The Platform Fallacy: Unravelling Platform Narrative To Clarify Corporate Strategy



Is the claim that the top five (or seven) companies in the world are platform businesses, really true? Or that the world is being overtaken by platforms? And if so, how useful is this characterization?


I was an early advocate of both the platform model and of ecosystem thinking, so I am biased towards saying yes. But I am going to say no.


The easy attribution of platform status to almost anything that’s digital makes me uneasy. If we keep asserting that all the most successful companies are digital platforms or use a platform business model, then for sure this consolidates the attraction of the concept. But it has to be true as well.


There’s a tendency in intellectual circles to protect and embolden a thesis at the expense of exploring reality and this is happening.


There is also a tendency in digital society for one explanation to dominate, not necessarily because it is the best explanation but because it obeys the same laws as SEO. Once it gets circulation, it becomes ultra-assertive and immovable.


Just two decades ago, such a mono-cultural intellectual life would be unthinkable. All good theories deserve a dialectical challenge. So this article seeks a reality check to the growth of platform fallacies, of which there are a few. It aims to open up a second front in the platform debate.


The background to the platform business model


There can be no doubt that the idea of a business platform has caught fire over the past decade. But what do we actually mean by “platform”. It is a critical question because in enterprises, platforms crop up in most conversations about the corporate operating model or architecture. In order to function, enterprises rely on a set of core platforms. These can be customer records and customer interaction support (CRM), transaction management, internal collaboration and process management, and similar do-or-die platforms that are central to how a firm functions.


The majority of companies have poor core platform architectures and most transformations are in some way designed to improve them.


Outside of enterprises, the term crops up in discussions around software as a service (SaaS or any kind of as-a-service model. They are all based on a technology platform.


Given this background, most discussions about strategy have to be about platforms but, to be clear, when we refer to platforms in this context, we mean technology stacks, often with a core dysfunction.


It’s important therefore to have a definition that elevates the platform business model up above everyday concerns about platforms. In this latter sense, every business is a platform business. Every business relies on platforms. What’s a simple way to differentiate? Deloitte offers one possibility:


“The role of the platform business is to provide a governance structure and a set of standards and protocols that facilitate interactions at scale so that network effects can be unleashed.”


There are more informal definitions too:


“A platform is a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.”


More formally, platforms are often described through this market-making function. That is to say, they are defined by the use of pricing to attract two or more parties to a set of transaction opportunities, in just the way that markets have always done. The additional feature, in terms of how people routinely define platforms, is that they exhibit or enable network effects.


The network effects element is critical to our ability to characterize modern markets. The network effect typically introduces a viral growth opportunity.


Imagine it this way. The first person who bought a mobile phone had nobody to talk to or text. It was therefore in her interest to introduce the concept of the mobile phone to everybody she wanted to communicate with through her phone.


In that very precise sense, she has to be an advocate for the mobile phone. She has no choice. Strong network effects such as these really only exist in these communications settings (such as Facebook) and they speak easily to the power of platforms. Network effects are the hallmark of the platform business. Ok, just that, in reality, they aren’t. More on this in a second.

Finally, the platform business is likely to have some kind of open connectivity - APIs, data or content - that third parties can make use of to grow their own business opportunities.


What is a third party? I’d suggest that a third party is one who is not a party to the core transaction on the platform. For example, on booking.com much of its API program is aimed at hoteliers and other inventory owners. The API enables the marketplace but it does not diversity it by creating third-party business opportunities.


So here are the components again. An ability to create a market, an ability to use price set to ramp up that market, the presence of network effects that necessitate user advocacy leading to viral growth, and third-party engagement mechanisms.


To be absolutely clear, we also need to understand which components do not define a platform.


They are not the introduction of a technology (such as Microsoft’s legacy Sharepoint platform) to a company.


They are not about any kind of marketplace. They are marked by being digital marketplaces that customers can access from anywhere. And that needs to be their primary purpose. They are distinct by being a digital marketplace.


And they are not just about viral growth. For example, The Beatles grew virally in 1963 after appearing on the Ed Sullivan show but their fame is not a result of network effects.


Network effects are also not word-of-mouth (WOM) marketing. Every company has access to WOM and different kinds of advocacy through social networks. That is the effect of being on a network.


