Decoding the platform in the business context

The platform metaphor has spawned a multidisciplinary literature that stretches from information systems to management. Depending on the context, however, the term can refer to somewhat different concepts, leading to some confusion. Our primer on platforms helps solidify our understanding of the term, and this post builds on that base to discuss the emergence of digital platforms in business. With IT developments and the democratisation of the Internet (Web 2.0), new types of platforms have emerged that operate game-changing business models. As a result, the meaning of “platform” has taken on additional dimensions and there is a real need to decode the concept.

Digital platforms

The development of IT has involved ever more intangible technologies. The physical components have not gone away, but over time they have been encapsulated into increasingly abstract layers of technology. For example, analogue computer chips were replaced by digital chips with non-physical programmable languages. Then, programming languages themselves evolved from machine languages to more and more abstract (and more natural) languages such as object-oriented languages.

The gradual abstraction of IT started well before the Internet, but the emergence of the worldwide web opened up a new dimension. Thanks to the ability to connect digitally with other users across the world, platforms became able to integrate social interactions alongside hardware and software. Thus, the concept of platform began to extend beyond the realm of technology into society.

The first logical step in this transformation is to integrate interactions between the developers of technology themselves. For example, SourceForge, the source-code website, emerged as a hub of open-source software development. Any developer could join the online community and write code collaboratively. As a result, SourceForge became an extension of the Linux operating system platform by enabling and managing a distributed community of Linux developers.

But web-enabled digital platforms almost immediately extended beyond the IT industry. E-commerce was one of the first major applications of online platforms by mediating commercial transactions. For example, Craigslist enables peer-to-peer advertising, but transactions still take place offline. eBay integrates both peer-to-peer advertising and transactions. Amazon does the same for the retail industry by connecting retailers to shoppers every step of the way, from advertising to delivery.

Similarly, online platforms emerged for exchanging media products and services: initially semi-legal peer-to-peer file exchange services (like Napster) gave way to legitimate media distribution services, with various combinations of user-produced content, commercial content, advertising, and subscription services (e.g. YouTube, Netflix).

Platform businesses

The online business platform not only is the latest stage in IT platforms, but also embodies a new type of business model: the “platform business model”. In their book Platform Revolution, Parker et al. (2016, p.5) define a platform as “a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participative infrastructure for these interactions and sets governance conditions for them.” In other words, this model brings together distinct categories of platform users in order to exchange value. The Internet has played a key role in this development by radically lowering interaction (transaction) costs, thereby making many new platform business models viable.

Economists call it the two-sided or multi-sided platform. because it matches distinct social groups, such as producers and users, as well as other parties. Amazon is two-sided: retailers and shoppers. Credit cards are three-sided: banks, retailers and card-holders. More precisely, rather than social groups, multi-sided actually refers to distinct social roles. For example, YouTube allows users to alternately play the roles of content provider and content consumer. This distinction helps to dispel some confusion about online platforms: In order to qualify as a platform business, they should be multi-sided. Some online platforms do not qualify because they are actually one-sided. For example, email involves just email users.

The underlying technology is not integral to the concept: multi-sided platforms don’t have to be digital, nor online. However, it is the multiplication of massively popular online platform businesses that has triggered awareness of the existence of the platform business model, when in fact the model had been around for a long time. Credit cards, shopping malls, and even the ancestral matchmaker (Figure 1) are all platform businesses. Of course, these old platform businesses, just as every other industry, are also under pressure to digitalise and may reinvent themselves as online platforms.

 

Figure 1. Types of Platform Business Models

 

The multi-sided platform is a powerful concept that encompasses a variety of patterns of value creation and exchange across a variety of industries. Sharing platforms are one particular pattern found across multiple industries. Despite the initial sentimentality over the “sharing economy”, the most successful sharing platforms have turned out to be old-fashioned, hard-nosed businesses. People who “share” their assets (e.g. their cars via Uber, or homes via Airbnb) in fact provide a commercial service (a ride or hospitality) and as such are indistinguishable from producers. Incidentally, if Uber drivers became Uber employees, would Uber still qualify as a platform business? Probably not, because drivers would then formally cease to be independent producers, turning Uber into a “one-sided platform”, i.e. not a platform business. Thus, Uber-like businesses bring to light a boundary of the platform business model.

Conversely, the content industry was home to multiple patterns of platform before content was digitalised, and spawned new ones afterwards, and even more once it went online. Take media: At first sight, it looks like a straightforward exchange between content creators and content consumers, which would qualify media as a two-sided platform. However, consumers often do not pay for the full value of content, which is partly or entirely subsidised by advertisers. In turn, advertisers’ messages are delivered to consumers, which is another form of exchange over the media platform. Hence, media can also be three-sided. For example, broadcast TV connects program producers, advertisers and an audience – and this was before video was even digitalised and exchanged over the Internet.

App stores are of particular interest because they are a bridge between technology platforms and business platforms, and are perhaps one of the most multi-sided type of business platform. They augment IT platforms by providing connectivity to easily complement them with software applications. For example, the Android store makes it easier for users to extend the functionality of their Android operating system + smartphone platform with myriad apps. Previously, you had to buy a disk in a brick-and-mortar store and then install the application, often laboriously, on your PC OS of choice (usually the Wintel technology platform). But app stores are also business platforms as they enable transactions between software developers or publishers and software consumers or users, a process that used to be mediated by retailers. Just like other types of media, apps can be distributed under a variety of revenue models: free, freemium, upfront, subscription, advertising-driven, etc. When advertisers are involved, app stores become three-sided. Media apps add another layer of complexity by involving content-providers, which makes app stores four-sided. Such apps are really platforms within platforms. Thus, in more than one way, app stores are the epitome of platforms. This is due to the nature of software, which is both technology and content.

Final words

The platform has undergone a series of semantic and conceptual shifts. Starting off as hard infrastructure, it has become ever more intangible, going through progressive stages of virtualisation until it morphed into a business model. This transformation has been powered by progress in IT. The flipside is that IT has muddled the distinction between technology platforms and business platforms. To dispel the confusion, it helps to think of platforms as two main concepts. The first, more traditional concept is the platform as infrastructure (i.e. the technology platform). In this bucket, we can throw railway platforms, automotive platforms, CPUs, Java libraries, Wintel, smartphones, Android, iOS, etc. The second, more abstract concept is of the platform as a social forum or space for matching people and exchanging (economic) value or even (social or cultural) values (i.e. the social platform). This includes the political platform mentioned at the outset and the multi-sided platform, a.k.a. platform business model.

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A primer on platforms

A primer on platforms