Platform Revolution

The platform concept is fundamentally simple: create a place where producers and consumers can come together in interactions that create value for both parties. It’s an idea that humans have been practicing for millennia. After all, what is the traditional open-air marketplace found in villages and cities from Africa to Europe if not a platform in which farmers and craftspeople sell their wares to local consumers? The same is true of the original stock markets that grew up in cities like London and New York, where buyers and sellers of company shares would gather in person to establish fair market prices through the open outcry auction system.

The main difference between these traditional platform businesses and the modern platforms featured in this book is, of course, the addition of digital technology, which enormously expands a platform’s reach, speed, convenience, and efficiency. (There’s a good reason why most stock trading has now migrated from physical exchange floors to electronic marketplaces accessible from anywhere in the world.) The Internet and its associated technologies give today’s platform businesses a truly breathtaking ability to transform industries, often in unpredictable ways.

We’ve already looked at the way in which the car-service platform Uber has leveraged network effects to claim a huge and growing share of the rides-for-hire market from such traditional businesses as taxis and limousine services—and in the process has built an enormous corporate valuation in a startlingly short period of time. By the end of 2014, the five-year-old company was valued by investors at $40 billion (up from the $17 billion valuation of just six months earlier), making it more valuable, at least on paper, than such venerable commercial giants as Mitsubishi, Target, FedEx, General Dynamics, and Sony.¹ Uber, which now operates in more than 250 cities around the world, has scaled these heights by providing an exceedingly simple yet valuable service to both consumers and producers, bringing quick and inexpensive rides to passengers while enabling drivers to earn better incomes than most taxi drivers—and without having to shell out the enormous sums required for a traditional taxi license. At the height of the market, in mid-2013, a New York City taxi medallion was valued at over $1.2 million.

So the Uber platform, simply by providing an online location where riders and drivers can come together, has brought benefits to both consumers and producers while building vast wealth for its investors. It’s a winning proposition for everyone—except for the hundreds of thousands of taxi drivers, car-service dispatchers, and limousine company employees whose jobs are suddenly in jeopardy. No wonder Barry Korengold, president of the cab drivers association in San Francisco (the city where Uber was launched back in the summer of 2010) describes the leaders of Uber as “robber barons”: “They started off by operating illegally, without following any of the regulations and unfairly competing. And that’s how they became big—they had enough money to ignore all the rules.” The president of one San Francisco cab company predicted that the entire taxi industry would collapse before the end of 2015—a forecast echoed by taxi executives in cities around the world. As a result, the value of a New York City taxi medallion fell by almost $300,000 in one year—with no bottom in sight.²

In chapter 11, we’ll return to the question of whether platform businesses like Uber are engaging in unfair competition, or whether traditional incumbent companies are simply angry about being outcompeted by digital interlopers. But for now, just let’s marvel at how swiftly and seemingly effortlessly a platform business is revolutionizing a once-secure industry.

Even more remarkably, the changes that Uber has already brought are probably just the opening salvo in a barrage of further disruptions that may ultimately transform the entire transportation sector. Combining the platform model with another technology that is rapidly moving from the drawing board to the showroom—the self-driving car—will improve Uber’s already stellar economic model and could lead to a series of cascading impacts that extend beyond the taxi industry. One futurist foresees a time when millions of people will eschew car ownership altogether, instead relying on an instantly deployable fleet of driverless Uber vehicles to take them wherever they want to go at a cost of around fifty cents per mile. Uber cofounder and CEO Travis Kalanick comments, “We want to get to the point that using Uber is cheaper than owning a car.” The ultimate promise: “Transportation that’s as reliable as running water.”³

The implications are startling. The major automakers would be devastated by the shrinkage of their market. So would ancillary businesses such as auto insurance, car finance, and parking. On the other hand, the sudden decrease in demand for parking places (since driverless cars can be in virtually continual use) will free up tens of millions of square feet of real estate for development, liberate lanes on practically every city street, and drastically reduce the pollution and congestion caused by drivers cruising the streets in search of a parking spot. If this vision for the next phase of Uber’s growth comes true, the landscape of America may well be rendered unrecognizable.⁴

And if all that is not enough, consider this observation by Kalanick: “If we can get you a car in five minutes, we can get you anything in five minutes.”⁵ Anything at all? One wonders what limits can be set on Uber’s disruptive potential. Kalanick seems not to acknowledge any.

