Platform Firms Always Beat Product Firms
By Yukun Yang (OCIS Student Member), Maheshwar Boodraj (OCIS Student Member), and Abayomi Baiyere (OCIS Student Representative-at-Large) – slides available upon request, email Marco
On Monday, August 7, 2017, Professor Marshall Van Alstyne (Boston University) masterfully delivered the OCIS keynote at the 77th Annual Meeting of the Academy of Management in Atlanta, Georgia, USA. His keynote – entitled “Platform Ecosystems: How Networks Invert the Firm” – focused on three key ideas: we will see a rise in large and gigantic firms, platform firms always beat product firms, and network effects invert the firm.
In support of these ideas, Professor Van Alstyne illustrated that Walt Disney (which has 195,000 employees) has a market capitalization of $178 billion, while Facebook (which has only 20,000 employees) has a market capitalization of $489 billion – more than double. Also, Uber (founded in 2009) has a market capitalization of $62 billion, while BMW (founded over 100 years ago) has a market capitalization of $60 billion. In essence, platform firms are generating far more value with much fewer employees in significantly less time than product firms.
Professor Van Alstyne went on to argue that the product business model is broken. He shared the well-known example of Apple and Microsoft. Specifically, while Apple had the better product, Microsoft had the better ecosystem, and consequently, Microsoft enjoyed tremendous success in the 1980s and 1990s by garnering the ideas and contributions of third-parties. Professor Van Alstyne further argued that you do not have to be a high-tech firm to develop a platform. For example, McCormick (a spice firm) created a platform around spice by using their research lab to identify consumers’ flavor profiles and then provided recipes that matched these flavor profiles. Consumers then modified these recipes and uploaded them, which created more value for other consumers. McCormick then sold this data to consumer packaging firms and other firms that created ecosystems where users can create more value for other users.
When talking about the power of platforms, Professor Van Alstyne emphasized the importance of network effects – the idea that platforms become more valuable as more people use them. This increased usage creates the opportunity for firms to monetize the transactions that flow through their platforms. Further, because network effects cannot be scaled as easily inside the firm as they can outside the firm, firms must shift their focus from inside the firm to outside the firm. Firms can accomplish this transition by focusing exclusively on building platforms (such as Airbnb and Uber) or by building platforms on top of products (such as Apple and Samsung). This new focus changes the role of firms from creating products internally to selecting and curating products from external sources.
Professor Van Alstyne provided detailed examples of how platform business models change nearly everything we have learned in business school. In marketing, businesses have shifted from outbound messaging to inbound messaging. For example, Warby Parker ships five pairs of glasses chosen for its customers and encourages them to take and post pictures online to get votes from their friends, which creates viral marketing exposure. In human resources, the emphasis has shifted from employees to contractors, from internal experts to external crowds, and from subordinate dictation to community persuasion. For example, TripAdvisor provides advice from travelers which replaces travel agents. In operations and logistics, value creation has shifted from internal to external servicing. For example, Apple augments its traditional value network with platform value networks to remain innovative, while Airbnb exclusively uses platform value networks to become the world’s largest hotelier. In finance, community corporate valuation models that underestimate market expansion due to network effects fail to invest. For example, Instagram was sold for $1 billion, not because of the contributions from its 13 employees, but from the 30 million users it owned.
In R&D and innovation, platforms open themselves to third-party contributions. For example, while Myspace tried to create every feature on its own, Facebook focused on creating a robust platform that allowed outside developers to build new applications. In information technology, support has shifted from inside the firm to outside the firm. For example, Jeff Bezos (Amazon’s CEO) mandated that all teams expose their data and communicate through interfaces and that all interfaces designed in-house must be externalizable. In strategy, the goal of the firm has shifted from control, entry barriers, and differentiation to more valuable market strategies. For example, Salesforce knew that it was hard to compete with Oracle and SAP, so it used customer innovations to create AppExchange –the world’s leading business app marketplace.
What does the future hold? According to Professor Van Alstyne, we can expect to see more and more things becoming platforms. For example, cars as platforms, blockchain and finance as platforms, cities as platforms, internet of things as platforms, energy/smart grids as platforms, architecture and building information modeling as platforms, education as platforms, and healthcare as platforms. In closing, Professor Van Alstyne re-emphasized that we will see a rise in large and gigantic firms driven by demand-side economies of scale, that platform firms will always beat product firms because they create value proportional to their use, and network effects invert the firm allowing them to scale from outside the firm.
This summary (and the presentation) draw on the following work:
Parker, G., Van Alstyne, M. W., & Jiang, X. (2016). “Platform ecosystems: How developers invert the firm.” MIS Quarterly 41 (1), 255-266
Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. (2016). “Pipelines, platforms, and the new rules of strategy.” Harvard Business Review, 94(4), 54-62.