The social life of platforms

All of a sudden, platforms are everywhere. I’ve written an issues paper on platforms which will be out (on the Toulouse School of Economics website) in a couple of weeks. It tries to summarize what we know already and what questions remain for both economic researchers and policymakers (lots). But there are also all of a sudden several books out. One, [amazon_link id=”0393249131″ target=”_blank” ]Platform Revolution[/amazon_link], by Geoffrey Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary I reviewed already here; it’s addressed at a business audience. Another, [amazon_link id=”1633691721″ target=”_blank” ]The Matchmakers[/amazon_link], by David S Evans and Richard Schmalensee has arrived this week. Evans’ earlier [amazon_link id=”1468102729″ target=”_blank” ]Platform Economics[/amazon_link] (2009) was (I think) the first on the subject. The excellent [amazon_link id=”1444788612″ target=”_blank” ]The Inner Lives of Markets[/amazon_link] by Ray Fisman and Tim Sullivan has some sections on platforms also – I reviewed it here.

[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] [amazon_image id=”1633691721″ link=”true” target=”_blank” size=”medium” ]The Matchmakers: The New Economics of Multisided Platforms[/amazon_image] [amazon_image id=”1468102729″ link=”true” target=”_blank” size=”medium” ]Platform Economics: Essays on Multi-Sided Businesses[/amazon_image]  [amazon_image id=”1444788612″ link=”true” target=”_blank” size=”medium” ]The Inner Lives of Markets: How People Shape Them – And They Shape Us[/amazon_image]

This post is about another new book, out in the UK on 17 June, Arun Sundararajan’s [amazon_link id=”0262034573″ target=”_blank” ]The Sharing Economy: The end of unemployment and the rise of crowd-based capitalism[/amazon_link]. There are fewer books specificially on ‘sharing’ (or P2P) platforms; the other I know about is Botsman and Rogers [amazon_link id=”0007395914″ target=”_blank” ]What’s Mine is Yours[/amazon_link].

[amazon_image id=”0262034573″ link=”true” target=”_blank” size=”medium” ]The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism[/amazon_image]

Despite the subtitle, The Sharing Economy does not over-hype these platforms although it certainly takes a positive attitude to their potential. For example, the book points out: “There haven’t yet been any large scale digital peer-to-peer rental marketplaces for assets other than automobiles.” Scale is difficult in P2P contexts; the prize is particularly large in the case of cars. The average car owner uses it 4% of the time, with an average 20% occupancy, so there is a 1% utilization rate on an asset whose value the book estimates as equivalent to 13% of global GDP. Logistics is a key challenge in many asset-sharing contexts, keeping the platforms geographically confined.

The book also flags what seems to me an important hurdle, namely raising the financing for the large losses incurred in the early stages of growing a platform to its critical mass, where the indirect network effects and scale economies can kick in. Venture capital is the main mechanism for doing so – crowd funding can’t achieve the same scale. So the big sharing economy examples are American, funded by rich investors – and hence, I think, much of the anger aroused by Uber and Airbnb in general commentary.

There are economic characteristics required also for a successful sharing platform. If asset-based, the assets need to be not too big and not too small (cars, but not aircraft carriers or saucepans). There must not be large economies of scale in production, or it would be just another consumer-facing digital business.

One of the very interesting sections of the book concerns the social characteristics of the sharing economy. Its origin myths place it outside the conventional monetary economy, with roots in time banking for the neighbourhood, welcoming strangers with hospitality, and so on. Again, the hostility to the big sharing platforms stems partly from their departure from the original social norms. But as Sundararajan points out, social design is vital to the success of the platforms because they rely so heavily on trust and reputation to function. He writes: “I believe some of the shifts we see in capitalist exchange over the coming years will reflect a reintegration of gift economies into an economic system that has become inefficiently commercial.” So this is intriguing: he sees platforms other criticise as bringing commerce into social contexts as a route for reinjecting the social into the commercial. For instance, P2P markets are successful in dense urban areas.

What are the hurdles to further expansion of the sharing economy? Sundararajan sees financing as one, although this may be changing. The notorious blockchain could perhaps enhance trust. Innovations such as the software layer provided by Stripe could be on the verge of making it much easier to monetize a platform-provided service. Other trust ‘infrastructures’ the book highlights innovations such as Traity a ‘general purpose portable reputation platform’.

As the book points out, sharing economy (and other) platforms are hybrids: between a market and an organization; between centralized control and decentralization; between the personal and the public; between the social and the commercial. He touches on one of my favourite subjects: how little we know about the sharing economy because it falls between existing statistics. (I am working now with the ONS as one of their Fellows to think through what statistical collection might be needed.)

And he concludes – as I do in my forthcoming paper – that economists need to provide policy makers with more evidence and better tools for understanding the impact of these new platforms. I also agree with Sundararjan’s conclusion that the knee-jerk regulatory response – stop them happening – is not one that will serve the public. Regulatory needs will change – he argues that platforms can be effectively self-regulatory in many respects. Ratings provide real-time, large scale monitoring of quality, for instance, which will do a more effective job than a government regulation rarely monitored or enforced. Reputation is literally vital to a sharing economy platform. But there will be other respects in which policy intervention is necessary, including rethinking how aspects of social security such as maternity pay or pensions can be delivered when a significant proportion of the workforce does not contract with a single employer for a substantial length of time. This need has been clear for 20 years; now is the time for policymakers to act.

So all in all, a very interesting book by one of the most knowledgeable researchers on the sharing economy. Well worth a read.

When everything is a platform

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 [amazon_link id=”0393249131″ target=”_blank” ]Platform Revolution: How networked markets are transforming the economy and how to make them work for you[/amazon_link] 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.