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Platform Business Models and the “Winner Takes All” Economy

David
May 14, 2015

A recent analysis by @Jesse_Livermore on the blog Philosophical Economics (“Profit Margins in a ‘Winner Take All’ Economy”) explores why the most profitable companies have sustained elevated profits over roughly the past two decades. In this analysis, the dispersion of profits over that time has narrowed dramatically, with the most profitable companies experiencing outsized (1,000 basis points) increases in profit, and the bottom two bins experiencing lower profits.  

 

(credit: Patrick O'Shaughnessy, The Investor's Field Guide)

 

This effect is concentrated in “new economy” companies like technology and finance. What immediately got my attention was that @Jesse_Livermore uses Google, Apple, Microsoft, and Facebook as examples of this effect. All four of those companies are primus inter pares of how to successfully execute a platform business model.

In fact, the author references hallmarks of a digital platform strategy: “A first mover with a strong intangible product can distribute that product to the entire world at little cost [digital] … and build a profitable user network around it that other corporations will have an exceedingly difficult time competing with.”

At Apigee, we’ve long been advising our customers on the power of digital ecosystems and platform business models. Many of our customers use Apigee Edge and our experience and expertise to build digital platforms and ecosystems in pursuit of platform strategies for their companies or industries.

While platform business models likely do not entirely explain the effect observed in the post, it’s a strong indication of what can happen if a company successfully executes such a strategy as a first mover in its industry sector.

Platforms tend to increase the degree of innovation in complementary products, creating a cumulative advantage for platforms that already exist: as they grow, they become harder to dislodge, as one of the top researchers on platform competition explains in this European Business Review article,  "What Managers Need to Know about Platforms."

Business leaders should carefully consider what digital platform strategy they might execute. If they are pursuing a platform strategy, how can they accelerate execution? It's an important question, because in a world of “winner takes all,” being second isn’t nearly as profitable as it used to be.

 

Platform strategies will be a key topic on May 20, at the 12th annual MIT Sloan CIO Symposium. Apigee Institute director Bryan Kirschner will join Jerry Wolfe, CEO and founder of Vivanda, and Paddy Srinivasan, vice president of products at Xively, in a panel dicussion, "Platform Shift: How New Business Models are Changing the Shape of Industry—and the Role of CIOs." MIT's Marshall Van Alstyne will moderate.

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