In my last “Platform” post, I described the high-level attributes of a Platform. In this post, I hope to describe what makes a Platform valuable to its each of the participants and therefore provides an explanation of the motivation for their respective decisions to participate and possibly provide a better understanding of the phenomenon. This will in turn help to explain the popularity of the Platform and the rush by companies to produce them. A couple of notes:
- This isn’t exactly what I promised in my last post, but it makes much better logical sense as the follow-on for that post and I will get to the ideas around function and data in future posts;
- The term Platform can be applied to a variety of mechanisms from those upon which families of cars are built to computer chips upon which whole classes of computing devices are based. In this post, we focus on software-based Platforms.
That said, the raison d’être for a Platform is to deliver value (in the form of services or products) to customers. To do this, a platform provides a way of organizing related applications into a functionally complete (in terms of its ability to seamlessly deliver a set of related functions leveraging shared data and consistent user interfaces) software offering that assists in the accomplishment of work and whose value, as a whole, is greater than the sum of its parts. Or if you prefer, a platform provides a way of organizing applications into useful bundles, that make sense both conceptually and as a useful, functionally complete (in terms of the functions they are designed to accomplish and seamlessly managing the workflow across functions) device or apparatus that assists in the accomplishment of some macro set of tasks.
The first step in building a Platform is to identify a set of customers who are being underserved in some important (to the extent that they will be willing to pay to be served) and map out the workflow (across a set of related functions) that will satisfy the unmet needs of the customer-set. This is a very awkward way of saying that the Platform doesn’t come first a business challenge does. And, it isn’t as easy as it sounds:
- Relatively speaking, not many problems are big/complex enough to demand a Platform solution. Most, such as a weather app, calculator, dictionary or even a photo album are well covered by a single application or even applet. So, finding good candidates is difficult;
- A significant scope of coverage is fundamental to the concept. The difficulty of initially seeing the entirety of the vision is why Platforms are not often designed, developed and delivered as a whole. Most often the Platform begins with an anchor piece of functionality (an application) and is extended until there is a complete integrated Platform; and
- Customers need to be willing to pay for the product/service that the Platform is designed to address. This last point might seem obvious, but it is often overlooked. Sometimes this is a simple question of the objective value of the proposed offering, other times it is related to perceptions and customers not being ready to accept significant change—which is often a prerequisite to buying into the concept of the Platform. I saw this with the introduction of the ERP and again with the introduction of Textura’s offerings.
That said, the Platform provides a mechanism to integrate related functions (each individually often covered by a platform component, i.e. an application) together to make the cross-functional process the Platform supports more efficient. For example, as far back at the1980s (well before the cloud phenomenon) several product developers recognized the need for comprehensive systems to manage the order-to-cash business process and an integrated system (Platform) that would bring together order entry, manufacturing, warehousing, logistics, accounts receivable all anchored to the General Ledger. This didn’t all come together at once. Product developers conceived and delivered “point solutions” that were targeted at one of the aforementioned functions. But then someone at SAP figured that an integrated Platform, cross functional solution would eventually (because of the improvements in efficiency and accuracy of the processing associated with tightly integrated components) be more (no, much more) desirable than what was then called best of breed (i.e. “point”) solutions. And, they were right.
The development of the ERP around the General Ledger (the “anchor”) was intended to improve not just the efficiency of the order to cash business process, but also to enhance the financial controls and improve reporting—both speed and scope, and it did. The point solutions disappeared and were replaced by ERP (Enterprise Resource Planning) platforms.
Let’s now outline why Platforms attractive to each of its participants.
- Owner—the Owner is the participant that pays the bills for the launch (development, marketing and initial sales costs) of the Platform. They own the property rights to the Platform and extract rents for its use. The Owner provides the financial resources and management expertise necessary to develop the Platform, i.e. without the Owner it is unlikely that the product would ever get developed in the first place. This is not to say that there aren’t situations where the Owner, Developer and Vendor (see next bullets) are the same entity.
