While smartphone usage is on a rise globally, tech-based companies have also started to emerge all across the globe. But the interesting pattern to be noted is that many of the company’s today are not solely reliant on selling products or services that they manufacture on their own. Instead, they create a network, where service providers are enabled to offer the value to the end customer. And while ensuring the seamless completion of these transactions, these ‘intermediary’ companies tend to capture some of the value for themselves. These are often termed as “platform economies”. Companies such as Amazon, Etsy, Facebook, Google, Salesforce, and Uber are creating online structures that enable a wide range of human activities. This opens the gateway for radical changes in how we live our everyday lives; starting from how we work, socialize, create value in the economy, and compete for the resulting profits. Their effects are distinct and identifiable, though certainly not the only part of the rapidly reorganizing global economy.
The world’s most valuable public companies and its first trillion-dollar businesses are built on digital platforms that bring together two or more market actors and grow through network effects. The top-ranked companies by market capitalization are Apple, Microsoft, Alphabet (Google’s parent company), and Amazon. Facebook, Alibaba, and Tencent are not far behind. As of last year, these seven companies represented more than $6.3 trillion in market value, and all of them are platform businesses.
The world’s most valuable public companies and its first trillion-dollar businesses are built on digital platforms that bring together two or more market actors and grow through network effects.
These platform businesses vary from one another in terms of their operational structure and how they function as entities. Google and Facebook are digital platforms that offer search and social media, but they also provide an infrastructure on which other platforms are built. On the other hand, Amazon, Etsy and eBay are marketplaces for numerous categories of products; either directly sold by the platform or by third-party sellers. Airbnb and Uber are the newest additions in the league of platform businesses; where they use these newly available cloud tools to force deep changes in a variety of incumbent businesses. Gone are the days of staying at a fancy resort during a holiday or waiting to hail a taxi for the daily commute. Instead, these companies have built the systems that enable home owners to become rental home owners, while enthusiastic commuters with private cars can share the available seats of his or her vehicle.
So what makes these platforms have a competitive edge over their ‘traditional’ counterparts? Firstly, these companies are very asset light, which allows them to scale at an unimaginably fast pace. While hotel companies will be spending billions on infrastructure and constructing the hotels to accommodate their rising number of guests, Airbnb simply increases their number of hosts in a new country – thus expanding in a way that is simultaneously faster and cost-effective. These companies also have zero marginal costs. For example Airbnb does not have to recruit, train and onboard a large number of employees to provide their accommodation services. Instead, they hugely benefit from their external resources (i.e. their hosts). And lastly, the thing that separates them from ‘brick and mortar’ businesses is their reliance on network effects. That is, the higher number of hosts there are on the platform, the higher the number of guests that incur; and it continues as an exponential loop.
Putting these unique traits of the platform economies aside, there are fundamental differences in which they create and capture value from the customers. Typically, a digital platform that uses the internet to connect dispersed networks of individuals to facilitate digital interactions between people. Therefore, within the platform economy there is a triangular relationship between three parties – the platform, the worker and the customer. It is the job of the platform to connect people with demand (the customer) to people that provide supply (the worker). Traditional linear business models create value through creating products and services that are sold to a customer. Platform based business models on the other hand, create their value by connecting users (both consumers and producers) on an online network. The platform does not own the means of production, but rather creates the means of connection. The strength of the platform economy lies in its ability to eliminate trade barriers by using increased information sharing between different players and circulation of data to its advantage. This creates a much more open economic system, with much greater participation of its users.
within the platform economy there is a triangular relationship between three parties – the platform, the worker and the customer. It is the job of the platform to connect people with demand (the customer) to people that provide supply (the worker).
