THE RISE OF PLATFORM BUSINESS How digital networks are changing competition
Whether we have purchased a book through Amazon or watched videos on YouTube, most of us have used a digital platform – an online framework for social and marketplace interactions. From Alibaba to eBay to Google, platform dealings have become part of everyday life for consumers. Now businesses are creating these high-value exchange environments to facilitate interaction with one another and, in the process, a pivotal change in the way businesses compete.
Only someone living without an internet connection on a remote island or deep in the jungle could have missed the digital platform revolution. From Uber’s well-publicized assault on taxicabs to Airbnb’s creation of an entirely new hospitality business, digital platforms have transformed many areas of daily life – and now they’re migrating from business-to-consumer (B2C) commerce and into the realm of business-to-business (B2B) interactions as well. Global consulting firm Accenture states in its “Technology Vision 2016” report, “unparalleled growth of the digital economy has put it on course to account for 25% of the world’s entire economy by 2020, up from 15% in 2005; Platform business models represent a fast-increasing proportion of the overall total.” “What we’re seeing is that the platform business model is a huge piece of how a lot of big companies are planning their futures,” said Michael Biltz, managing director of Accenture Technology Labs in San Jose, California, who advises firms on platform development. “Not all companies will create platforms themselves, but most firms are looking to carve out a nice meaty role within some of these new ecosystems that are just starting to be developed.”
B2C platforms such as Apple and Facebook have become a routine part of everyday life; but B2B platforms are less well known. Examples include Panoptix from Johnson Controls, a US firm that makes heating and air-conditioning equipment. Panoptix is an innovation platform that allows developers to write and sell apps for building management issues such as energy conservation and then sell them to users online. Meanwhile, an Australian bank launched a platform in Indonesia to help small businesses monitor their cash flows. While the online tools are free, the data gives the bank insights into which businesses might need its loans, as well as their creditworthiness. IDC Research, a Framingham, Massachusetts, market intelligence firm that specializes in technology, calls B2B platforms “Industry Collaborative Clouds,” to distinguish them from consumer-oriented platforms. Eric Newmark, program vice president for IDC’s Cloud, SaaS and Industry Cloud practice, estimates that these platforms now have revenue of between US$2 billion and US$4 billion a year, a tiny fraction of the income in the US$2.6 trillion market capitalization B2C platform economy. But he forecasts dramatic growth in B2B platforms over the next five to six years, reaching US$25 billion to US$30 billion annual turnover as companies scurry to reap the same benefits B2C companies are getting from platforms.
San Antonio-based Frost & Sullivan, another technology consultancy, is even more bullish about B2B platform commerce. It expects this business to reach US$6.7 trillion by 2020, double the amount of B2C business. Leading the charge are Chinese platform firms like Alibaba, which enables small manufacturers in China’s cities to reach outlying wholesalers and retailers without the need for brick-and-mortar stores. Whichever estimate you believe, it is undeniable that many companies are financing B2B platforms out of their balance sheets, without the need for the venture capital that fueled the growth of most B2C platforms. B2B platforms also can run profitably on a much smaller scale with hundreds, not millions, of users. That puts platforms within reach for even small companies to convert their existing pipelines to platform ecosystem.
B2B platforms got off to a slow start, Newmark said, because established companies were initially reluctant to embrace cloud infrastructure. With cloud, software and data are hosted on remote server farms that allow companies to leverage the provider’s platform expertise without investing in costly software and staffing. “It took a while for companies to move past their apprehensions around security and privacy,” Newmark said. “Now, it’s all cloud-first strategy.” The Center for Global Enterprise, a New York City-based research institute, reports that North America, home of Silicon Valley and its deep-pocketed venture capitalists, is leading in the development of platforms of all types and has a near-monopoly on big global platform brands. North America is followed closely by Asia, especially due to China’s Alibaba. Europe is a distant third, hobbled by its mélange of languages and lacking a single large domestic market.
Annabelle Gawer, co-director of the Centre for the Digital Economy at the University of Surrey in Guildford, England, said that platforms generally fall into two categories: transaction platforms, where the technology facilitates some kind of business deal between two sides, as with Amazon’s marketplace; and innovation platforms, where the technology provides a core upon which third parties can develop complementary technologies, like Apple’s App Store.
“WHAT WE’RE LIKELY TO SEE ON B2B PLATFORMS IS SMALLER NUMBERS, BUT THE TRANSACTIONS THAT THEY’RE LIKELY TO DO WILL BE MUCH MORE VALUABLE.”PROFESSOR OF ENGINEERING AT THE THAYER SCHOOL OF ENGINEERING, DARTMOUTH COLLEGE
In both types of platforms, success depends on “network effects,” the upward spiral of growth created as producers attract buyers, who in turn attract more producers, who in turn attract more users. This spiral quickly creates a dizzying number of connections that multiply exponentially. Therefore, platforms are often called “matching engines.” However, “true platform innovators aren’t just market matchmakers using data-driven algorithms to drive better buyer-seller matches,” Harvard Business Review observed in August 2016. “They invest in new value creation. In platform markets, cultivating user credibility becomes as strategically important as reducing transaction costs. Successful platforms empower their users.” Successful platforms also remove what David S. Evans and Richard Schmalensee, in their book Matchmakers: The New Economics of Multisided Platforms, call “frictions.”In economics, frictions are transaction costs that keep buyers and sellers from easily forming connections, but they also could be delays in making a connection. Time saved making a dinner reservation through OpenTable, even when the restaurant is closed (or too busy to answer the phone), is an example of removing time friction. The more substantial the friction being addressed, the more likely participants are to join a platform.
