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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

How does a platform business achieve a better value proposition than its rivals? The primary factors are increasing the quality of matches between complementary users and charging the most competitive fees. Examples of the first variable include eHarmony’s promise of a superior pairing through its advanced user profiling process or eBay’s user-generated ratings of sellers and buyers.

With respect to fees, there are a host of options. The two main classes are one-time charges to “join” the platform and those based on usage (such as transaction fees, service charges, and pay for placement). One could also charge fees based on match quality. Although less frequently employed, this strategy offers interesting potential. For instance, when the band Radiohead used its online delivery platform to provide downloads of its album In Rainbows in 2007, users paid whatever they wanted according to what they perceived as its value (or the quality of the match between album and fan).

Sometimes it makes sense to forgo fees on one side of the platform to bring users to the other. Consider a nightclub that is attracting a disproportionately large percentage of men. It could waive entrance fees for women or offer other incentives such as drink specials in order to attract more women. We know this as “Ladies’ Night.”

Once a platform market tips, the winner can consider modifications to its fee strategy. Netflix used to offer unlimited video streaming as a benefit for subscribers of the company’s DVD rental services. However, after amassing an enormous user base, it now charges separately for streaming.

Despite the long history of tipping, some platform markets seem impervious. The gaming console market appears to be stable with three platform companies: Nintendo’s Wii, Microsoft’s Xbox 360, and Sony’s PlayStation 3. Under what conditions can firms coexist in a platform market, escaping the doom (or missing the riches) of a single, surviving market leader?

We repeatedly found one condition that allowed multiple platforms to coexist for the long run or at least give the appearance they were doing so: heterogeneous consumer tastes within a given market. Dating sites provide a strong example: eHarmony, JDate, ChristianMingle, and Cougar Life each aspire to connect two sides of the romance market, but each serves a different preference among a diverse customer base. And in the gaming market, some users are seeking graphically intensive war games, while others want physically active yoga programs. Where different platforms serve different sectors of the market, multiple platforms can coexist.

Of course, that’s only at one level. When you define most seemingly heterogeneous markets one layer deeper—where customers with similar tastes reside—you’ll find most platforms do, in fact, tip. Thus, one essential element of success is accurately defining the market you intend to dominate: Is it video-game consoles or video-game consoles for sports enthusiasts? The former serves a heterogeneous market, the latter a homogeneous one.

This prompts other questions: How can you identify a platform market that is attractive to enter, and under which conditions is it appealing? If you seek to enter a market serving a relatively homogeneous set of customer needs—such as computer operating systems or credit card platforms—you must come equipped with a competitive advantage that allows you to provide a match between users (or an improved pricing scheme) that can overcome switching costs. When a market has not yet tipped, this can be a successful strategy. If the current market has already tipped to a dominant platform, however, it will be considerably more difficult to simultaneously pull enough users on both sides of the market away from the current winner. Imagine an entrant wanting to displace eBay. Few sellers would want to join a new site with no buyers, and few buyers would join a site with no sellers. The value proposition would have to be overwhelming.

 
 
 
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