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Platform business ecosystem is a novel approach towards doing business today that helps to facilitate interaction between all the parties involved in it (whether consumer or producer). Even the established companies have shifted their business model from traditional linear approach and replicated platform-based models as adopted by the most valuable startups which are disrupting the market today.
Airbnb, Uber, Google, Facebook, Youtube, Netflix, Alibaba, PayPal are some of the most valuable startups/companies of the last decade but apart from their premium valuations what is the one factor common amongst them?
They are all platform businesses!
The platform is not just a piece of technology, rather it is a business model that does not own the means of production – instead, they create means of connection by facilitating exchanges between the various stakeholders. Hence, the platform business model has become the holy grail of business models today after the huge success of these envied companies.
Platforms represent a big change in the way industries have traditionally been organized. The key to success in such a fiercely competitive and dynamic business environment is the first and fast-mover advantage. Therefore, today seven of the top 10 most valuable companies globally are now based on a platform business model.
Not only do the new-age startups have this ability to adopt such a novel approach, but the existing corporations and businesses have both the resources and the ability to do so. They can create their own platform or at the very least become part of another platform’s ecosystem by leveraging their expertise.
How to Study a Platform Company?
There’s an easy framework to understand and identify platform companies which are:
- New things we couldn’t do earlier
- New ways of doing existing things
- New distribution models
- More efficient use of capital/labor/natural resources
Well, all of these pointers will suggest the readers to understand how the platform companies can be identified. A distinguishing factor of a platform company is the efficient use of labor/capital/natural resources which we can see in the above infographic ‘Platform in Action’ and now let’s understand some of them in detail…
The traditional supply chain which we know is, where the businesses have their own warehouses, factories, logistics, retail, and distribution network that keeps facilitating the entire supply chain. But imagine the platform ecosystem to be the new-age supply chain…
Let’s see a few examples…
Imagine a company like Alibaba which is the world’s largest retailer has no inventory of its own, Airbnb which is the world’s largest vacation rental provider has no properties of its own, Uber which is the world’s largest ride-hailing app has no taxis/cabs of its own. Isn’t it fascinating to know the scale of operations these companies work on with such an asset-light model?
These companies have distributed assets with well-coordinated labor and act as an intermediary between the producer and consumer. For instance, Youtube acts as a platform/medium where there are a lot of content creators and consumers at the same time; however, the role doesn’t stay the same as producers can become consumers and vice-versa.
It hits us hard sometimes when Uber/Ola/Swiggy charges us a higher amount for the same ride/order which would’ve cost us less. Right?
Well, these companies use the ‘Surge Pricing’ mechanism which is a dynamic way of inventory management as Uber/Ola does not own any taxis/cabs. Hence they are always dependent on third-party drivers to manage this demand and supply.
Imagine a person who is free for 3-4 hours a day on a daily basis, does not want to commute long distances for work. Can he/she become a suitable candidate for a Swiggy delivery agent or an Uber/Ola driver? This is exactly how these platform companies manage their supply chain in a very capital-efficient manner and with an innovative approach.
Why do we say that network effect is very essential to reach critical mass?
The network effect is a very common jargon used in context to the platform ecosystem where you’ll see there are many companies obsessed with numbers such as monthly active users, daily active users, etc. which determines the pace of reaching critical mass.
What is critical mass?
Critical mass is a self-sustaining point where there are so many users on the platform that their interaction alone will take care of the profitability of the business. Hence, the companies can achieve scale by building meaningful interactions by continuously engaging the users in dynamic ways which creates a positive feedback loop.
This is very common in social networks. If all your friends are on one social network, you would also want to be on the same network. There might be ten different chat applications out in the market but you’ll probably use Whatsapp as all your friends are on it. Hence, this creates a network effect for the companies on its own which helps to attain critical mass faster than expected.
Here’s where we come to our original question.
Are Platform Companies The New-Age Monopolies?
Yes, and No. But mostly Yes!
In the earlier paragraph, we discussed an example of a Chat App. Now, although creating a chat app is not a big task, and there are practically no legal/resource barriers to creating a chat app. Still, only a handful of chat apps are actively used by people worldwide.
WhatsApp is used by almost a third of the world population. In India, more than 90% of smartphone users use WhatsApp. There are a lot of apps that are more convenient to use, have more features, have more customization, and offer more privacy. So, what’s so special about WhatsApp?
So, even if making a chat app is easy AF, the network helps make it an effective monopoly.
What investment lessons do we have here?
The next wave of large public companies in the world will be mostly platforms!
If we see in the above chart, out of the total 126 unicorns, 57.9% of them are platforms and if we move internationally then these numbers are even surprising and mind-numbing. Countries like China and India have 80.9% and 88.9% of the unicorns respectively to be platform startups.
The growth and conviction of the platform companies cannot be left untouched as undoubtedly they also receive higher valuations than linear startups. The platform unicorns received an average valuation of $4.51 billion which is significantly higher than $2.49 billion for linear unicorn companies. The higher valuations also suggest that investors value platform companies and are more confident in the upside of their platform investments.
Our message to you is, a platform business is not an opportunity, it is an imperative!
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