“Software is eating the world.” The slogan was originally used by Netscape founder Marc Andreessen in the title of a 2011 op-ed article in the Wall Street Journal to encapsulate how technology—particularly the Internet—has transformed the world of business.⁶ The story of Internet-enabled disruption as we’ve witnessed it so far has occurred in two main stages.

In stage one, efficient pipelines ate inefficient pipelines. Most Internet applications during the 1990s involved the creation of highly efficient pipelines—online systems for distributing goods and services that outcompeted incumbent industries. Unlike traditional offline pipelines, online pipelines benefited from low marginal costs of distribution—sometimes as low as zero. This allowed them to target and serve large markets with much smaller investment.

Traditional media companies were the first to feel the pinch. Newspapers were upended by the Internet’s ability to distribute news to a global audience without the traditional distribution costs (printing, shipping, retailing, delivery). An efficient pipeline had eaten an inefficient one. The unbundling of classifieds and other forms of advertising from editorial content then stripped the newspaper model of a crucial monetization mechanism, as the more efficient online method for delivering targeted advertising outcompeted the traditional ink-on-paper method. Again, an efficient pipeline ate an inefficient one.

Retail and mail order shopping soon felt the pain. Amazon’s success in the book industry led to the fall of Borders and other bookstores. Blockbuster’s bricks-and-mortar system for distributing DVDs failed to compete with Netflix’s distribution economics, based initially on the online selection of DVDs that were delivered by mail, and later on streaming video. Music company revenues plummeted as sales of CDs collapsed, replaced by faster and cheaper file downloads, many of them pirated or shared illegally. Over time, many of the Internet distributors found ways to leverage granular data about consumer choice so as to serve their customers better than the traditional pipelines ever did.

Business revolutions such as these embodied Andreessen’s vision of “software eating the world.” Today, having attained the status of a cliché, his vision needs an update: “Platforms are eating the world.” We’ve entered stage two of the disruption saga, in which platforms eat pipelines.

The evidence for this new stage of disruption is all around us. As we’ve seen, taxi companies—and regulators—have realized that Uber is on the march to global domination of local transportation. Once ridiculed by the hotel industry, Airbnb has rapidly scaled to become a global provider of accommodation, with more rooms booked every night than the largest global hotel chains. Upwork is gradually evolving from a marketplace for talent into an infrastructure that allows entire organizations to be built in the cloud, connecting freelance workers from remote locations without the need for a physical workspace and the costs associated with it. Amazon continues to expand its impact on traditional book publishing while making inroads into dozens of other retailing arenas. And while traditional pipeline giants Nokia and Blackberry have lost 90 percent of their market value in the last decade, platform giants Apple and Google have dominated the stock market.

In the world of platforms, the Internet no longer acts merely as a distribution channel (a pipeline). It also acts as a creation infrastructure and a coordination mechanism. Platforms are leveraging this new capability to create entirely new business models. In addition, the physical and the digital are rapidly converging, enabling the Internet to connect and coordinate objects in the real world—for example, through smartphone apps that allow you to control your home appliances at long distance. Simultaneously, organizational boundaries are being redefined as platform companies leverage external ecosystems to create value in new ways.⁷

In this new stage of disruption, platforms enjoy two significant economic advantages over pipelines.

One of these advantages is superior marginal economics of production and distribution. As we’ve noted, when hotel chains like Hilton and Sheraton want to expand, they build new rooms and employ thousands of staff. By contrast, Airbnb expands with near-zero marginal costs, since its cost for adding an additional room to its network listings is minimal.

A platform’s ability to scale rapidly is further enhanced by network effects. When positive network effects kick in, higher production leads to higher consumption, and vice versa. More freelancers participating on Upwork make it more attractive to companies looking to hire, which in turn attracts more freelancers; a wider array of merchants on Etsy attracts more customers, who in turn attract more merchants. A virtuous feedback loop is set in motion, fueling the growth of the platform at minimal cost.

