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Managing the Maze of Multisided Markets

The founders of Palm Inc. were quicker to recognize the virtues of a multisided platform. They started with an integrated product, a handheld device with a terrific small operating system and a killer handwriting recognition application. But they responded to the evolving business environment by turning this traditional one-sided business into a two-sided platform business by encouraging independent software developers to write applications for the Palm. The company transformed this two-sided platform into a three-sided platform in 1997, when it started licensing the Palm OS to other makers of handhelds. Today 13 companies (plus Palm) sell “Palm-powered” devices.

NTT DoCoMo Inc., the giant Japanese mobile phone service provider spun off from NTT, runs a successful three-sided platform. Its phones enable users to access a variety of nonvoice services, ranging from interactive Sony PlayStation games to purchases from vending machines. Content providers get access to the network free of charge, paying NTT DoCoMo only a percentage of the fees charged to users of their premium services. The company generates most of its revenues from subscriber fees, which are billed according to the amount of information downloaded rather than time spent on the network.

The success of multisided platform businesses ranging from American Express to Palm to NTT DoCoMo has led some traditional one-sided businesses to restructure as platforms. Take voice mail. Several firms developed software that telecoms use to operate voice-mail systems in which the only customers are subscribers. Unisys, one of the largest messaging vendors, with 110 million voice-mail boxes worldwide, is extending this old technology to a four-sided platform. The company is developing platforms that connect content providers, subscribers, application developers, and telecommunications distributors.

Experiment and Evolve
There’s no substitute for experience in solving the chicken-and-egg problem, or in setting prices to balance demand. So late entrants can often learn a lot from pioneers. (See "Colonizers and Consolidators: The Two Cultures of Corporate Strategy.") Moreover, just because a variant of a platform strategy has worked well doesn’t imply that some clever follower can’t do it better. American Express didn’t start making money until it experimented with higher cardholder fees and lower merchant fees than its competitors were charging.

Or consider the role of first-mover advantages. During the dot-com boom, everyone seemed to agree on this formula for success: Price low to build market share quickly. Network effects, in which the value of the services for individual users rises with the total number of users, would then theoretically serve as a potent barrier to entry for competitors.

The idea looked good in the business plans that made the rounds of the venture capitalists. But it has hardly ever fit the realities of platform industries. Diners Club was first in payment cards, and it developed a huge network. Yet that didn’t stop American Express from toppling it. The first general Web auction site wasn’t eBay Inc. — it’s just the only one anyone remembers. Nor, for that matter, did Palm sell the first PDA.

Experimenting on a small scale and then expanding can help platform businesses avoid catastrophic losses. The mighty eBay started as an auction site for people who wanted to buy and sell Pez candy dispensers. It got the pricing model right (sellers pay, buyers don’t) and worked the kinks out of the platform design before rushing to fill the market. Over time it has expanded to other C2C products, to B2C, and ultimately to B2B. Yet where scale mattered, eBay managed to get there quickly. For example, it used its brand recognition and national market reach to become a powerhouse in used-car sales in a matter of months.

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