We could also shape this definition a little more precisely by saying that platforms are not e-commerce websites. A booking engine such as Booking.com could claim to be a platform business because it brings together buyers of hotel rooms and sellers. That is a market. But there is no network effect here. The buyers do not interact with each other (and the same is true of Airbnb) and nor do the sellers, by and large.


What Booking.com has is inventory and unfortunately, inventory is often classified as a weak network effect. In my view that weakens the analytical value of the term. Inventory is very important. It powered the first wave of Amazon’s growth. But it is not a network effect.


I wonder to what extent platform theorists would allow themselves to be constrained by a definition that limits the scope of which companies are truly platform businesses operating a platform business model?


So platform businesses are not defined by WOM or by inventory or advocacy or technology platforms.


Is Apple a platform company?


The big question though is whether the top companies are really platform companies. In separate articles, I’ll look at Google and Amazon but for now, let’s figure out Apple.


Apple has a variety of API developer communities, including for its Mac OS and iOS. In fact, it was the pre-existence of the first of these that made the growth of the iOS developer community possible. Contrary to received wisdom, there were already tens of thousands of apps for personal handheld devices prior to 2008, 50,000 for the Palm Pilot alone. In addition, in iTunes, Apple had abundant experience in managing a content ecosystem of record labels.


So, well before Apple’s supposed transformation to a platform company, it had a lot of experience with apps through the Mac OS and of ecosystems in the content community. It was just never called a platform business until it became only one of two companies that owned a successful mobile operating system.


Interesting to note then that its apps business-line has never contributed more than 7% of revenues and that figure is inflated by other activities. What’s more, it is a fairly recent number. Apps have been much less significant to direct revenues historically.


That’s not to say that the SDK and developers have been insignificant and clearly sales of the iPhone have benefited hugely from apps. However, Apple’s business is primarily about designing and selling the world’s most profitable phone.


There’s a potential misunderstanding about the whole arena of mobile apps anyway. On the face of it, Apple is in part a platform business because it brings together the developers of apps and the buyers. Under Tim Cook, there has certainly been a more commercial edge to this activity. But by and large, for most of its phenomenal growth period apps were not sold or bought.


Of the 101 apps on my iPhone, there are only two that I have paid for. So about 2%. For the most part, the apps are functional, free, and serve a utility purpose for me. I have apps like my banking app maps, photos, camera, Whatsapp, Chrome, hotel apps, Booking.com, Instagram, and so on. They are useful and entertaining in some ways, but most of all they are free. Otherwise, I wouldn’t have them.


In a 2014 study of apps in the EU economy, analysts from Gigaom pointed out that more than half of apps (in the App Store and for Android) were built by contractors. They also pointed out that apps’ development made up a potentially stunning $63 billion economy that could create an additional 3.5 million jobs in Europe. And isn’t this the crux of Apple’s business too? They have boosted smaller ecosystems into whole sub-economies. They are an employment and wealth generator like no Government can now hope to be.


That same study, however, suggested that there were too many barriers to commercial app growth on IOS and Android. Independent app developers struggled to win customers, were lost on the app store, and relied on good fortune to get noticed sufficient to become viral. In other words, this was not really a marketplace. It was dominated by non-transactional forces and beat back the attempts of companies that wanted to use it as a marketplace.


There is/was also an asymmetry whereby Apple benefited from inventory but developers struggled to make a living. For that reason, too, developers were incentivized to sell the idea of an app to a customer who would pay for it to be developed rather than go onto the market to transact.


By 2021 the share of paid to free apps was in the order of 3% to 97% for Android and 7% to 93% of iOS. That’s not to say that all these apps make no revenue. Some make revenues from in-app advertising but again this is a hits business. To get enough views to hit strong ad revenues requires a budget that most independents don’t have.


What does this mean in terms of Apple’s status as a platform business? In my view, Apple is a device and ecosystem business and that’s not the same thing. What it attempts to do is build device features that appeal to the majority of its users. The App Store in many ways is a happy accident and one that it is increasingly exploiting but far more important are device features such as its DSLR-strength camera (on the iPhone 12) and health features on the Apple Watch.


These require Apple to help create new ecosystems. With Apple Watch, for example, there is a feature called Heart Rate Variability (HRV). This is a measure of inter-beat frequency. In a clinic setting, it would not be measured in the way that Apple has to measure it through a wrist-based device. Over time, therefore Apple needs to win wider acceptance of its chosen metric. It does this through its more general ecosystem engagement with the medical profession and the power of the brand.


