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A quick question: What are the common characteristics of these brands?
eBay, Uber, YouTube, Tinder, Kickstarter, Google, Airbnb, Facebook, Visa, WhatsApp
At one glance, there might look like, “Yeah, they are just big brands.”
The truth is, they are all examples of a platform business.
What is a platform business? I define it as a business structure connecting communities and providing a transaction platform.
There are 3 important components in the definition:
- It is a business structure.
- The purpose is to connect different communities together
- It provides a place for communities to interact in terms of services and money
With the above definition in mind, you would realize it’s very different from traditional business.
Platform businesses are almost digital in nature, so for the purpose of this article, I’ll focus on platform as a digital platform business.
Traditional business vs. Platform Business
Traditional businesses typically run on the linear model. That means: Raw Material -> Transform to Product -> Selling at a Profit.
In the linear model, the value is in the transformation and/or distribution process. It’s purely input and output. Sometimes they also call it “Pipeline business.”
The platform business disrupts the linear model where they have no raw materials, transformation process, or reselling; they just provide a platform for related parties to work with each other. The value is in the transaction or exchanging elements like data, resources, or money.
Is Platform Business a Winner in Today’s World?
It is said that when a platform-based business enters a marketplace, it will usually win the traditional, linear business. Why is that so?
There are 4 factors that platform-based business wins. Let’s take an example of Airbnb (platform-based business) and Marriott Hotel Group (traditional business):
1. Platform businesses scale much better as there are no gatekeepers
If Marriott would like to expand into a new area, they will need to hire a process of acquiring the land, building the hotel, hiring staff, running promotions, and managing the operations.
In Airbnb, if they want to target a new area, they need to connect with the users in that targeted area and invite them to be hosts. Once they get a small group to be the host, Airbnb will open the bookings online right away.
As you can see, Airbnb allows anyone to be a guest or host with minimal control. In the case of Marriott, only businesses are involved.
2. Platform business could easily create supply and value
Since Airbnb allows anyone to be a host, there are no costs involved in having more supplies of rooms. In the case of Marriott, there is a huge capital investment needed.
3. Platform business get their data from the users via the feedback loop
Airbnb guests can review the quality of their stay online, resulting in automatic quality control. In the case of Marriott, they will need to request their guests to leave feedback. Marriott will have to gather feedback and conduct an audit before implementing any quality control.
4. Platform business inverts the business operations
Many traditional business operations are inverted, which means the focus is no longer on internal activities but on external ones. For example:
- Resource Management: The focus is on Customer Relationship Management and not on Enterprise Resource Planning
- Marketing Messages: Customers spread the message base on their experience and not on the company’s messaging system (e.g., advertising)
- Innovation: The innovation comes from crowdsourcing or open source community and not on company’s R&D
How Fast Does a Digital Platform Business Model Grow?
Platform business grows at an alarming rate. Traditional businesses like McDonald’s, General Electric, Walmart, etc. typically grow into huge businesses over a few decades.
Especially in digital platform businesses, the business can boom in just a few years.
Let’s take a look at a few that are already multi-million (or billion) dollars business today:
- Facebook: Started in 2004
- Airbnb: Started in 2008
- WhatsApp: Started in 2009
- Instagram: Started in 2010
- Tinder: Started in 2012
- TikTok: Started in 2016
Many of these businesses have disrupted traditional business, taking away a huge market share.
As such, many industries have jumped on the platform bandwagon because of the abovementioned businesses’ avalanches.
Some businesses jumped on the platform business model:
- Amazon: Created Amazon Marketplace, Amazon Kindle, and Amazon Ads
- Google: Created Google Ads, Android, etc.
- Microsoft: Bought Skype and LinkedIn
Some smaller businesses jumped on the platform using platform business marketplaces like Alibaba or Lazada.
Platform Business Today
It is important to note that while platform businesses are disrupting various industries, most companies today apply a mix of business models.
That means there are only a handful of businesses that are 100% platform business (e.g., Airbnb, WhatsApp, Facebook, etc.)
Many companies transform themselves to work within a Platform-powered Ecosystem to benefit from the platform business model.
A platform-powered ecosystem is a business network where the business creates an environment to develop platform businesses that impact the whole business.
You can see platform powered ecosystem as a collection of various platform businesses working together to support the traditional business model.
Some examples of the platform-powered ecosystem include:
- Amazon: The Amazon Marketplace and the Amazon Kindle platform business provides new product to the existing Amazon shopping platform
- Playstation: In addition to the games that Sony has produced, they have also allowed third-party game developers to produce games for their console
- Google: Acquired Waze to complement Google Maps
It is clear to see the benefits of a platform business, and it is no surprise that many businesses have jumped on the platform business bandwagon.
Common FAQ About Platform Business
Let’s answer some of the common questions about the platform business.
Are platform businesses good?
The bigger question is, “can a current business move to a platform?” Many businesses today have integrated platforms into their operations to compete in the modern world in a hybrid form.
Businesses today usually opt for incorporating a platform business into their operations as a more viable solution. We can see this clearly with Amazon, which started as an online bookstore and moved to a platform business with Amazon Marketplace. Apple is another good example when they open the App store, which rapidly grows the developers and users community.
What is not a platform business?
If the business is not a platform if:
- It relies on pipeline operations
- It has to create its own supply
Is Netflix a platform business?
Netflix is not a platform business as they create content under the Netflix brand.
Is Google a platform business?
Google is a platform business, and we can see this in Google Ads and Google Maps.