Further, a platform delivers a sustainable competitive advantage (and requisite return on investment) to the entity that owns the Platform. Why is this? A Platform solution is relatively difficult to replicate—not just because of the network effects (the product gets more valuable, the more users it attracts) that accrues to the first mover in a space, but also because a Platform is a complex apparatus and difficult to replicate. It also delivers significant value through integration which in turn drives efficiency and an improves their clients’ understanding of their business because of the analytics it facilitates—which is another topic altogether and one which I will cover in a future post. It is for these reasons that a Platform solution can generate disproportionately sized rents.
- Developer—the Developer, produces (by pulling together an understanding of the business problem with the appropriate application of technology to address that problem) the intellectual property around the platform and implements it in software and/or hardware. Because Platforms are by their nature significant entities, it is rare that the developer is able to avoid bringing in Owners to help finance the development effort.
That said, the Developer derives value through the returns on their initial creativity (conceiving and developing the concept into a product) and the development of ongoing strategic enhancements (to be differentiated from minor operational improvements) to the system. The Owner compensates the Developer for the product of their work. The structure of the capital markets, especially the venture capital infrastructure/apparatus support this notion: That the creativity and knowledge necessary to develop a breakthrough platform is rarely contributed by the people who put up the money. That doesn’t mean that the Developer always gets what they deserve in this bargain, but the promise of a considerable return is a great motivator and has induced many very talented Developers to build incredible products, some of them Platforms.
- Vendors—the Vendor pays the Owner to use the Platform to facilitate a transaction where a product or service is conveyed from the Vendor to the Consumer. I would note that in some cases the Vendor and the Owner are the same party. For example, when Amazon sells goods, they are both the Owner and Vendor, but when they act as an intermediary posting goods (and often even handling the logistics of warehousing and shipping) that are sold by others, that “other” party is the Vendor.
The Vendor derives value by having a platform (with all its attendant functionality) to run a business. Often the Vendor and the Owner are, at least initially the same entity, but over time the Owner understands that there are markets (products and/or services) that it doesn’t want to address and Vendors fill those voids and make the platform (because of better coverage) more valuable for due to increased traffic and number of transactions being processed meaning more potential customers for all.
- 3rd Party Players—3rd Party Players add value to the platform by enhancing its capability through additional functions which the owner/developer decides not to provide. 3rd party players not only draw more customers to the platform (increasing critical mass), but also produce additional revenue for the platform’s owner.
3rd Party Players generally focus on providing functionality that the vendor does not. For instance, there are a significant number of websites that provide specialized knowledge and services (about products in a specific category) and then leverage Amazon to process the buy transaction. This is made possible by 3rd Party Players who provide the mechanisms to integrate websites to Amazon’s infrastructure. eBay supports an analogous model. In these cases, both Amazon and eBay find it advantageous to allow 3rd Party Players to address markets by providing functionality that it doesn’t make sense for them to provide themselves.
- Consumers—the consumer (both retail and business) derives a great deal of value from the Platform and is willing to pay the rent to use/buy it. The consumer not only pays to use the platform, but often (when the Platform is a collaborative transaction) pays the vendor for some product or service that is delivered using the Platform as a facilitator of the transaction.
The consumer is willing to pay the rents to use the platform because a platform will improve their competitive position or simply make their life easier. The most obvious way this happens is through improved efficiency, but a platform often offers improved functionality and providing the possibility of offering new products and services when compared to the legacy systems that had been cobbled together and were at best interfaced (which is both expensive and error-prone) together.
Increasingly, a platform allows the Consumer (especially the Business Consumer) to aggregate data across the platform and gain a better understanding of their business (both operationally and strategically) and the constantly changing environment that they operate in. In the long run, big data and analytics, facilitated by sophisticated platforms, will likely provide significantly more value than operational efficiencies and will become the primary driver (at least from a business’s perspective) of Platform-related value.
So, there you have it, platforms significantly benefit each of the parties involved in a Platform ecosystem. The trick is understanding that you have a Platform opportunity (either from inception, or after your anchor has been well established) and exploiting that option when it presents itself. The folks at Amazon, Uber, eBay and other have done it and there are other opportunities. I spent my last year at Textura rigorously defining a construction industry Platform strategy for the company. It was a challenging exercise and the opportunities were significant (size and number of components), so my firsthand experience that says: 1) it is possible to build a Platform strategy when the opportunities exist, 2) it isn’t easy. It takes quite a bit of effort and knowledge; and 3) it can pay off.