Updated: Apr 30
During the last years of trying to figurate out how network-based business work, I have come across several words and definitions about platforms: from aggregators, hybrids, product-platforms, exchange or transactional platforms, maker or innovative platforms, UGC platforms, network marketplaces, unmanaged, lightly managed and fully managed marketplaces... which made my head explode 🤯🤯🤯 but also made me wonder if there was a way to understand their diferencies and challenges
Thanks to the wonderful contribution of Sangeet Choudary, Marshall Van Alstyne, Geoffrey Parker, Michael Cusumano, Anabelle Gawer, Ben Thompson, Pete Flint, Andrew Chen, Cassey Winters (to name a few ) we can finally understand how Platforms in essence leverages existent network interactions and value exchange from a particular part of a given supply chain.
Yet perhaps the nature of the network nodes and type of value exchanged can help us understand the different type of platform business behavior, challenges and moats ?
After trying to build platforms business as a product manager in various startup, I came to learn that not all networks business models can be considered as just one type of platform nor that b2c and b2b act in the same way.
In the following article, I would like to share some thoughts around 2 types of platform behaviours I have found in my journey and how their behavior changes depending on the network and type of value creation it bundles together.
Facilitating new value creation
On one hand, we have network-based business models which purpose is to enable the creation of value that didn’t exist before. This type of network businesses, also known as Innovation or Maker Platforms, offers developers access to open building blocks and well-documented toolsets so they can create value on top of it, and while giving access to a wide distribution channel of consumers, the Innovation Platforms enables an economic transaction that benefits the producers in the first place. This common pattern can be found in platforms like Windows OS, Googles add ons web store, Alexa skills marketplace and Shopify, Salesforce, Slack or Apple’s AppStore.
One of the things I found fascinating is how businesses that follow this path commonly began offering a product or service to a consumer side and after owning a compelling distribution channel, open it up to 3rd parties in order to leverage a wave of innovation that when accomplished, results in a vibrant ecosystem that thrives on the vast innovation built on top of it.
The famous statement “Come for the tool, stay for the network” popularised the idea and it’s frequently applied by startups. But how to build an Innovation Platform that 3rd party developers will love, relies on “creating a sandbox where the other kids want to come to build their castles, because your backyard is where the awesome neighbourhood barbecue party is happening.”
A common challenge these businesses face while opening up is how this “sandbox” is design, architect, build and kept. Most 3rd-party-developers expects to have access to a stable technical and business environment but is really common to see software businesses struggle due to painful legacy architecture and code design that is too expensive to purge.
Another interesting characteristic I come to realize is that the value created on top of the Innovation Platforms is lock-in inside. The creation and distribution of any skill developed in the Alexa platform depends heavily in the compatibility with Amazon developer kit, API, framework and distribution channel and no developer can expect to create a skill to work with both Alexa, Hound, Siri and Google Now. The same happens with any app you develop for the android and apple store, any extension you build for the chrome browser, any integration you made for Slack and any plugin you connect with WordPress or Salesforce.
It can seem obvious but underneath relies a huge tipping point that make this type of platforms so different. Remember that as a “producer” you might expect to distribute a song you created both on Spotify, Youtube, Soundcloud or even by email, yet, Innovation Platforms have a unique competitive moat that relies on how they manage the openness while keeping tight their core building blocks to leveraging 3rd-party governance. So when Apple removed google maps from the iPhone preinstalled apps back in 2012, or when it refused to support flash after the iPhone was launched, exemplifies the fact that this type of platforms can’t afford to have their developer network creating value on top of other platforms that already are highly differentiated inside their own ecosystem, and this is why they rely on proprietary building blocks and controlling their openness and core interactions.
Nevertheless, this competitive moat also has a downside based on the high dependency on the producer side plus the fact that supply is limited, you can add a specific amount of developers and companies which brings the risk of having a saturated network of producers that are actually really hard to acquire and retain. The previous tactic to subsidise the developer community used by the first and second generation of Innovation platforms is not enough since the number of emerging platforms depending on the same supply is forcing these type of platforms to be more than a cool sandbox where the other kids want to come to build their castles, since acquiring those kids is getting harder and harder.
So I’m really looking forward to see what sort of social currencies and incentives will begin to emerge as a way to overcome this challenge since partner programs and economic incentives are not enough anymore.
How would you speed up the flying wheel? > more developers> more apps> more consumers> more developers
How to gain trust from developers?
Aggregating existing value exchange
On the other hand we have network based business models which purpose is generally to aggregate already produced content, services, goods as well as every existent node from any given supply chain. This type of network businesses are mainly known as Aggregators, but is common to see them also placed under the name of Transaction or Exchange platforms and even Network marketplaces or unmanaged, lightly managed and fully managed marketplaces.
Normally Aggregators demands a creative way to solve the launch phase since it depend on achieving growth and liquidity fast in order to attract every node participating in a given value chain, making the initial expansion very aggressive compared to how Innovators Platforms growth. This type of platforms deploy organic growth mechanisms to aggregate the supply or demand side first, and they need to add the other side as soon as possible to leverage both the identity, interaction plus transaction of the value exchanged.
Normally this type of platforms businesses relies profoundly on reputation and recommendation mechanism to maintain control, trust and stickiness, plus owing the transaction between parties is a key strategic moat. That is why is so common to see sometimes tools and services offered on top of each interaction to even strengthen their network effects.
Houzz is a beautiful example of this where you begin to see how matching first home designers with each other soon expanded to other clusters such as contractors, architects, home owners and every player of that supply chain while giving a place to own and claim their digital identity.
Another interesting characteristic that I came to realised is how they tend to commoditised suppliers since actually their main objective and dependancy and future moat is on owning the identity of each node, the consumer touch point plus the channel where the transaction happens.
This brings me to the last characteristic explained by Ben Thompson in his article "Defining aggregators" :
"For aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers. This further means that aggregators enjoy winner-take-all effects: since the value of an aggregator to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones."
Now I do realized the platforms definitions and types are still evolving and there is no way to have a one fit all model that can help us understand the complexity of these fascinating businesses, so I guess we will have to keep learning and adapting but I hope my thoughts can help start an interesting conversation around it.
Key take aways
Maker or Innovation Platform:
Facilitate building blocks to leveraging entirely new value creation.
Depend highly on the producer side.
Thrive when they successfully manage differentiation and integration.
Aggregators, Exchange or Transactional Platform:
Aggregators generally harvest already produced content or goods
Aggregators tend to commoditised suppliers
Aggregators thrive when they own the transaction exchange
Own relationship between nodes of the network and supply chain
Maintain control points closer to the consumer side