Platforms & ecosystem economics — how to use them to make money in your business
Business models for growth
Management models go in and out. Conglomerates had their moment in the sun in the 1950–60. Ling-Temco-Vought² made packaged meat, consumer electronics and military aircrafts. General Electric once owned NBC Universal and Kidder Peabody, the investment bank.³ Tobacco companies bought theme parks. Chocolate companies made razors. The 1990s were more harsh with perpetual spin-offs and de-consolidation as an attempt to remedy decades of bad decisions.
Since then we’ve had the tech boom and the digital revolution. This appears to be brining something very much resembling conglomeratisation back in vogue.
Though with strikingly sexier language.
Platforms and ecosystems — the current obsession of every executive — are multi-sided business models that create value via inter-party exchange. They do this by extending a focused, successful business into new unchartered territory with the aim of new growth and value creation. Now seen as the transformation lifeline for many incumbent legacy businesses seeking growth, these two terms are becoming used interchangeably and, worryingly, often without clarity of what sets them apart and how to use them.
Platforms are not ecosystems.
Ecosystems are not platforms.
Both have discrete charachteristics, mechanics, execution blueprints, and economics. Understand them so you can use them to your advantage in your business — big or small.
Platforms take friction out of a market
Fundamentaly, a platform is a 3 sided model — seller, buyer, broker — that exists to take friction out of a market. Amazon marketplace brokers an exchange between buyers and sellers. Facebook brokers an exchange between ad sellers and ad viewers. Microsoft brokers an exchange between software makers and customers with a problem. Google brokers an exchange of information between parties with problems and parties with solutions. Uber brokers a transaction between a rider and driver, AirBnB between a traveler and property.
[A Platform] needs to enable transactions between two parties, with the value being generated by the transactions themselves. — Joy Macknight
In all these examples the role of the broker — the platform — is to create a space where parties engage. To do that, the broker must capture attention and succeed at becoming a de facto desination for a particular need. Amazon is a desination for buying something quickly without needing to go into a shop. Facebook is a destination for social connection, and the attention that generates is leveraged into advertising. Uber⁴ is a destination for journeys, AirBnB for traverlers. Google is a destination for every question. Microsoft and Windows is a destination for productivity.
Domain dominance is key to success. Platforms are both modular and horizontal, built to dominate a clearly defined space. Sellers/partners/service providers are interchangeable and commoditised. Success doesn’t hinge on any particular relationship. Breadth wins.
Platforms tend to be clunky. As the primary purpose is to facilitate exchange, platform scale comes from transaction ease. This means onboarding parties as quickly as possible on all sides of the exchange becomes a priority. And in this pursuit the finesse of user experience is often lost. Amazon is rife with knockoffs, scams, and poor quality goods. Malicious content is rife on Google and Facebook. Not every Uber driver is lovely. Some AirBnB properties suck. And lets not forget computer viruses in Windows programs. Due to the sheer volume of parties transacting on a platform, and the primary objective of getting them in the door, control is effectively lost
Platforms make money from economies of scale.
By attracting high volumes of users they drive down transaction costs¹ and in so doing become even more attractive. The business model of a platform is hoovering up pennies on every transaction. Monetisation relies on giving value away to the players and customers in the platform in order to incentivise more players and customers to enter the platform. Microsoft has famously said it gives away 80% of the revenue generated on its platforms back to the software creators. Amazon takes a share of every transaction, a greater share where it delivers fulfilment services, but the sellers themselves make the predominant volume of revenue.
Ecosystems bring things together
In contrast, ecosystems exist to bring multiple parties together around a shared customer proposition. Ecosystems have orchestrators and partners coming together to create something unique that wouldn’t exist otherwise. Apple brings together curated and quality controlled apps in its app store. Disney builds universes around IP with multiple partners synchronising to create products and experiences. Netflix is en entertainment ecosystem, born out of series and movies and increasingly being leveraged into gaming and other content. Facebook is building an ecosystem around AR and VR, with devices, content, and monetisation models with a big bet on the future.
An ecosystem is a group of firms linked through non-generic complementarities, or investments in mutual adaptation. Ecosystem members have to coordinate to create a unique value proposition for the consumer. — Andrew Shipilov
The role of the ecosystem orchestrater is to define a system of value creation build around a customer need. The orchestrator seeks to extend itself into new ground by integrating across the value chain. The simplest form of integration in the value chain is via partners, with value being derived at transaction level. Extending capabilities to deliver across the vaue chain in-house is the more complex form of integration. The Apple ecosystem, with devices, apps, content, financing, gaming, and other services is a seamlessly vertically integrated ecosystems where partners provisioning across the verticals are often invisible to the customer.
Ecosystems are vertical and integrated to higher or lower degrees. Partners matter and inter-dependency both ways is created over the long term.
Ecosystems are built on curation, control, and customer experience
There’s a quality and finesse to ecosystems with value being derived from long term brand strength that builds customer life time value. Each individual transaction is less important than the full depth of customer relationships. Engagement and frequency are primary value drivers. In the short term, an ecosystem is calibrated to create engagement first and foremost, with monetisation taking a back seat as customer affinity is grown.
Ecosystems accrue value to the orchestrator over the long term. By taking a central role in the customer relationship, they define the roadmap for ecosystem evolution and follow large value pools. Orchestrator brand is central to the ecosystem, and this allows them to access partners of choice at optimal terms. By staying at the centre, they access customer data and leverage the customer relationship into new territory. Ecosystems scale with diversification around a core central proposition.
Combine at your own risk
Platforms and ecosystems are both fundemental business models. It’s possible to bring them together. Amazon is a platform first, but it’s also built a content and device ecosystem with Fire and Prime. Facebook is a platform first, but also has an AR/VR ecosystem. It’s easy to lose your way when crossing these models, and it’s not for the faint of heart. You need to develop strengths required to make both succeed while aggressively minimising the risks. If venturing into this territory, do so only once you have crystalised success in one model before extending in the next. Clearly defined boundaries between the territory for each is a must.
References:
¹ Don’t Confuse Platforms with Ecosystems, Andrew Shipilov, INSEAD Professor of Strategy, and Francesco Burelli, Strategy Consultant, Arkwright | December 22, 2020, https://knowledge.insead.edu/blog/insead-blog/dont-confuse-platforms-with-ecosystems-15801
² The Forgotten History of How 1960s Conglomerates Derailed the American Dream, Nicholas Gilmore, The Saturday Evening Post, November 1 2018. https://www.saturdayeveningpost.com/2018/11/the-forgotten-history-of-how-1960s-conglomerates-derailed-the-american-dream/
³ GE never made sense, Alicia Doniger, Nov 11, 2017, https://www.cnbc.com/2021/11/11/ge-never-made-sense-says-yale-corporate-leadership-expert.html
⁴ Why Some Platforms Thrive and Others Don’t, Feng Zhu, Marco Iansiti, Jan-Feb 2019, https://hbr.org/2019/01/why-some-platforms-thrive-and-others-dont