While many might think that platform models are only relevant in a business to consumer (B2C) context, it is the business to business (B2B) world that is currently seeing the most activity in terms of platform adoption. We are all witnessing the emergence of B2B and B2C platforms in many sectors globally including retail, education, healthcare, transport, agritech, fintech and real estate. Global small and medium-sized business trade is on the rise, driven by the growth of platforms such as Alibaba, which allow much smaller enterprises to participate in global trade, without the need to invest in their own supply chains. As these platforms scale, control over trade could shift from countries to these digital platforms. Many experts even suggest that in a world dominated by platform companies that offer ways for customers and companies to connect, countries that want to act as global trade hubs must think like a platform nation.
Now many might think that platform economies operate as intermediaries and facilitate seamless transactions. So, the revenue models are supposed to follow a similar pattern. But in reality, there are multiple ways in which platform economies can capture value from the ecosystem that it has established. Some of the various types of revenue models adopted by platform economies have been mentioned below –
Admission fee: In the Admission fee model, the platform sponsor charges a fee for individual actions to place supply or demand. Examples of this are listing a property on Immobilienscout24 or posting job advertisements on Monster. Often different packages (5 or 10 packages) are offered in addition to the one-time use. The admission fee is mainly used to monetise the supply side and to bring standardised price structures onto a platform with infrequent, inhomogeneous or individualized transaction units.
Transaction Fee: Through transaction fees, platform sponsors benefit from every transaction that is enabled between two or more actors. This pattern occurs most frequently in the analysis and addresses the supply and demand side in similar proportions. In the case of very dominant platforms such as AirBnB, both parties carry part of a combined transaction fee. This pattern is particularly useful in cases of high transaction frequencies, with similar transaction sums and with little manual effort for the platform sponsor to drive the respective transaction to success.
Arbitrage: In the arbitrage model, the platform sponsor exploits a very widely separated relationship between actors on the platform, often associated with physical products, and creates its own position of power controlling the access between the actors. Although this position can also be recognized for most other patterns, the arbitrage model actively contributes to maintaining the position of power to the extent that the platform sponsor takes on not only an orchestrating but also a price-setting role on the platform by acting as an intermediary. The model seems to be particularly applicable for physical goods that are not subject to a short-term decline in value. The access for the supply side to the demand side often appears to be the strongest sales argument for the platform sponsor.
Data monetization: The indirect monetization of data generated by actors on the platform serves the platform sponsor as a secondary or even primary source of income. For the data-generating actors, the use of the platform, as in the case of Facebook for example, is often free of charge. By accessing the data, the platform sponsor enables third parties, among other things, to access relevant actors or valuable information. For platform sponsors who use data monetization for value capture, the value capture potential increases with increasing richness and relevance of the collected data from interactions and transactions between the actors.
Membership fee: In a membership model, actors pay for a particular or unlimited use of the platform infrastructure. The Fitness Startup Urban Sports Club, for example, offers its members three packages of services with different membership fees. This pattern is particularly interesting for models in which the number of emerging transactions per actor can be reliably predicted or the transaction goods can be efficiently scaled.
Freemium: Freemium is a modified form of membership in which a certain part of the platform products and services are made available to certain actors free of charge. An initially free activity on the platform lowers the entry barrier and creates the opportunity to convince actors to access the full range of services associated with the payment of a membership fee through persuasive offerings. The streaming platform Spotify for example also finances its freemium model by monetizing data through advertisements in the free package. Freemium appears particularly promising if the marginal costs for additional actors on the platform are low for the sponsor.
Service and product sales: The platform sponsor’s activity as a complementary actor on its own platform is particularly interesting if the respective company already has the necessary expertise and infrastructure and sets up a new platform to include other players from its own industry. Companies such as Amazon initially act as platform sponsor, generate an information advantage over the suppliers on the basis of their data sovereignty and then compete with their own complementors in promising product categories. The latter approach is often seen as inadequate use of the infrastructure operator’s market power and is rightly controversially discussed.
As the world continues to evolve, technology backed companies are radically changing how we operate in our everyday lives. Platform economies are not only making our lives more connected and seamless, but are also redefining how human species act, live and interact as a whole. For now, all we can hope is that these radical differences can lead to transformative positive impact in the days to come, as we implement technology to unlock a better future for us all.
