There is something almost every company in tech seems to want, but few understand why they want it. Spend some time thinking about the reasons, and you may start thinking about every business in entirely new ways.
“Platform,” the grail of so many high-technology companies that aim for greatness.When you are a platform, essentially, you entice other businesses to seek customers through interacting with your business. To use another popular tech p-word, the “paradigm” example is Microsoft’s operating systems for IBM personal computers, which was first MS-DOS and then Windows.At first, the Microsoft OS faced many competing operating systems, but because it powered IBM’s PC – and then the many “IBM clones” from other companies – it won out.
The great number of PC owners attracted other software developers who built other things Microsoft wasn’t, increasing the attractiveness of the PC (hence more owners, hence more developers).It was a very successful platform, at least in that sense.
In a remarkably prescient 1996 article in The Harvard Business Review, the economist W. Brian Arthur identified the Microsoft platform as one of many instances of tech breaking the fundamental rules of traditional economics. Instead of producing goods that eventually reached diminishing returns (the price limitations of reaching the most possible customers), companies like this created increasing returns, by operating under less stable terms but with greater network effects and strong customer lock-in. Much has changed since Arthur wrote his article – in particular, the high-cost barriers to entry for many participants, the size of potential networks, and the steep technology learning curve that keeps customers from abandoning what they know. You can thank cloud computing for those cost reductions and increased reach, though big clouds themselves have high barriers to entry in terms of money and talent.Yet despite those changes, platforms endure, and the reasons why suggest something else is going on.Think about some more recent successes, and the things that propelled them.
Apple introduced the iPhone in 2007, intending a music player, a phone, and an Internet browser in a single device. A year later something interesting happened: Apple cut the price of the phone in half, and introduced the App Store, a place where developers could offer all kinds of software for the phone, leveraging other aspects like geo-location and the accelerometer. iPhone prices didn’t radically go up until 2014, when Apple had an impressive network of developers, apps, and, yes, customers. Facebook also provided access to customers, attracting developers to this model in its early stages. Things like signing on to other services through Facebook, however, made the company powerful for the way it gave members of the social network easy access to other services. In this case, other sites were interested in Facebook because of the size of its network.As we move further into companies that probably couldn’t exist without the cloud – outfits like Uber, which combine social networking, big data analysis, and mobility, all anchored in the cloud – we find platforms that grow strong through customers. But not, as in the old days, because it attracted developers, but because like Facebook sign-on, the growing size offered members additional benefits.So what has changed? Arthur’s prescient essay offers clues.
Businesses would succeed in a world of increasing returns, he said, by discerning the overall ecosystem in which their product lived, and reacting quickly to changes within that system of producers, consumers, allies, and partners. (Another great early theorist of our new economic system, Peter Drucker, also argued that information technology was creating “a new basic civilization” based on the biological metaphors of ecology.)The platform is, it turns out, a place where customers congregate, but more importantly, it is an information chokepoint, a place where there’s valuable data to be gathered about behavior, economic relationships, and popularity of goods and services. It’s an ecosystem, but also a means to reading the ecosystem.Which raises an interesting question: Could someone create something like an information-monitoring platform within a company? Are there information gateways that can be observed, or individuals who are particularly gifted in discerning and disseminating critical information about larger conditions of the corporate ecosystem?
Figure that out, and the margins will follow.