Book Review: Cusumano, M.A., Gawer, A., & Yoffie, D.., (2019), The Business of Platforms, Harder

So-called platforms are unique businesses driven by network effects and multisided market dynamics, with AI playing an important part. The key seems to be to make a business’s so-called operating system its raison d’être, into an industry-wide platform. In the past, for instance, Microsoft was thinking platforms, while IBM and Apple at this time were thinking products! A small number of companies are exerting an enormous influence over our personal, professional and even political lives. How did it come to this? The answer is Microsoft, Apple, Amazon and Alphabet (Google) — and Facebook, Alibaba and Tencent might be added.

There are two basically different types of platforms— transactions and innovations. And there is an increasing demand for government to rethink data-privacy laws, antitrust laws and other regulation that could potentially rein in the most powerful platform businesses. A critical aspect of what companies such as those cited above do is to collect vast amounts of data, at times close to the limits permitted by law. Cambridge Analytica as an example, went too far, broke the law, and then filed for bankruptcy.

It seems important that the managers of these platform companies learn to live in two worlds— the conventional economy and the platform economy. There is another distinction regarding the types of platforms. Politicians compete on ideological platforms, we catch the train on physical platforms, and companies create product platforms. Successful platforms bring together people and organizations so that they can interact and innovate in ways that may otherwise not be possible.

To have the best platform seems much better than having the best product. To engage multiple sides of a market seems important for achieving this. Facebook can serve as a good example.

We now come to the core of this book, namely, to discuss two basic types of platforms.

-       Transaction platforms: An intermediary for direct exchange – transactions. Examples are Twitter, Airbnb or Alibaba.

-       Innovation platforms: A technological foundation upon which other firms develop complementary innovations. Examples are IBM Watson, Android, or Nintendo.

Also, there are several prominent hybrid platforms that serve both purposes, such as Apple, Google, Facebook or Amazon.

One of the main powers of an effective platform is its potential for rapid growth. Such platforms benefit from network effects— being influenced by various digital technologies and benefiting from other platforms. It is important to understand what these network effects are, and what impacts they may have on competition. A big challenge is to “translate” such network effects into steady, growing revenue streams and profit.

It is worthwhile to notice that many platforms enable so-called asset light business models. Necessary investments may not be all that high. Importantly, the number of people on one’s own payroll may be limited. This is perhaps particularly important in the AI age, where many types of jobs may get redefined or eliminated.

The authors suggest a four-step approach to building a platform business:

Step One: Choose the markets for the platform that is to be developed. It may be particularly important here to be clear about whether the aim is to create a transaction platform or an innovation platform.

Step Two: Solve the “chicken or egg” problem, i.e., how to get started when side A’s volume depends on side B, and side B’s volume depends on side A. A way to crack this dilemma when it comes to innovation platforms might be for the platform developer to buy some of its own complements, such as giving out free or inexpensive tools to help third-party innovations. For transactional platforms, an essential question seems to be to check that there might be enough buyers to attract sellers. In reality, there are typically many judgments at play here.

Step Three: Design one’s business mode. While straightforward, this design shall, of course, be different for innovation platforms versus transaction platforms.

Step Four: Establish and enforce ecosystem rules. Who should be allowed to do what?

Let us now consider hybrid platforms. These are, of course, particularly popular, because they combine the best of two worlds. To delineate such platforms, it may be useful to start with one aspect and then the other. I.e., innovation and transaction or transaction and innovation.

Cost-benefit considerations are, of course, critical when it comes to the development of such platforms. The cost side might in particular be particularly high, and it may take time to get one’s platform going. Typically, one would need to have “deep pockets”.

There seems to be a “mad” rush into the platform business. Fear of missing out (FOMO) seems to be a key driver. Unfortunately, a common problem with most platforms is that they tend to be relatively short-lived. A more or less constant effort to evolve one’s platform is important. When platforms show signs of failure, we may now and then see them seeking out particular niches in order to survive. Regrettably, however, lack of realism is often the case when it comes to such aims to reposition.

Getting pricing wrong may be a big problem. And, to underestimate the need to build trust is often the case. This may be the case for transaction platforms in particular. When customers experience a lack of the promised results or performance, they may leave, to never come back. One may attempt to develop a platform when others have come up with something that is essentially working already. These are all examples of what can go wrong. Timing is crucial. To better understand one’s competition is also of utmost importance.

When a particularly resource-strong firm realizes that it may be losing out, it may attempt to “buy” itself into an effective platform business. This was the case with Walmart, the world’s largest retail company, based in Arkansas, which increasingly faced competition from Amazon. It came to see Amazon as its largest threat. Walmart then developed a successful platform, based in Silicon Valley, where it could more easily attract top human talent. While Walmart was building a new platform, it was hiring key talents to speed things up. But not many firms are as resource strong as Walmart. Smaller firms may be better off building their own platforms on top of already existing platforms, i.e., some sort of hybrid.

With the phenomenal economic success of many platforms, there is perhaps no wonder to expect that governmental competition regulators become keenly interested in these platforms’ activities. There are therefore several important anti-trust cases, both in the US as well as within the EU. Leading platforms such as Microsoft, Google or Android come to mind. There seems to be a call for rebalancing, with more openness and fairness, and less focus on privacy, even fraud.

Also, a main issue here seems to be whether people working in given platforms are to be considered as the platform’s own workers or not. For instance, are Uber’s drivers independent or not? This contractor versus employee dilemma has implications for defining what is competition. Also, there are implications on labor laws.

In general, it seems critical to find a balance between pursuing growth without abusing market power. To learn what activities to avoid seems equally important.

The authors predict that in the future more and more platforms shall become hybrids, i.e., combining transactional and innovative foci. Innovations coming from platforms are seen to increasing in frequency. Large platform companies are likely to become stronger. Free competition, the way we have been used to see it, is likely to decrease. A few giants such as Apple, Google, Amazon, Facebook, Alibaba and Tencent are likely to become even more dominant.

What are some of the key innovations that are being spearheaded by platforms?

-       Self-driving cars and ride sharing. There seems to be a movement towards services!

-       Quantum computing. So-called data centers are emerging, to be able to handle the enormous need for computer power, to handle emerging search models.

-       Game testing is likely to become a reality.

-       …

For all such innovations, it seems critical to look at the leaders in the networks. Innovations are likely to be driven by relatively few executives, in top positions at the networks. This may be seen as a double-edged sword. Innovations may largely be for the good, but they might also be for the evil!

Platforms are indeed prominent parts of business today. With the advent of AI these are likely to become even more important. The present book gives an excellent overview of platforms as a business concept. This reviewer is convinced that the platform concept is not only important today but is going to become even more dominant in the years to come. This book is helpful for understanding this evolution.