Market Platforms and the Virtuous Data Cycle
In an earlier post, “Digital Ecosystems, Agile Apps, and the Experience Platform,” we discussed the importance of growing an app into an ecosystem by creating a common technology platform, where users, developers, and the enterprise all benefit from sharing app data. While the technology side of this is relatively obvious—it’s a formalization of shared services, a time-honored approach in distributed computing—the business side is less obvious.
The inversion of the product pyramid mindset
Operating a business as a platform requires a shift away from a first-party product-oriented mind-set to a model that builds value through reuse and sharing with third parties. There are different platform business models in use today. The three we’ve distinguished are product platforms, experience platforms, and market platforms. Each platform type has different purposes and success metrics. In this post we’ll focus on market platforms, the most difficult to build but the ones with the opportunity to create the greatest business value.
This has turned business models on their heads, in the sense that in a traditional product-focused value chain, a product is pushed out to the end-users and is then permanently consumed. But in a platform model, value flows to multiple players in the ecosystem: product developers, resellers, consultants, and customers. Not only can digital products be consumed an infinite number of times, but each usage of the product generates data that flows back and enriches the enterprise, and can in turn be made available to the whole ecosystem. This virtuous cycle is the heart of the digital platform model.
Market platforms and network effects
There are plenty of examples of companies and industries—both inside and outside the technology realm—that have thrived as platforms. In the market for online recruitment, for example, companies like Monster, CareerBuilder, and LinkedIn have provided platforms that benefit jobseekers on one side, and employers on the other. One can even view car manufacturers and oil companies as platform providers that benefit auto owners and gas stations in the market for internal combustion engines.
Generically, we can call the two sides “users” and “providers." EBay is a great example of a market platform, as are NASDAQ and Marketo.
This market platform business model generates value and profit from:
simplifying market-wide processes
rewarding each player in the value network for participating
Platform businesses in general thrive on network effects. As we mentioned in the previous post, the ratio of value to the cost of adding one more network user or provider grows disproportionately as the network grows larger. The more users, the stronger the network effect, and the stronger the platform.
In the digital economy, the platform model builds ecosystems through a virtuous cycle (as outlined by Geoffrey Parker and Marshall Van Alstyne in their paper “Innovation, Openness and Platform Control”) :
1. The platform sponsor (the enterprise) gives away platform value by exposing data to partners/developers.
2. The partners build apps for the installed base, adding new layers of value.
3. The platform sponsor benefits from increased sales and royalties.
4. The partners benefit from cost savings and access to the installed base.
Data: the currency of your digital ecosystem
A platform also introduces the ability to analyze the interactions that make up the activity along the value chain. For example, the widespread use of mobile devices at the customer end of the value chain—the edge of the enterprise—offers the ability to gather a wealth of intelligence about customers’ interactions with apps. It also enables a business to respond quickly to changes in the market or customers’ expectations.
Every company can find ways to project its business model through software, and become a platform. Through the technology platform, each player in the value network becomes part of a digital ecosystem, because of the ability to interact with the business from any app or device.