Platform Business Model

Just before Thanksgiving, I had the great opportunity to engage with strategy consultants and professors at University of Chicago on business strategy.  One of the key topics was Platform Business Models. 

What’s that you might wonder?   A platform business model brings together two or more distinct groups of customers, where each group represents a ‘side’ of the platform.   The value of the platform for one consumer group creates value for the other.  Sometimes this is referred to as a value chain.   

See Michael Porter from Harvard for more details.  Platforms create a network effect.  The more content on the platform, the higher the value created.   Here are a few examples:

-           Google:  users and advertisers

-          iTunes:  musicians and fans

-          PlayStation:  game companies and gamers

Platforms aren’t just technology-based.  A shopping mall is a platform.  The stakeholders are merchants and shoppers.  A hospital is a platform – healthcare professionals and patients.  The better the medical staff, the more patients.    

There is an interesting dynamic that transpires between the platform provider and content providers.  Content providers (e.g. games, software applications, music, movies, stores, medical procedures) are continuously demanding more features from the platform providers.  To maximize revenues and neutralize the power of the platform, content providers port their content across multiple platforms.  In some markets, like music and movies, content providers (until recently) didn’t have much choice beyond iTunes and NetFlix respectively. 

Platform providers on the other hand have several levers to pull.  First, they build proprietary features that create lock-in for the content providers and second they begin to develop their own content/applications to compete with their partners.  To convince content companies to build on their platform, they must create the first killer app.  This demonstrates the power of the platform and the breadth of scenarios that the platform is vital for success.  

Case in point is the new iPhone.  Initially when the platform (iOS) was getting  started, Apple needed Google for maps.  Apple owned the platform and began to better understand the requirements, patterns and usage of mapping and decided to write their own application.  Why?  Two reasons – one Google was encroaching on their territory and two – margin expansion.  As iPhone reaches maturity, they need to improve margin.  Paying Google for maps.

In my career, I have worked extensively in platform-based markets. Our content providers  are systems integration and consulting companies.  These partners provide excellent feedback into our product development process and they create customer solutions to fill gaps in our current release.  Partners are an incredible source of innovation and too often their input and feedback is missed.  My mantra – listening to one partner is like listening to the voice of 100 customers. 

Hope this gives you something to think about.  Platforms have two sides and you have to understand both dimensions to succeed in business.