Arguably the biggest mistakes in scaling multisided platforms have been made by the mobile phone industry. The industry collectively spent $115 billion on technology and spectrum to facilitate 3G high-speed service for cell phones. However, it failed to understand that the content to make customers willing to pay premiums for 3G service wasn’t yet available.
Not every mobile phone company has been badly damaged by failing to get the 3G platform right the first time around. NTT DoCoMo, which succeeded so dramatically in selling the relatively limited services available through the previous generation of mobile phone networks, has finessed the 3G content problem by expanding very cautiously into the new technology. By contrast, U.K.-based Vodafone Group PLC, the largest mobile communications supplier in the world, spent $20 billion for the spectrum needed for 3G services in the U.K. alone. Among other issues cited, Vodafone’s deal with Vivendi Universal SA to provide content apparently discouraged participation by competing content providers.
Business strategies would be relatively simple to design if platform businesses just had to worry about frontal assaults — the shopping mall across the street, the Microsoft Xbox challenge to the Sony PlayStation, Yellow Pages USA going head-to-head with the telecom company SBC Communications Inc. in some U.S. regional markets. In these cases, at least, firms are fighting on the same battlefield.
But sometimes platforms intersect in complex ways. One platform may connect customer groups A and B, while another links customer groups B and C. So the managers of the respective platforms must set prices and services with an eye on how the other platform treats customer B.
Free over-the-air television faced this problem with cable television. Free TV had succeeded by delivering relatively inexpensive-to-produce content to viewers and paying the bills with revenues from advertising. Cable television, by contrast, made most of its money from access charges, giving it the option to offer viewers less advertising as well as premium content. AOL Time Warner Inc., which delivers relatively rich content along with Internet access, is now facing a similar problem in competing with plain-vanilla Internet service providers.
Note, too, that price competition between platforms can be fierce when customers on one side have practical alternatives for obtaining services. The Milwaukee Journal Sentinel dominates the newspaper market in the city. That doesn’t mean it can exercise much pricing power, though: Advertisers in Milwaukee have many other ways to gain the attention of potential customers.
Tomorrow the World
Markets hardly ever cooperate by following simple rules derived from economic theory. In traditional markets, however, economic truisms can at least serve as benchmarks and starting points for more nuanced analysis. By contrast, multisided platforms, especially those in new markets, too often require clean-sheet planning from strategists. With multiple, yet interdependent, customer groups to serve, companies find that direct costs provide little guidance for pricing strategies. By the same token, early entry may yield first-mover advantages, or merely simplify the search for successful strategies by those that follow. Consider, too, that customer group interdependence makes it far more difficult to anticipate the impact of changes in the business environment.
Still, along with greater challenges go greater rewards to the nimble and the better capitalized. Many of the great business empires of the modern era — think eBay, American Express, Microsoft, Cisco — have prospered precisely because they have excelled at making multisided platforms work to their advantage. Today dating clubs, tomorrow the world.
Reprint No. 03301
David S. Evans (email@example.com) is a senior vice president at National Economic Research Associates in Cambridge, Mass., where he focuses on regulatory policy and business strategy in industries challenged by rapid changes in technology and market organization. Mr. Evans is a coauthor of Did Microsoft Harm Consumers? Two Opposing Views (American Enterprise Institute, 2000). He has worked as a consultant for the Microsoft Corporation.