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Published: November 12, 2013
 / Winter 2013 / Issue 73

 
 

From Netscape to eHarmony: The High Risks and Big Rewards of Platform Markets

Companies that link complementary partners, like dating sites or online auctions, can dominate for years or be swept away in an instant.

Platforms are market structures that bring together complementary partners. Think eBay, which pairs buyers and sellers online, or credit cards, which similarly connect consumers and the companies with which they want to do business. Platforms enable all sorts of relationships: Apple’s iOS joins mobile software programmers and iPhone users; myriad online dating services couple potential life partners. In short, any company that matches two sides of a market is a platform.

Everyone uses platforms, and company fortunes are made and lost through them, but the dynamics of how platforms operate and how winners emerge remain little understood—even among those organizations whose very existence depends on them.

Indeed, central to the strategy of any platform business is the imperative to simply survive. A quick survey of business history shows how easily platforms come and go. Facebook handily displaced MySpace. Internet Explorer eliminated Netscape and enjoyed a run of dominance, but now is threatened by Google’s Chrome. Yet those companies with staying power can grow to dominate industries in ways that can veer toward monopolistic—and earn supernormal profits. It’s a concept known as tipping.

When a platform market tips, a single winner emerges: Google in search, Microsoft Windows in business computing. Not all markets tip to a single winner quickly, but when they do, the effects are dramatic. Winners gain an outsized share of revenue and profit, and those that achieve long runs of supremacy learn to use their advantage to build greater and greater strength.

The tipping phenomenon hinges on a business’s ability to convene many users—and often a wide variety of them—on both sides of its market. Microsoft’s Xbox 360 game console would not be very successful if it had only one gamer using its product and one developer creating programs. Nor would it enjoy enduring success if it had 1 million software developers but only one gamer. A platform strategy needs many users of both types. Further, the platform increases in value to potential users as it attracts more of each type. The more sellers on eBay, the greater the selection of products for buyers. The more buyers, the more attractive the market for sellers. It’s a system that can quickly feed on itself and lead to tipping.

But how that winning firm is selected is an inherently difficult question. Indeed, it is hard to discern whether a platform-based market is in the process of tipping until we actually witness that it has tipped. To address this challenge, my colleagues and I ran a series of economic experiments in which subjects representing both sides of a market were given the option to choose among multiple competing platforms. Subjects received initial financial incentives for choosing each platform that increased as more of each type of user gravitated toward a given platform (to represent the rising value of the platform based on participation). But we also informed subjects that one platform was superior in its ability to match users.

Prior to the experiment, it was not obvious that all users would eventually migrate to the superior platform, because—as is found in practice—we also instituted switching costs. For example, once someone becomes a Facebook user, the cost of transferring from Facebook to a new social network is, at a minimum, the cost of learning how to use the new platform. There is also the cost of giving up all of one’s connections. Hence, the challenges faced by Google+.

We found, however, that despite allowing for switching costs, over time users ultimately all choose the superior platform. This suggests that the winner will be decided by the platform that can provide the most value to both of its user types. This result persists even when we allow an inferior platform to have a head start—to gain dominant market share and lock in customers who want to avoid switching costs. Perhaps, then, there is hope yet for Google+, assuming it can deliver the kind of step change in user experience that Facebook delivered in comparison with MySpace.

 
 
 
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