The business of interactions
Business models are evolving from linear product/consumer flows to providing frameworks and environments for joint value creation. The key to successful platform design is focus on the interactions between platform participants.
The maker movement, APIs, network effects, and expanded marketplaces are altering the landscape of business. Uber and Airbnb are changing resource allocation and what it means to be a business. facebook and Twitter have shown that monolithic, unidirectional publishing models aren’t the only way to engage audiences and create content.
We are no longer in the business of building software. We are increasingly moving into the business of enabling efficient social and business interactions, mediated by software.
The plug-and-play business model
Software has been disrupting traditional business models for many years. Most recently, software has formed the core of platforms which orchestrate a variety of resources to create new value. The emergence of increased connectivity, decentralized production, and artificial intelligence has created an opportunity for connecting producers and consumers in ways that were not possible earlier.
From pipes to platforms
A major transition occurring now is the move from linear, transaction-based business processes, to multi-sided platforms which bring together several parties to exchange and create new products and services. Where pipes push products and services in one direction to consumers, platforms bring together several types of producers and consumers to interact in their domain.
In the pipe model, value was created upstream and delivered downstream. Platforms facilitate
Platforms allow participants to co-create and exchange value with each other.
Because platform are different than previous, linear producer/consumer models, they can enable a richer set of interactions and services. By bringing together various pairings of consumers and producers, they can support increased creativity. Everyone who was once just a consumer can now be a producer or play multiple roles.
There are three fundamental changes which have formed the platform ecosystem: the shift from consumption to production; the shift from resource ownership to resource orchestration; and the shift from processing to enabling interactions.
Pipe businesses succeeded through acquisition of resources and domination through aggregation. Platform businesses succeed through intelligent pairing of producers and consumers in configurable ecosystems. Pipe businesses are optimized to efficiently convert raw materials into end goods and services. Platform businesses are designed to create effective interactions between participants at scale.
Where once media was produced centrally and pushed to consumers, now consumers are creating social media and interacting with brands on global communication platforms.
As the connectedness of people, ideas, and things increases, so does the opportunity for platforms to arise and create new links in the value network.
Platforms require a different mindset that traditional “pipe” companies. Resources and value are not contained in warehouses, the expanse of all potential consumers and producers is the field of play for platforms. The supply chain is no longer a chain, it a network of connected creators and innovators. Focus moves from dollars to data as coordinating matches between producers and consumers relies on real-time insight. Just as value production does not proceed along a straight line, the platform user experience is no longer a funnel because the platform exposes multiple touch points to its constituents. Loyalty programs and lock-in, powerful levers in pipe businesses, are being replaced by behavior design and deep understanding of user experience. Choudary calls these and other principles “The Platform Manifesto.”
The goal of the platform is to enable these interactions between producers and consumers–repeatedly and efficiently.
The platform doesn’t deliver good and services as a pipe business does, rather, it enables producers and consumers to interact and create value. Medium does this by enabling writers to gain an audience; Yelp helps restaurants build their reputations; and Twitter provides a way for its users to build their followership and engagement levels.
Choudary exclaims that “we are in the business of mediating and enabling interactions!” rather than building software or selling products and services. Interactions manifest in each possible way a producer and consumer can relate to one another on the platform. If the platform does not make these interactions its primary focus, the vitality and value will drain out of the platform.
The Platform Stack
The platform must attract consumers and producers, facilitate their interaction, and enable matching between the two groups. To achieve this “plug and play” model, the platform must maintain and build a network-marketplace community, infrastructure, and data. The emphasis on these three layers varies across platform businesses. The network-marketplace community layer consists of the producers and consumers who interact on the platform. The infrastructure layer contains the tools, services, and rules that are building blocks of the platform. The data layer is what enables the platform to match supply and demand.
Choudary breaks down various businesses by their emphasis on each of these layers. A thick top layer (network-marketplace community) is found in Craigslist which focuses heavily on their community, but very little on infrastructure/tools or data. WordPress is an example of an almost exclusively infrastructure layer platform business that invests a lot in their tools and available services. Data is used by platforms like facebook and Airbnb to tailor relevant content and match hosts with travelers.
Platform scale is achieved not through marketing initiatives and growth hacks but through a series of architectural considerations while designing the platform that optimize the platform for high participation by producers and consumers.
Choudary lists five drivers of platform scale which differentiate it from pipe business scale.
Minimal marginal cost of production and distribution means that platforms can scale more easily once the framework is established. Network effects operate in platform businesses by enabling growth through positive customer feedback. The rules and principles by which platforms design and enforce community interaction and culture drive their growth and evolution. To effectively match consumers and producers requires an understanding of relevance, which is provided by effective filters which can learn. Similar to network effects, virality is a propulsive for platform businesses and their members.
Choudary provides theory, examples, real-world strategies, and models for understanding and designing platform businesses. This book describes how “pipe” businesses are being usurped by platforms and how to design a platform business.
Platform Scale contains an up-to-date and insightful look at platform patterns and clear strategies for how growth and scale are achieved. The models Choudary uses are presented in illustrations at the end of each chapter and build on each other to form a complete picture of platform dynamics. He gives two diagnostic and strategic views of platforms: 1) the platform components and participants; and 2) the platform stack including data, infrastructure and services. He uses these throughout the book to illustrate how to achieve scale and create value. Choudary dissects various platform businesses and specific interactions to give detailed advice for interaction design, incentives, and network effects, and virality.
After reading this, you’ll have several great models to use for analyzing your own and other platform businesses along with strategies for growth. There’s only one other book on platforms which covers more ground: Platform Ecosystems by Amrit Tiwana.