Leveraging network effects, platforms are able to build open electronic ecosystems embracing hundreds, thousands, or millions of remote participants. Such ecosystems can be larger than most pipeline-based organizations and can have access to more resources than a traditional pipeline company can command. As a result, the value created in such an ecosystem can be much larger than the value created in a comparable traditional organization. Therefore, firms that continue to compete on the basis of resources that are owned internally are increasingly finding it difficult to compete with platforms.

THE IMPACTS OF PLATFORM DISRUPTION ON VALUE CREATION, VALUE CONSUMPTION, AND QUALITY CONTROL

Platforms, then, have economic advantages that enable them to grow faster than similar pipeline businesses. This phenomenon alone would lead to significant disruption of traditional industries, as platform businesses displace pipeline businesses at the top of the Fortune 500 rankings. But the era of platforms-eat-pipelines is disrupting businesses in many other ways as well. In particular, the rise of the world of platforms is reconfiguring the familiar business processes of value creation, value consumption, and quality control.⁸

Reconfiguring value creation to tap new sources of supply. As self-serve systems, platforms grow and conquer markets when they minimize the barriers to usage for their users. In particular, every time a platform removes a hurdle that makes the participation of producers more difficult, value creation is reconfigured and new sources of supply are opened up.

Wikipedia became one of the first platforms to tap a new source of supply when it created a system that enabled volunteers to capture and organize the world’s knowledge. Soon, YouTube was empowering any teenager with a video camera or a smartphone to compete with movie studios and television networks.

Today, we see the phenomenon of reconfigured value creation at work in many kinds of platform business. Singapore-based video-
streaming platform Viki leveraged a global community of enthusiasts (rather than hiring employees) to add subtitles to Korean and Japanese dramas, which it then marketed in the U.S. After the resulting rapid burst of growth, Viki was sold to the Japanese company Rakuten for $200 million. Facebook used a similar approach to find translators for its website instead of relying on professionals.

To fuel the continued explosion of new sources of supply, platform businesses are steadily lowering barriers that might discourage producers. Twitter attracted millions of content creators with its new standard literary format—the message of 140 characters or fewer. By comparison with traditional blogging, which required more effort and time, the tweet is a quick and easy form of writing, which encouraged many more users to become content producers.

In similar fashion, Airbnb works to lower the hurdles for its member-hosts by regularly conducting events and programs designed to illustrate and teach its best practices. Uber works to remove economic barriers that might discourage would-be drivers by providing financial incentives like sign-up bonuses. Platforms like Dribbble, Threadless, and 99designs have built large ecosystems of designers, largely owing to the democratization of the tools of design and printing over the last several years—yet another case of barriers to entry being lowered, in part through the help of platform tools.

The proliferation of new production technologies further enables the emergence of new groups of producers. Just as the smartphone camera expanded the volume of content on platforms like Instagram and Vine, the spread of 3D printing is likely to lead to a new range of platforms for industry design. However, technology often needs the support of innovative business design to produce massive reconfiguration of value creation. Software for word processing, typography, and graphic design has existed for decades, but not until Amazon’s Kindle Publishing platform offered quick and easy access to a large readership did a whole new ecosystem of authors emerge.

Reconfiguring value consumption by enabling new forms of consumer behavior. The advent of the world of platforms is also disrupting traditional consumer behavior, inspiring millions of people to use products and services in ways that would have been unimaginable a few years ago. As journalist Jason Tanz puts it:

We are hopping into strangers’ cars (Lyft, Sidecar, Uber), welcoming them into our spare rooms (Airbnb), dropping our dogs off at their houses (DogVacay, Rover), and eating food in their dining rooms (Feastly). We are letting them rent our cars (RelayRides, Getaround), our boats (Boatbound), our houses (HomeAway), and our power tools (Zilok). We are entrusting complete strangers with our most valuable possessions, our personal experiences—and our very lives. In the process, we are entering a new era of Internet-enabled intimacy.⁹

Not so long ago, activities like these would have been viewed as weird, if not downright dangerous. Today, they are familiar to millions, thanks to the trust-building mechanisms established by platform businesses. A host of upstart platforms that bill themselves as “the Uber of X” are working to alter consumer behavior in other arenas.¹⁰

Reconfiguring quality control through community-driven curation. When new platforms such as YouTube, Airbnb, and Wikipedia are launched, they are often widely criticized, even ridiculed. This is because, in their early stages, they fail to offer the quality and reliability provided by their traditional competitors. YouTube’s early content often bordered on pornography; much of it was pirated. Apartments listed on Airbnb would get raided by city inspectors responding to complaints about orgies. Wikipedia biographies declared many a living person deceased.

