Platform economics and two-sided markets may sound like arcane concepts — straight out of an MBA course textbook. Yet, when I read up on these ideas and heard business and IT leaders discuss the topic at a recent event, they made perfect sense. Essentially, it’s about how new, open, online markets are disrupting and transforming businesses and industries in totally unprecedented ways. Value is created by an ecosystem of customer and partner interaction and complementary products, not from one single side of the market: the more participants, the greater the value.
We’re already aware of many “platform” pioneers such as Google, Amazon and iTunes that upended long-standing business models. But perhaps we haven’t thought about how radical these markets were when first introduced. I can remember the term disintermediation being used to describe how digital disruptors — say, online retail or on-demand entertainment — were taking business away from traditional brick-and-mortar stores and services.
Next-generation Content and Commerce
But now, the concept and the technology have leap-frogged those early models completely. Not only are cloud services, consumer devices, open software and “smart” devices ubiquitous, they are changing the rules — and the game itself. Just consider the changes that may take place now that Amazon founder Jeff Bezos owns the venerable Washington Post: It could, as Henry Blodget at Business Insider is quoted as saying, become “a laboratory for the next generation of integrated content and commerce.”
Marshall Van Alstyne, a professor at Boston University and MIT, has studied market disruption for many years. He writes that:
Platform businesses match and benefit from two-sided networks. Airbnb matches people with spare rooms to people with travel plans. YouTube matches content creators to content consumers. eBay matches buyers to sellers. oDesk matches tasks to talent, just as Apple iTunes matches users to apps and listeners to music...
Ever-cheaper information and connectivity have revealed demand-interdependent or “two-sided” network effects that are turning old concepts upside down. For instance, we intuitively understand that a product with network effects gets more valuable as more users use it: Think about telephones, faxes and email gaining critical mass and creating S-shaped growth. But two-sided network effects are different. Here, a product or service gets more valuable to one group of users the more another group uses it. Consider that a single Internet searcher gets more value as others produce more Web content, just as a single content producer gets more value as the audience of searchers grows.
Forging Ahead Without a Map
What does this all mean for your business? Our current issue of Smart Enterprise magazine gives you multiple examples — from Pinterest to Tesco to Rackspace — of businesses and industries not only reinventing themselves in the digital economy, but thriving. Can your enterprise say the same?
As Bezos wrote in a letter to his new employees:
There will, of course, be change at The Post over the coming years. That’s essential and would have happened with or without new ownership. The Internet is transforming almost every element of the news business . . . and enabling new kinds of competition . . . . There is no map, and charting a path ahead will not be easy. We will need to invent, which means we will need to experiment.
How are you benefiting from new digital opportunities and platform economics? Are your customers also your partners? Let us know how your are reinventing your business.
Editor and Community Manager
Smart Enterprise Exchange