Sometimes it seems like nobody wants to set up a business these days; it has to be a platform. These come in different flavours of course, from sharing economy start-ups to existing online social or other networks. Whatever, the platform concept has become ubiquitous. Like many ubiquitous concepts, its definition is a bit fuzzy and its exact characteristics variable, but the basics are well-understood: an entity enabling value-creating interactions between different groups of people; with the value coming from network effects (across the sides of the platform) and often also the improved matching of transacting parties enabled reduced information/transaction costs. Thus Ebay provides sellers with lots of buyers and vice versa, and enables people to sell or buy niche items.
It’s intriguing that for many people everything looks like a platform now. The economics of multi-sided platforms (or two-sided markets) dates back to the early 2000s. The well-known Rochet and Tirole paper was published in 2004 and had been circulating for a while before then, while Geoffrey Parker and Marshall Van Alstyne were publishing related work in 2000. In their new book Parker and Van Alstyne, joined by co-author Sangeet Paul Choudary argue that once platforms became possible, they became inevitable: “Platforms virtually always win… Pipelines [ie traditional businesses] rely on inefficienct gatekeepers. … The platform can grow to scale more rapidly and efficiently because traditional gatekeepers are replaced by market signals provided automatically by the entire community.” What’s more, platforms do not need the same investment in physical capital as a pipeline business and have no idle capacity – think Airbnb versus hotel chains. They do not need inventory. The community can even provide the quality control and certification.
[amazon_image id=”0393249131″ link=”true” target=”_blank” size=”medium” ]Platform Revolution: How Networked Markets are Transforming the Economy–and How to Make Them Work for You[/amazon_image]
The book is a very accessible introduction to the economics of multi-sided platforms, very much from the perspective of a business audience, people who might want to set one up. Introductory chapters describing platforms and the basic economic principles are followed by chapters on how to design a successful platform – how to provide value and set prices to balance both sides appropriately; how to acquire and use data; successful launch and growth strategies; monetization; growth; competition issues; and regulatory issues. There are helpful examples throughout – eight different cases of launch strategies that worked, for instance.
If you don’t know the economics literature, this book is a clear and practical guide to platforms. If you do know it – and I’ve now read a fair amount – the analysis will be familiar, albeit with lots of interesting and useful examples that still make it worthwhile. I found the chapter on strategy the most interesting. It notes the challenges of getting to successful scale, although I think in fact underestimates them. It also discusses the complexity of competition (or as it’s sometimes called ‘convergence’ – everybody competing with everbody) and the advantages that go to those able to take a very long term view. The book’s main downside is apparent in this chapter too: it’s a Pollyanna view of platforms. I’d have liked a more challenging discussion of competition among the titans and the regulatory and even political questions this raises. (I set out my thoughts on this on the FT’s The Exchange blog.)
All in all, though, this book is a welcome addition to the still quite small non-technical literature on platforms, which is much needed given how complicated the academic literature on this subject has become.