages, that was basically the digitization of information. You used to have to look at a phone book if you wanted information. You had to go to the library. Well now everyone builds all these web pages, so all the information has become digital. Once you had the digitization of information, Google Search was able to build a platform business model. that connected that information with readers, searchers. So they connected two user groups, people who have web pages, which is a lot of companies, and people who are searching for information. That was their interaction. And really that’s what Google started at was a digital phone book for all effective purposes. Once you digitize location, that’s GPS. When GPS got added to everybody’s phone, information about location became digitized and suddenly you could access it. That digitization of location enabled Uber and DD to emerge because suddenly I’m standing on the street, someone else is driving a car, we can now connect each other based on location. Digitization of identity and trust, I think that has a lot to do with Facebook and Airbnb. And anyway, you can go down the list, Once you see a digitization, you can start to sometimes see a business platform, a digital platform emerge. If you look at the big companies of the world, let’s see, Apple, Alphabet, Google, Microsoft, Amazon, Facebook, that’s one, two, three, four, five of the top 10 companies of the world right now by market cap. That’s five of them. They’re all digital platforms. You go back 10 years, they weren’t there. You go back 10 years and it was like Walmart and ExxonMobil and stuff. So they become very fast, very powerful. And it’s really from a couple effects. It’s because they’re scalable, because they’re digital, and they create value by using external resources, not internal resources like factories. Okay, what else? We’ll go through a couple more points here, but that’s the main idea. I’m right at 20 minutes. I think that’s pretty good. There’s a lot in here about how these companies really are different animals, that they are effectively ecosystem orchestrators, that they’re like tentacles that reach out into society or business, and they enable connections. So you almost have to start thinking in a different way when you think about these platforms, you need to sort of see the world as ecosystems and networks, and how to go out into that world and connect aspects of it through you. That’s a very different mindset than I’m gonna make a better sneaker and what do people want in sneakers and how do I sell that, how do I market it. So you kind of have to get into this idea that like the value we create as a business is about orchestrating and enabling interactions between user groups out in the world. So it’s more like we’re building the roads and the train tracks than we are the shops on the road. The little statement I tend to say a lot is like, if you’re gonna do a product business like shoes, that’s like building yourself a house. If your business is a platform business model, that’s like when the whole village gets together and builds you a castle on the top of the hill. You know, one you’re doing yourself, one the whole village is working for you. And you know, Mark Zuckerberg can sit back and billions of people are creating content for him every day for free. and putting it on his platform and he’s just letting other people see it. Everyone else is doing the work. That’s kind of amazing if you think about it. Okay, now I’m gonna put in the show notes, which will be in the iTunes list, but it’ll also be on my webpage for this talk. A couple books about this that I think are great, and one is called Platform Revolution, which is by Jeff Parker, Marshall Alstein, and Sangeet, Sangeet or Sanjeet? Ciao, Dari. I don’t really know how to say his name. I’m sorry about that. I actually had a good conversation with him a year or so ago. Really interesting guy. Another book is called Invisible Engines by David Evans, Andre, hi. God, I’m really bad at these names. I’m gonna put the, I’ll put the cover of the book so I won’t butcher their names. But those are pretty great books about the subject and it really sort of bends your brain and you start to think about this in a different way. But I think that’s good for the review. And now within platform, one last point. Within platform business models, There are actually multiple types. There’s a couple books recently where people say, oh, there’s only two types of platform business models. There’s either a transaction business model, transaction marketplace where someone’s buying and selling or something, or there’s a sort of innovation platform where you build something other people can build their stuff upon, like YouTube creators creating content. And they say, it’s only two types. I don’t really buy that. The world is very complicated. You know, that’s like saying there’s only two types of animals. There’s birds and there’s cats. Yeah, maybe even argue it’s true at some biological level. I have no idea if that’s true. I don’t think that’s helpful. There’s a lot, there’s lions and there’s tigers and there’s cheetahs and there’s no, no, there’s a lot of types of business models out there. I keep a list of about seven different platform business model types that I always think about, which can be marketplaces. They can be audience builders, payment. platforms and you can also combine them. So it’s not like you’re just one or the other. You can have a marketplace platform like Alibaba, buying and selling stuff, eBay, and you can combine it with an audience builder platform, which is like YouTube. YouTube connects people who create videos with people who watch videos. Amazon creates, let’s say Alibaba creates merchants with consumers, buyers and sellers. Well, you can put those on one platform. where you can go on Alibaba and buy stuff and watch videos. Oh, and the videos are about buying stuff. So you can combine these. Oh, and then we can pay for it with, you know, whatever, Alipay. Okay, well that’s a payment platform type. So you can get multiple platform business models happening at the same time, and you can get multiple feedback loops, multiple network effects happening at the same time. So think about it like nature. Nature’s really complicated. Lions are very different than cheetahs. They’re very different than hyenas. Yeah, they may all be cats. Actually, I don’t know if hyenas are cats. So they all may be technically cats and they all might have claws and they all might have fur, but they’re really different animals and you gotta think about it this way. These platform business models may have similar attributes and tools. They may all have claws, but they’re different types of animals. Okay, I think that’s it for today. It’s a great day here in Bangkok. One of the problems with doing this in Bangkok is I have to turn off the air conditioner because it gets in the background of the audio. It gets really hot really quick. So I have to speak fast because I’m starting to sweat pretty bad here It was that’s enough for today, but thank you so much for listening And if you haven’t signed up, please do so I would greatly appreciate it That’s over at Jeff Towson comm and I will talk to you next week