Despite Their Huge Upside Potential, Why Do Most Platforms Fail?
SEPTEMBER 23, 2019
“For anyone who follows the world of business, it is now common knowledge that the most valuable firms on the planet and the first companies to surpass the trillion-dollar mark in value (albeit temporarily) are platforms,” note Michael Cusumano , Annabelle Gawer , and David Yoffie in their recently published book The Business of Platforms : Strategy in the Age of Digital Competition, Innovation, and Power. “Moreover, in a recent list of more than two hundred current and former ‘unicorns’ - startups with valuations of $1 billion or more - we estimated that platforms made up between 60 and 70 percent.”. What do we mean by platform ? The book offer a simple definition. “Platforms, in general, connect individuals and organizations for a common purpose or to share a common resource.” A platform strategy differs from a product strategy in that it relies on an external ecosystem to generate complementary innovations and/or business transactions. The effect is much greater potential for innovation and growth than a single product-oriented firm can generate alone. Platforms are all about network effects. The more products or services a platform offers, the more users it will attract, helping it then attract more offerings, which in turn brings in more users, which then makes the platform even more valuable. Moreover, the larger the network, the more data is available to customize offerings to user preferences and better match supply and demand, further increasing the platform’s value. The digital economy has been bringing the power of platforms to an increasing number of industries and applications. But to make things simple, the book divides all digital platforms into two basic types. Innovation platforms consist of common building blocks that enable ecosystem partners to create new complementary products or services. Examples include smartphone apps on Android and iPhones, digital content on iTunes and YouTube, and cloud applications on AWS and Azure. . The second type, transaction platforms , enable access to a huge variety of information, goods and services. Examples include Amazon Marketplace, Google Search, Facebook, Uber and Airbnb. The most valuable platform companies are hybrids , offering both innovation and transactional capabilities, as is the case with Amazon, Apple, Microsoft, Google, Facebook, Tencent and Alibaba. As part of the research for their book, the authors analyzed the performance of platform-based companies compared to that of conventional product and service companies in the two decades between 1995, - when the mass-market Internet first exploded onto the scene, - and 2015, - when they started the research that led to The Business of Platforms. Their analysis is based on the Forbes Global 2000 list of the world’s largest public companies. Their research was also published in an article in the May, 2019 issue of the Harvard Business Review , - A Study of More Than 250 Platforms Reveals Why Most Fail. The overall finding was that publicly listed companies associated with PC, smartphone and Internet platforms are quite rare. They only identified 43 out of the approximately 2000 firms they looked at - 18 innovation platforms and 25 transaction platforms. The median annual revenue of the platform companies was $4.3 billion, compared to $4.8 billion for the non-platform companies. However, the median number of employees for the platform companies was 10,000, around half the approximately 19,000 employed by the non-platform companies. Platform companies also had twice the operating profit, and much higher market values and growth rates compared to non-platform ones, which explains what the authors called the platformania of recent years. Platform companies fail at an alarming rate. To understand why and how they fail, the authors identified 209 platform companies that had failed between 1995 and 2015 and compared them to the 43 successful ones. The vast majority, 174 or nearly 85%, were transaction platforms; 21 were innovation and 14 were hybrid. Their overall average life span was 4.9 years and the median was 3 years. Transaction platforms lived on average 4.5 years, innovation ones 5.0 years, and hybrid 7.4 years. The reasons why these platform companies failed are numerous. After all, startup-ventures fail all the time. But the authors found four common mistakes that lead to failures: mispricing; lack of trust with users and partners; prematurely dismissing the competition; and entering too late. Let me say a few words about each. Mispricing. “The biggest business challenges for platforms are to nurture network effects and then translate the momentum and value created into a steady and growing stream of revenue and profits.” Marketplace network effects come from connecting buyers and sellers or consumers and producers, - be it a marketplace of physical products, services or information. User-driven networks effects, e.g., social media, come from connecting large number of users to each other. “Platforms make money by facilitating these connections and associated innovation.”. Kickstarting these network effects generally requires underwriting one side of the market to encourage the other side to participate. Think of Amazon subsidizing two-day shipping to attract buyers and sellers to its marketplace, while consistently losing money or earning meager profits for its first several years as a public company, much to Wall Street’s displeasure. Or Uber and Lyft losing billions of dollars even though both have now gone public. It’s not surprising that so many platform companies, especially transaction ones, run out of money before their network effects achieve liftoff. Mistrust. While getting the price right is necessary for success, it’s not sufficient. Platforms, transaction ones in particular, require two or more parties who generally don’t know each other to connect. “In such a world, building trust is essential.” The book cites the example of eBay China, which had a dominant share in e-commerce in the early 2000s. As was the case in the US, eBay China relied on PayPal as its payment system. But, Chinese consumers didn’t have the kind of banking and credit card relationships that underpin PayPal in the US and other advanced economies. Enter Alibaba. Unlike PayPal, it’s Alipay payment system was based on an escrow model which didn’t release payment until the consumer was satisfied. This enabled Alibaba to quickly capture the bulk of the e-commerce market in China, forcing eBay to withdraw despite it’s first mover advantage. Hubris. Prematurely dismissing the competition is another common mistake. There’s no question that first movers often have an advantage, and once the market tips in their favor they are likely to be the long-run winner. “But there is a better way to think about tipper markets: it is the winner’s opportunity to lose. Hubris, along with overconfidence and arrogance, to name a few misdirected traits, can produce spectacular failures.” Consider the eBay China example, or that of Myspace , the largest social networking platform in the world from 2005 to 2008. Mistiming. “Perhaps the most classic platform mistake is mistiming the market.” The book illustrates this last mistake with the smartphone market. For years in the early 2000s, Microsoft tried to recreate its Windows PC leadership with Windows Mobile and Windows Phone. But despite billions of investments, including the acquisition of Nokia’s mobile division in 2013, Microsoft eventually withdrew from the smartphone market. “Entering the business five years after Apple, and three years after Google, meant that Microsoft missed the platform window and never recovered.”. Many things can go wrong in a platform market because there are so many moving parts. “Firms not only have to coordinate internal operations, a supply chain, and novel methods of distribution. They also have to manage complements, overcome chicken-or-egg problems, and simultaneously stimulate multiple sides of a market… Despite the huge upside opportunities that platforms offer, pursing a platform strategy does not necessarily improves the odds of success as a business.”. Complex Systems Economic Issues Innovation Management and Leadership Services Innovation Society and Culture Technology and Strategy