Being digital doesn’t make a billion-dollar startup. Being a platform does. But not the way you think.
Mary Meeker, venture capitalist superstar, in her 2015 Internet Trends presentation, listed the top global publicly-traded internet companies by market value. At first glance, the list looks diverse. There’s a consumer electronics company (Apple), a search engine (Google), two ecommerce companies (Alibaba and Amazon, at #3 and #5, respectively), and a social media network (Facebook, #4).
But what makes them similar is more important than what makes them different. They’re all economic platforms. And that has profound ramifications for all companies—whether they operate in the digital realm or the real world, and whether they’re start-ups or well-established incumbents.
For technologists, a platform is a foundational layer on which you build apps or services. But that’s only half the picture. But for economists, a platform is an intermediary that reduces the transaction costs for two markets to do business with each other.
If an economic platform plays its cards right, it can benefit from so-called indirect network effects. In an influential 2003 paper, economists Jean-Charles Rochet and Jean Tirole (who won the 2014 Nobel Prize in economics) observed that many markets with network effects “are characterized by the presence of two distinct sides whose ultimate benefit stems from interacting through a common platform.” For example, the more people who have a Visa credit card, the more merchants who want to take Visa. The more merchants who accept Visa, the more people who want a Visa card in their wallet.
This indirect network effect is what Meeker’s all-stars are exploiting. Apple provides an economic platform that brings together mobile app developers on one side, and people who want an app for that on the other. Google and Facebook bring together advertisers on one side and people in target demographic groups on the other. Alibaba and Amazon bring together sellers on one side and shoppers on the other.
If that description doesn’t feel right where Amazon is concerned, this highlights how platform competition can sneak up on you. Amazon’s Marketplace sellers are third parties transacting through Amazon’s site just as they might through eBay. Amazon’s goal is not just to sell you more stuff, but to reduce the transaction costs of online commerce so much that it becomes the preferred platform for anyone who wants to buy or sell anything over the internet (and maybe beyond).
The digital nature of companies in Meeker’s top five also makes a difference, especially in light of platform competition. Digitization and datafication turbocharge indirect network effects, reduced transaction costs, and rapid growth that make any platform successful.
Digital startups have recognized that data is a kind of capital and can even substitute for financial and human capital in creating new digital products and services. This insight, coupled with a platform business model, is a powerful competitive advantage.
But all is not lost for incumbent firms. In fact, a new whitepaper from MIT Technology Review Custom and Oracle, The Rise Of Data Capital, describes why large firms have a particular advantage in amassing data capital assets and using them to create competitive advantage.
Platform competition and digital disruption will likely come to more real-economy industries. But whether it will come from incumbents or upstarts is up for grabs.