This is the problem with abundance. When platforms start unlocking new sources of supply, quality often nosedives—an example of the negative network effects we discussed in chapter 2.

These early days in the life of a platform can be difficult. However, over time, as the curation mechanism starts to work, the platform improves its ability to match consumers with relevant and high-quality content, goods, and services from producers. Strong curation encourages desirable behavior while discouraging and eventually weeding out undesirable behavior. As the platform nurtures quality, it develops the reliability needed to attract a wide array of customers. Mainstream competitors, often quite suddenly, find themselves competing with an unfamiliar upstart—one that is poised to grow much faster than they can.

Once platforms start scaling, they need to ensure that the curation mechanism doesn’t break down. Platforms that successfully scale their curation efforts gather better data on their users and improve their matching algorithms over time. They also ensure that manual curation is gradually phased out in favor of automated curation mechanisms based on socially driven feedback loops. For example, Quora, the question-and-answer platform, started out with in-house editors curating its content. Once a critical mass of users started participating, curation was largely turned over to algorithms driven by community judgments.

The rise of the world of platforms, then, doesn’t simply mean the emergence of new business entities competing with traditional incumbent firms. It also means the appearance of new forms of business activity, as these changes in the modes of value creation, value consumption, and quality control suggest.

The rise of platform businesses is transforming the structure of the business landscape in three specific ways that have largely gone unnoticed. We describe these three forms of platform-driven disruptions as de-linking assets from value, re-intermediation, and market aggregation.

De-linking assets from value. The most familiar platform examples—Airbnb, Uber, Amazon—come from the business-to-consumer (B2C) arena. How do you convert a product to a platform in the business-to-
business (B2B) arena? Many corporations own massive fixed assets like power generation plants, magnetic resonance imaging (MRI) machines, or tracts of farmland. How do you build platforms around those?

The answer: you de-link ownership of the physical asset from the value it creates. This allows the use of the asset to be independently traded and applied to its best use—that is, the use that creates the greatest economic value—rather than being restricted to uses specific to the owner. As a result, efficiency and value rise dramatically.

Two of this book’s authors (Geoff Parker and Marshall Van Alstyne) used this approach in response to a request from the state of New York to help in designing a smart market to integrate the state’s increasing number of distributed energy resources. These include solar rooftops, battery storage, and household generators, as well as the virtual storage that arises from a building’s thermal inertia. Buildings can be preheated or cooled or can delay heating and cooling within a couple of degrees without affecting occupants’ comfort. Together, these systems constitute resources that can be used to help the state’s electric power system accommodate the swings in demand and supply that are part the natural daily and seasonal cycle—but only if there is a system in place to handle the coordination. Currently, price signals arise from the system-wide wholesale market and are aggregated, thereby obscuring the clearer signals that localized data would provide.

To solve this problem, we recommended a platform that separates the physical assets from the value they create—that is, the energy produced. Such a platform would allow small sellers to meet the demand by the larger buyers of power, who then deliver it to end consumers. To obviate the need for users of the platform to constantly check market prices, the system should create automated signals so that sellers’ machines can be programmed to respond automatically to local relevant price and demand information distributed through the platform.

If the New York system is implemented, significant savings would be realized, since investments in new transmission, distribution, and generation capacity could be delayed or avoided entirely. In addition, the system, being highly flexible and responsive, could accommodate further deployments of renewable energy better than the current system can, as it relies on large power plants to respond to variability in supply and demand.

De-linking assets from value also allows expensive health care equipment such as MRI machines (each costing $3–5 million) to be used more efficiently. A single hospital may use just 40 to 50 percent of its own MRI capacity. Solution: time-slice the usage, and create a market for slices among other hospitals and small clinics that cannot afford their own machines. Separating the asset from the value it creates can drive the utilization rate to 70 or even 90 percent, producing incremental revenue for the machine’s owner.

It’s just one further step to turn a local market into a statewide or regional one. In fact, as of mid-2015, a Boston firm called Cohealo is taking that step, with the goal of becoming the Airbnb of expensive hospital equipment.

