Everybody wants to build a platform – the term has become inflationary in startup and innovation circles. That’s understandable because successful platforms are amongst the most profitable and most rapidly growing businesses in the world.
However, building a successful platform is exceedingly risky and difficult. A thorough understanding of platform economics is key (that’s one of the things Mark Zuckerberg excels at, BTW).
This presentation provides an introduction to platform economics and covers major topics such as network effects, winner-takes-all effects, growth mechanisms and strategies for complementors
Apidays New York 2024 - The Good, the Bad and the Governed by David O'Neill, ...
Print Money Like Mark Zuckerberg: Understanding Platform Economics
1. Print Money Like Mark Zuckerberg:
Understanding Platform Economics
Innospective Innovation Briefing
September 2018
www.innospective.net
2. Digital platforms dominate the modern economy
• The 5 most valuable companies in the
world are all platform companies:
Apple, Amazon, Alphabet/Google,
Microsoft, Facebook
• Many industries are getting disrupted by
new players who use platform economics
against incumbents (e.g. Uber, Spotify,
Netflix)
2Source: Kleiner Perkins
4. What is a platform?
• Platform (in the economic/technical sense) =
a foundation that connects individuals and organizations so they
can innovate, transact and/or interact in ways not otherwise
possible or economically efficient.
• Digital industry platform = an online environment that provides
access to goods or services with near-zero costs of access,
reproduction and distribution.
• This presentation is focusing on the last type and will use the term
“platform” in that sense.
Source: Cusumano et al., Brynjolfsson et al. 4
7. Pillars of digital platform economics
Note: Several of these pillars are closely related or depend on each other. For example, a winner-takes-all dynamic couldn’t exist without near-zero marginal
costs and network effects. But it still makes sense in practice to think about these dimensions separately when designing a platform strategy, be it as a platform
owner or complementor.
Sources: Cusumano et al., Brynjolfsson et al, Innospective analysis 7
Platform
Network
effects
Enabling base technologies
e.g. mobile devices, cloud infrastructure, AI, networks
Multi-sided
markets
Near-zero
marginal
costs
Winner-
takes-all
dynamics
Asset-light
business
model
Modern digital platforms rest on five economic pillars that enable their growth and profitability.
9. Asset-light business models
• Most quickly growing digital platforms don’t own the most expensive assets (or incur
the majority of the necessary costs) to provide their services.
• Examples:
• Uber doesn’t own cars
• Airbnb doesn’t own hotels or apartments
• Apple doesn’t employ the developers necessary to create millions of apps in its iOS App Store
• There are exceptions to the rule and some hybrid models.
Source: Yahoo Finance, company financial reports 9
4%
26%
Walmart Alphabet/Google
Operating income as % of
revenue
$500 B
$22 B
$111 B
$29 B
Revenue Operating Income
Revenue and Operating
Income
Walmart
Alphabet/Google $205 B
$115 B
$197 B
$42 B
Total Assets Property Plant and
Equipment
Assets
Walmart Alphabet/Google
A comparison between Walmart and
Alphabet/Google shows the effects of a
(relatively) asset-light model: While Walmart
has almost 5x the revenue of Google, the latter
produces significantly more income.
Both companies have a similar amount of total
assets, but Alphabet’s is mostly cash. It only
needs about 1/3 the tangible assets (here
represented by the “Property, Plant and
Equipment” number) to generate higher
profits. And that’s despite Google’s giant global
network of expensive datacenters it needs to
run its business.
All numbers 2017 fiscal years
10. Near-zero marginal costs
• Digital platforms can typically add new users at a minimal
cost once the necessary infrastructure is in place.
• These are the same dynamics that can be observed in
other industries:
• Pharmaceuticals: It costs a lot to develop a new drug, but
making another dose is typically cheap.
• Installed software: Developing a new operating system costs
billions, but installing it on another device is nearly free.
• Depending on the nature of the business the costs to build
and operate the underlying platform can be high. Average
costs per user can still be substantial and rise over time as
a platform expands its functionality, but low marginal costs
mean that profitability often increases with growth (see
Facebook example on the right).
Source: Facebook financial reports, Innospective analysis 10
Facebook’s average revenue per user rose from $3.25 in 2010
to $19.09 in 2017, a 488% increase. Its average costs to serve
these users increased as well, but somewhat more slowly,
leading to a significant growth in profitability per user.
0
500
1000
1500
2000
2500
$-
$5.00
$10.00
$15.00
$20.00
$25.00
2010 2011 2012 2013 2014 2015 2016 2017
Users(MM)
Avg.revenue/costperuser
Facebook User Profitability
Monthly active users at EOY Avg. Revenue per user
Avg. Operating costs per user
12. The principle behind network effects:
Metcalfe’s Law
• The value of a network grows by the square of
its number of users (not linearly) as new
users join. A network with n participants has a
value of n2
• Main reason: The number of unique possible
connections in a network with n participants =
n(n-1)/2
• Named after Bob Metcalfe, the inventor of the
Ethernet networking standard
• This explains the quick continuing growth of
successful networks because the value
increases much faster than the number of
participants.
Source: https://commons.wikimedia.org/wiki/File:Metcalfe-Network-Effect.svg 12
Two telephones can make only one
connection, five can make 10 connections,
and twelve can make 66 connections.
13. Winner-takes-all dynamics
• Platform-driven markets typically show a
strong winner-takes-all or winner-takes-most
effect, with one or few players taking almost
all market share.
• This is driven by near-zero marginal costs and
strong network effects.
• If a new user joins dominant platform A, the costs
are low but the generated benefit is higher than
joining smaller platform B.
• However, markets that exhibit low barriers to
entry (e.g. low capital needs) or are subject to
disruptive technological innovation can see
even once dominant platforms lose their
importance rapidly.
Source: Statista, Innospective analysis 13
Winner
takes all
Near-zero
marginal costs
Network effects
Low barriers to
entry
Disruptive
innovation
A typical example for a winner-takes-most market: Android has 88% of the
mobile operating system market, followed by iOS’s 12%. Nobody else matters.
22. Defend against new entrants
• History shows: Even the strongest platform position is not unassailable.
New market entrants with a different approach and unique economics
can unseat incumbents within just a few years.
• Even very dominant platforms have to remain vigilant and defend
against new entrants, possibly through early acquisitions.
• Facebook buying Instagram, WhatsApp, Oculus, then trying to buy Snapchat and
just copying it when that failed.
Sources: Statista, StatCounter, Asymco 22
Mobile Operating Systems: Global Market Share Web Browser Market Share Microcomputer Market Share
Nokia
Google
Microsoft Google
26. There’s money to be made as a platform
complementor – but levels differ
• Platform owners like to point out how much money their respective complementors/ecosystem partners
make.
• Apples-to-apples comparisons are hard, but there is often a clear difference in how much of the total
ecosystem value the platform owners capture vs. leave for partners.
• The following comparison of the platform owner’s relevant revenue (blue) vs. ecosystem revenue (red)
shows that depending on the market, platform take rates can be very different. More complex platforms
(such as Microsoft Windows, which opens many revenue opportunities for partners in software products,
training, integration etc.) tend to have a larger ecosystem than simpler platforms.
Sources: IDC, company financial reports, Midia Research, Innospective analysis 26
62.5
580
Microsoft corporate revenue Microsoft ecosystem revenue
Microsoft-related revenue (2010, $B)
29.9
26.5
Apple services revenue iOS developer revenue
iOS-related revenue (2017, $B)
4.1
7.4
Spotify revenue Total streaming music revenue
for record labels
Streaming music revenue (2017, $B)