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How Digital Platforms are Revolutionizing Markets

April 07, 2016

It’s no overstatement to say that the two-sided networked market, or platform, business and organizational model is one of the most important economic and social developments of our time. Surprisingly, many people—even savvy business executives—remain unaware of how this happened, or what to do about it.

The platform model underlies the success of many of today’s biggest, fastest-growing, and most powerfully disruptive companies– from Google, Amazon, and Alibaba to Uber, Airbnb, and Tencent. Platforms use technology to connect people, organizations and resources in an interactive ecosystem in which enormous value is created and exchanged. And we believe that they are just beginning to transform a range of other economic and social arenas, from health care and education to energy and government.

As recently as 2007, single-product leaders ruled their markets—dictating pricing, marketing strategies and manipulating demand cycles globally. Brands such as GE, Sony, Garmin, Canon, Nokia and Toyota reigned supreme.

In Platform Revolution, our new book co-authored with Sangeet Paul Choudary, we explore the escalation of IT-driven platforms over established product leaders — such as iPhone’s rapid domination of its industry at the expense of Nokia, Blackberry, Motorola, Sony Ericsson and others. We also advise business and technology leaders on ways to prepare for even more rapidly unfolding disruption.

If it seems like business models are evolving radically, it’s true: Platforms invert companies, transforming firms’ traditional focus on internal value creation to an outward focus on external value creation.

Platform businesses outcompete traditional “pipeline” companies by harnessing resources they do not own and scaling at a pace traditional firms cannot match. Consider that Airbnb owns no real estate and Uber owns no cars yet each has grown faster than Marriott or Yellow Taxi has ever grown, or can hope to grow, using traditional methods of supply.

Platforms typically employ just a tiny fraction of the people the incumbents employ. Ecosystem partners provide labor and capacity. By contrast, a pipeline business employs a step-by-step arrangement for creating and transferring value, with producers at one end and consumers at the other as in a traditional “linear value chain.”

In a recent HBR article, we noted that “platform businesses bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together are also the source of the value they create and their competitive advantage.” Businesses—newcomers as well as traditional firms re-inventing themselves—must understand the new rules and executive must also make smart choices about access and governance.

There will be huge benefits and winner-take-all markets, but there will also be painful transitions, job loss and societal tradeoffs.

Platform Revolution offers a roadmap on how to start and run a successful platform business, explaining ways to identify prime markets and importantly, how to monetize platforms. For business leaders, we drill down into the strategies behind some of today’s up-and-coming platforms, such as Tinder and SkillShare, and explain how companies can adapt in a changing marketplace. For traditional companies, we point to firms like Nike and McCormick spice that have built platforms in non-technology markets. For IT executives and those charged with developing and maintaining platform infrastructures, we delve into complexities to avoid and standards to implement.

Some key takeaways from Chapter 1 include:

  • A platform’s overarching purpose is to consummate matches among users and to facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.
  • Because platform businesses create value using resources they don’t own or control, they can grow much faster than traditional businesses.
  • Platforms derive much of their value from the communities they serve. Platforms must therefore serve those communities wisely.
  • Platforms invert companies, blurring business boundaries and transforming firms’ traditional inward focus into an outward focus.
  • The rise of the platform has already transformed many major industries—and more, equally important transformations are on the way.

Intrigued? Learn more and order the book here.

GEOFFREY G. PARKER is a professor of management science at Tulane University and a research scientist at the MIT Initiative for the Digital Economy.

MARSHALL W. VAN ALSTYNE is a professor of Information Economics at Boston University and a research scientist at the MIT Initiative for the Digital Economy.

SANGEET PAUL CHOUDARY is the Founder and CEO of Platform Thinking Labs. He is also the co-chair of the MIT Platform Strategy Group at MIT Media Labs, Boston, and an Entrepreneur-in-Residence at INSEAD Business School.