This concept of de-linking assets from value helped rescue Australian farmers from a drought more severe than that faced by California in 2015. Like California, Australia suffered from a patchwork system of water rights that limits the use of water to whatever an individual owner has in mind. The system was reformed beginning in 2003 by separating land ownership from water rights. With the help of a private company called Waterfind, Australia created a platform for water trading that greatly increased the economic efficiency of water use. A farmer with a low-value crop might stop farming and sell his water to a farmer with a high-value crop, or to a municipal water authority within transport distance. As a result, when Australia was hit by drought starting in 2006, its farmers suffered far less than those in California have. Now Waterfind is setting up a subsidiary based in Sacramento, hoping to apply the same platform-based solution to American agriculture.¹¹

Re-intermediation. During the first stage of Internet-driven disruption, many business commentators predicted that the biggest impact of the new information and communication technologies would be widespread disintermediation—the elimination of middlemen, or intermediate layers, from industries, establishing direct connections between producers and consumers. Experts pointed to the decline of traditional businesses like travel agents and insurance brokers, as consumers learned to shop for airline tickets and insurance policies without intermediaries. The same process of disintermediation was expected to sweep many other industries over time.

The reality has proven to be somewhat different. Across numerous industries, platforms have repeatedly re-intermediated markets, introducing new kinds of middlemen rather than simply eliminating layers of market participants. Typically re-intermediation involves replacing non-scalable and inefficient agent intermediaries with online, often automated tools and systems that offer valuable new goods and services to participants on both sides of the platform.

Networked platforms serve as more efficient intermediaries owing to their ability to use market-mediating mechanisms that scale. While traditional intermediaries relied on manual efforts, platform intermediaries rely on algorithms and social feedback, both of which scale quickly and efficiently. Moreover, their ability to gather data over time and use it to make the system more intelligent allows platforms to scale their intermediation in the market in a manner that was impossible for traditional middlemen.

Intermediation by platform businesses is transforming industries, creating new venues where market participants are connected with greater power and efficiency than ever before. In the music industry, artist and repertoire (A & R) executives, who traditionally associated themselves with a large record label in order to attract talent, now operate as independent professionals, scouting for talent on platforms such as YouTube and SoundCloud. Literary agents search for new authors on content platforms such as Quora and Medium. Small businesses run advertising campaigns without using traditional ad agencies or media channels by relying on Google’s AdWords platform. This, in turn, has led to the rise of an entire new range of intermediary agencies in Asia that manage AdWords campaigns for a fraction of the traditional price. Thus, while platforms displace large and inefficient intermediaries, they empower small and nimble service providers who leverage the platform to provide services to end users.

In another form of re-intermediation, platforms create a new layer of reputational information by leveraging social feedback about producers. Platforms like Yelp, Angie’s List, and TripAdvisor have created an entirely new industry based on certifying the quality of product and service providers—in the process driving some traditional industry certifiers (such as travel guide and consumer magazine publishers) out of business.

The re-intermediation produced by platforms is also changing the economics of participation for producers and consumers, leading to both new winners and new losers. In the traditional book business, publishers absorb (and spend) the bulk of book revenues, generally paying author royalties that range between 10 and 15 percent. By contrast, authors on Amazon’s self-publishing platform generally retain 70 percent of the revenues. Of course, Amazon authors must also defray many of the costs that a traditional publisher would cover, such as editing, design, publicity, and marketing—which makes the designation of “winners” and “losers” in this instance more complicated.

A similar economic shift in favor of app developers was set into motion with the emergence of the app ecosystem of the iPhone and Android. These new economics for participants are possible because of the superior marginal economics enjoyed by platforms.¹²

Market aggregation. Platforms are also creating new efficiencies by aggregating unorganized markets. Market aggregation is the process whereby platforms provide centralized markets to serve widely dispersed individuals and organizations. Market aggregation provides information and power to platform users who formerly engaged in interactions in a haphazard fashion, often without access to reliable or up-to-date market data.