Equally, with its camera, its new Apple RAW standard is not really a RAW image file. It is a digital negative that incorporates Apple’s automated data extraction tools. This makes the Apple RAW file format very difficult to get into a competent RAW editing software package. Over time, Apple will need the imaging ecosystem to develop or adapt tools for iPhone editing or its users will have to rely on presents on platforms like Instagram (hardly an appealing prospect).


Apple continues to grow its influence in everyday activities that its users engage in, photography, health monitoring, and even sleep monitoring, sometimes through apps and sometimes through its wider ecosystem reach, all in the service of iOS and its devices.


It is difficult to see how this makes it a platform company unless you start to change the definition of platform. And it is worth doing that. Changing the topic briefly, Jeff Bezos conceived of Amazon as a utility and that indeed is what Apple has become.


As a utility it provides an infrastructure (iOS) that enables companies to communicate with their clients (e.g. banks to customers and customers to banks); it is standardizing a high-quality file format for digital photography, and it is redefining health monitoring. It is also a highly scaled provider of employment and business opportunities.


As I said in a book published in 2015, platforms are utilities that increasingly will take on roles previously performed by Governments. Apple is the proof.


Apple is also an integrator of different services of its own. This can be seen also with companies such as Alibaba (integrating e-commerce, insurance, finance, logistics, travel) and of course Amazon.


In Apple’s case it integrates devices with health and well-being services, retail, photography, productivity, apps, mapping, and communications, to name but a few.


What Apple has never relied upon are network effects. As we’ve seen, its’ apps platform had a large inventory but there was never a compulsion for every user of the iPhone or any one app to advocate the iPhone to friends and colleagues.


There is a counterargument, that inventory is a form of the weak network effect. That is to say, the overall benefit to every user of Airbnb, say, is stronger if the platform has inventory in every country in the world. That may be the case but that is inventory. If we weaken the idea of network effects to mean simply that a company has a ”full inventory” then what power does the idea of network effects have? Surely we should be analyzing the power of inventory?


There is some network effect created by Apple’s mail service and by iOS messaging but try as we might, it would be a strain to say these account for its enormous success.


Apple has never needed compulsory advocacy either. It has fared extremely well with word of mouth online. People love the brand and advocate it in a very WOM way.


Nor is it distinct by being a digital marketplace in the way that, say, Amazon is or Facebook.


Apple is a very traditional company in many respects, relying on its brand power to sell well-designed products. Where it becomes interesting as a modern digital company is in its power to influence and shape ecosystems.



The rise of the mega platform


To describe Apple as a platform, we need to change the definition of the term. Rather than network effects and multiple-sided markets, we would be looking at other, more interesting features:


1. The role as a utility, serving tens of thousands of companies in their relationship with their customers.


2. The ability to integrate activity that would previously be conducted in different vertical sectors into one horizontal business.


3. Massive, data-driven market segmentation that gets to the heart of the unmet needs of customers.


4. Its role in creating and sustaining ecosystems such as the HRV metrics community, well-being, photo-editing. Skills like this are rare - GE took a bet on being able to create ecosystems in healthcare, ecology, and industrial data, and came off second best.


5. Quasi-governmental powers. Think about these. Employment creation on an unprecedented scale. Apple has probably created in excess of 5 million jobs via its apps platform and iTunes. And continues to create them. Alibaba has done the same and went a step further by training 1 million young people in entrepreneurship in Rural China. Apple and Alibaba score as quasi-governmental agencies.


These are the types of characteristics that typify companies such as Apple, Facebook, Google, Alibaba, and so on.


If we want to call them platform businesses then we need to change the definition away from network effects and two-sided markets to these more dramatic powers. In a 2016 article, I referred to mega-platforms. These are not meta platforms. I mean mega as in huge and dominant.


They are companies that could eventually rival countries. Alibaba has already said that it envisions being as large as the French economy by 2035. And that’s the point. They rival governments. And we’ll see if antitrust actions can rein them in. Personally, I doubt it. They are too economically entwined in other commercial activities.


It is worth reviewing how companies like Amazon. Google and Alibaba compare with Apple. All in their own ways defy the definition of platform companies given to date. They fit with my definition above, however. Is it time to leave behind the theory and get with the reality?



Haydn Shaughnessy is the author of Shift: A Leader’s Guide to the Platform Economy and co-founder of Flow Academy, a company that specializes in operating model design.

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