One major distinction between B2C platforms and B2B platforms is volume. While B2C platforms often require hundreds of thousands of users to reach profitability, B2B platforms can succeed with significantly fewer.
“In the B2B space you could have a much smaller number of participants, perhaps as few as a couple of dozen firms, who see value in participating in one of these platforms,” IDC’s Newmark said. That simple math has led to dozens of specialized B2B platforms. Consider the container shipping business. On any given day, thousands of shipping containers sit unused. So, in 2016, the world’s largest container shipping line, Maersk, joined forces with China’s OneTouch, a platform owned by Alibaba, to provide online container booking services to Chinese companies. Bypassing freight forwarders reduced time frictions and cut costs. On consumer platforms, low prices are critical to maintain positive network effects, said Geoffrey G. Parker, a professor of engineering at the Thayer School of Engineering at Dartmouth College in Hanover, New Hampshire, and co-author of Platform Revolution: How Networked Markets are Transforming the Economy – and How to Make Them Work for You. For B2B platforms, convenience may be more important than pricing. “What we’re likely to see on B2B platforms is smaller numbers, but the transactions that they’re likely to do will be much more valuable,” Parker said.
Still, companies that aspire to become platform players may need to rethink traditional business models and dangle carrots to entice initial users to join their platforms. “In platforms, it’s more complex,” said Peter Evans, principal for Innovation Solutions at consultants KPMG in Atlanta. “You’re orchestrating a market and figuring out what is the right mix and how you engage.” One benefit of migrating a company’s business to a platform is that network effects generate a treasure trove of information about each transaction and interaction. That data can be aggregated and mined for insights, as the Australian bank is doing. Data also can generate incremental revenue streams, as Google is doing by monetizing the data generated by its search engine. For example, platforms that serve hospitals gather huge mountains of data about diseases and treatment that outside players, such as pharmaceutical companies, might be willing to pay to access. Sangeet Paul Choudary, who runs a platform consultancy in Singapore called Platformation Labs and is co-author of Platform Revolution, cites the example of India’s Mahindra Tractors. Mahindra once had a pipeline business, with a product created at the start and sold at the finish. Then Mahindra created a platform that its customers use to connect with other farmers, leasing their farm equipment during down times, much as Airbnb users rent unused space in their homes to travelers. Mahindra’s platform benefits from the increased user base, the goodwill of helping its customers generate additional income, as well as a trove of data. A key consideration for many B2B companies, Choudary said, is whether to join a platform that includes arch rivals or is owned by a competitor.
“IN PLATFORMS, IT’S MORE COMPLEX. YOU’RE ORCHESTRATING A MARKET AND FIGURING OUT WHAT IS THE RIGHT MIX AND HOW YOU ENGAGE.”PRINCIPAL FOR INNOVATION SOLUTIONS, KPMG
Setting aside these concerns to cooperate with other firms for mutual benefit has been dubbed “coopetition.” For some firms, Choudary said, “it becomes very difficult to come on board a platform that’s run by a competitor. However, the scenario in which you may be forced to do that is when the Number One player in the industry is somebody who has a significant market upside. If that player is considered to be the standard for your industry, then that hugely skews the market and you have to participate.” While platforms add a new wrinkle to this model, the model itself is an old one. For example, US banks, recognizing the impracticality of each bank having a point-of-sale device in every store, joined forces in 1958 to form the VISA network, which accepts most bank credit cards on one device. Most experts agree that one ingredient common to all successful platforms is a well-thought-out governance policy. Governance is especially important in the B2B world, where transaction sizes can be huge. “You want to have markets where you encourage good interactions, so you reward people,” Dartmouth’s Parker said. “And you punish or exclude them for doing bad things.”
While platforms can be attractive, the initial investment to start one can be staggering. Elon Musk, one of the founders of online payment service PayPal, noted in a 2013 interview with Khan Academy that the company spent US$60 million to US$70 million attracting consumers to use the service. Rather than create their own capital-intensive platforms, most companies may be better off joining another firm’s ecosystem, Accenture’s Biltz said. “Everybody’s trying to figure out what role they want to play in these new ecosystems because not everybody is going to become the next Uber or Amazon,” Biltz said. “A lot of them are going to become players that plug into these different ecosystems.” As B2B platforms proliferate, it seems likely that new and as-yet unimagined uses will take shape, just as they have in the B2C space. Combining the internet’s ability to attract thousands of distant users with a platform’s capacity to match them for all kinds of business deals, all while collecting reams of important data that can be sifted by artificial intelligence, suggests that the future of B2B platforms is extremely bright. The next Amazon or Uber could emerge from their ranks.”Zurück zum Seitenbeginn
For more information: http://3ds.one/3DEXPERIENCEplatform