Consider, for example, bus transportation in India. Different bus fleets operate on interstate, intrastate, and other routes. Many different types of bus exist, and pricing is extremely variable. Because the industry is so fragmented and unorganized, consumer search costs and decision overhead are high.¹³ Now a platform business called redBus is aggregating information from all Indian bus operators in a central plug-and-play infrastructure. The result is quicker, easier, and cheaper decision-making for consumers, and, in the long run, a healthier transportation market for India.

Many successful platforms perform a similar market aggregation function. Amazon Marketplace, Alibaba, and Etsy provide online sites where vendors of thousands of kinds of products from around the world can offer their wares to consumers. Service platforms like Upwork bring thousands of skilled professionals under a single roof, making it easy for potential employers to evaluate, compare, and hire them.

Platform businesses, then, are disrupting the traditional business landscape in a number of ways—not only by displacing some of the world’s biggest incumbent firms, but also by transforming familiar business processes like value creation and consumer behavior as well as altering the structure of major industries.

What can incumbents do to respond? Are entrenched companies that operate familiar pipeline businesses doomed to capitulate as platforms reshape and ultimately take over their industries?

Not necessarily. But if incumbents hope to fight the forces of platform disruption, they’ll need to reevaluate their existing business models. For example, they’ll need to scrutinize all their transaction costs—that is, the money they spend on processes such as marketing, sales, product delivery, and customer service—and imagine how those costs might be reduced or eliminated in a more seamlessly connected world. They’ll also need to examine the entire universe of individuals and organizations they currently interact with and envision new ways of networking them so as to create new forms of value.¹⁴ They’ll need to ask questions such as:

• Which processes that we currently manage in-house can be delegated to outside partners, whether suppliers or customers?

• How can we empower outside partners to create products and services that will generate new forms of value for our existing customers?

• Are there ways we can network with current competitors to produce valuable new services for customers?

• How can the value of the goods and services we currently provide be enhanced through new data streams, interpersonal connections, and curation tools?

Nike has proven to be one of the most intelligent incumbent companies seeking new ways to survive and thrive in the world of platforms. Some of the competitive steps they’ve taken may seem obvious. They aren’t.

Pipeline businesses like Nike have traditionally scaled in one of two ways. Some expand by owning and integrating a greater length of the value-creation-and-delivery pipeline—for example, by buying upstream suppliers or downstream distributors. This is referred to as vertical integration. Others expand by widening the pipeline to push more value through it. This is horizontal integration. When consumer goods companies grow by creating new products and brands, it’s an example of horizontal integration.

In January 2012, Nike brought out a wearable technology device, the FuelBand, to track user fitness activities, including steps walked and calories burned. Like many other companies, Nike has also been developing apps—in this case, apps related to sports and fitness. On the surface, these might seem like traditional product-line extensions aiming at horizontal integration. But in reality, Nike is testing an approach that, if successful, will lead to a new form of growth—one pioneered by platform businesses like Apple.

Over the last decade, Apple has grown in part by connecting its products and services to one another in the cloud. The ability to sync contents and data over iTunes and iCloud makes the ownership of multiple Apple products particularly valuable, and much more useful than (say) the ownership of multiple products from Sony, Toshiba, or another electronics manufacturer. Data acts as an integration glue to make all these products and services perform in concert.

This leads to a new form of growth. When multiple products and services connect and interact using data, pipelines can start behaving like platforms, producing new forms of value and encouraging users to engage in more interactions.

Like a suite of Apple products, Nike’s FuelBand-connected shoes and mobile apps are not simply separate products and services connected by a brand name. Instead, they constantly interact, providing users with information and advice about their athletic performance, their fitness regime, and their health goals. Unlike a traditional sporting goods company, Nike is building an ecosystem of users using the data it captures about them. Over time, it can leverage this data to create more relevant experiences for its users and connect them with one another to enable valuable interactions.

Nike is not the only company taking the first steps in transforming its traditional pipeline business into a platform business. Under Armour, a rival of Nike in the sports and casual wear market, has been moving quickly to build its own fitness ecosystem. In November 2013, it purchased MapMyFitness, a leading workout and exercise tracking platform. Then, in February 2015, it followed up by buying two more fitness platforms—MyFitnessPal, which focuses on nutrition, and Endomondo, a “trainer in your pocket” that mainly serves consumers in Europe. The total purchase price for the three companies: a hefty $710 million. “What’s really astounding,” one analyst commented, “is that none of the companies acquired make actual devices. Instead, everything is about platform and data. And—more importantly—users.” In combination, the three acquisitions boast 130 million platform users.¹⁵ Like Nike, Under Armour sees that the future of its industry is platform-based, and it is determined to be a disruptor.

Similar competitive moves are occurring in other sectors. Industrial giants including GE, Siemens, and Haier are connecting their machines to the nascent Internet of things.¹⁶ These networked machines constantly stream data into a central platform that enables them to interact with and learn from one another.¹⁷ Access to data from this network of devices helps each machine better utilize its resources and provide more reliable service.

Can any product or service become the basis of a platform business? Here’s the test: if the firm can use either information or community to add value to what it sells, then there is potential for creating a viable platform. This creates huge opportunities for a lot of firms.

Consider McCormick Foods, a 126-year-old company that sells herbs, spices, and condiments. By 2010, the company’s traditional growth strategies had run their course. McCormick had already expanded into a full range of food seasonings and established a foothold up and down its supply chain, including operations in farming and food preparation. The company was running out of growth options. CIO Jerry Wolfe heard about Nike’s move into platform-building. Could McCormick do the same?

Wolfe reached out to Barry Wacksman, a partner at R/GA, a leading New York design firm that had helped Nike design its platform. Together, they hit on the idea of using recipes and taste profiles to build a food-based platform. Wolfe and Wacksman used McCormick’s taste laboratories to distill three dozen flavor archetypes—such as minty, citrus, floral, garlicky, meaty—that can be used to describe almost any recipe. Based on personal preferences, the system can predict new recipes an individual is likely to savor. Members of the McCormick platform community can modify recipes and upload the new versions, creating ever-expanding flavor options and helping to identify new food trends, generating information that’s useful not only to the platform’s users but also to managers of grocery stores, food manufacturers, and restaurateurs.¹⁸

As these examples demonstrate, the ability to leverage platforms is no longer restricted to the Internet upstarts of Silicon Valley. Nor is the incumbent’s response to the forces of disruption restricted to merely attempting to fight back against the rising tide of platform power—or trying, usually in vain, to hurriedly build a copycat platform after their industry has been colonized.

The leaders of incumbent companies who understand the new business model can begin building tomorrow’s platforms in a way that not only leverages their existing assets but strengthens and reinforces them.

So platforms are eating the world. The disruption they are driving is reaching businesses one industry at a time and is likely to hit practically all information-intensive industries at some point. We’ve already seen it play out in the media and telecom industries. Retail, city transportation, and hospitality are currently under assault. We expect banking, education, and health care to start feeling the heat soon. These industries are highly information-intensive but have so far resisted platform-driven disruption thanks largely to protective regulatory regimes and the consumer conservatism driven by greater risk sensitivity. When YouTube shows a user a tasteless or pirated video, the damage is less serious than when a poorly curated platform connects a borrower to a loan shark, an education platform offers a college student inaccurate math or science information, or a medical platform matches a patient with an incompetent physician. Nonetheless, Lending Club, Udemy, and Jawbone are chipping away at these markets and making early inroads.

In the end, of course, bringing platform disruption to these and other industries is not primarily a technological challenge. The innovators who hope to create the great new platforms of the future need to focus on the core interactions in the marketplaces they hope to conquer, and analyze the barriers that limit them. Overcoming those barriers will enable the building of platform-based ecosystems in those markets. We’ll explore this topic in greater detail in the final chapter of this book, where we’ll share our vision of the future of the world of platforms.

TAKEAWAYS FROM CHAPTER FOUR

Platforms are able to outcompete pipelines because of their superior marginal economics and because of the value produced by positive network effects. As a result, platforms are growing faster than pipelines and taking leading positions in industries once dominated by pipelines.

The rise of platforms is also disrupting business in other ways. It is reconfiguring value creation to tap new sources of supply; reconfiguring value consumption by enabling new forms of consumer behavior; and reconfiguring quality control through community-driven curation.

The rise of platforms is also causing structural changes in many industries—specifically, through the phenomena of re-intermediation, separation of ownership and control, and market aggregation.

Incumbent companies can fight back against platform-driven disruption by studying their own industries through a platform lens and beginning to build their own value-
creating ecosystems, as Nike and GE are doing.