The Power Of The Platform Isn't Always What It's Cracked Up To Be

It seems like every business discussion today is just counting the seconds before the term “platform” comes up. Books and articles are written, pundits swoon and conference audiences nod and exchange glances in knowing agreement. Everyone, it seems, wants to transform their business into a platform.

Yet take the argument to its logical conclusion and the message becomes problematic. Platforms, as many have observed, function as multi-sided markets and therefore must connect value to value. So if everybody becomes a platform, who actually creates the value to make a vibrant marketplace?

The truth is that, while some amazing platform businesses have been created, there is also a considerable amount of survivorship bias going on. We notice the Amazons, Ubers and AirBnB’s, but forget about the thousands of platform startups that failed. Make no mistake, even in an increasingly networked world, you still need to create, deliver and capture value.

Creating Value

When Elance was founded in 1999, it seemed like a really good idea. Taking its name from a Harvard Business Review article titled The Dawn of the E-Lance Economy the founders sought to match freelance contractors and firms much like Monster.com did for full-time recruiting. Unfortunately, the business really never gained any traction.

So the investors decided to hire a new CEO and take the company in a new direction. Instead of matching firms to freelancers, it would help companies manage relationships. This idea met with much greater success and Elance became a pioneer in vendor management software. In fact, it became so successful that it attracted stiff competition from the likes of SAP and Oracle.

So Elance sold the software business and return to the original idea. This time though, it applied what it had learned about making relationships successful rather than just making matches. It partnered with training firms to help freelancers build and certify skills, created private talent clouds for customers and developed algorithms to create better engagements.

The strategy was a resounding success and the company later merged with oDesk to form Upwork, the world’s largest freelance platform. Elance is no exception either. From Netflix to Amazon to just about everything in between, it seems that eventually platform businesses eventually need to go beyond merely making matches and create a product or service.

Delivering Value

One industry that’s been absolutely ravaged by the platform economy is retail. With digital commerce platforms offering better prices, selection and convenience, how can brick and mortar retailers ever compete? After all, who goes into a store anymore?

Apparently, just about everybody. According to the most recent data from the US Census more than 90% of sales still go to traditional retail outlets. While clearly automation and e-commerce have depressed margins and sent many companies reeling, there’s still a lot to be said for an in-person, in-store experience.

Take a closer look and you’ll find that digital commerce has its limitations. For example, AirBnB’s estimated revenues of $ 2.8 billion are impressive, but represent less than 1% of the $ 500 billion hospitality industry. That shouldn’t be surprising. Many travelers — especially business travelers — are looking for more than just a hotel room, but also the service that comes with it.

That’s why Apple has invested so much time, effort and money into its stores and why successful platforms like Amazon and and Warby Parker are opening up retail locations. An online purchase is only a mere transaction, but in a retail environment, well trained salespeople can build relationships, cater to a particular customer’s needs, service purchases and upsell.

Capturing Value

One of the most attractive aspects of platform businesses is how easy they are to start. Pretty much anyone can build a website, aggregate disparate information and offer it as a solution to customers. You don’t need to rent expensive commercial space or even develop particularly sophisticated software. You just collect data, make it accessible and you’re in business.

Yet that is also the platform model’s achilles heel. Low barriers to entry lead to aggressive competition, which makes an expensive marketing war almost inevitable. That’s why becoming a successful platform so often depends on how much of a war chest you can attract from venture capital funds and, because platforms tend to be “winner take all” propositions, there are far more losers than winners.

To see how this often plays out, take the time to read Timothy B. Lee’s profile of Uber. Yes, Uber has driven down the cost of taxis, but it has lost billions in the process. It’s not at all clear whether it has actually built a sustainable business model or is just in a predatory race to drive competitors out of business so that it can use its monopoly power to drive up prices.

Sure, it’s possible that Uber may eventually become profitable, but is it really the paragon of the new economy that its advocates make it out to be, or a throwback to the robber baron days of Vanderbilt, Rockefeller and Carnegie?

Harnessing The True Power of Platforms

None of this to say that platforms are all hype and no substance. As I’ve written before, platforms allow us to access ecosystems of talent, technology and information in an incredibly powerful way. That, in turn, is changing how we need to compete, shifting the basis of competition from optimizing efficiency to widening and deepening connections.

To understand why, let’s return to Elance. As a freelance matching service, it offered little benefit. Most companies have their own networks of contractors they like to work with. It was only when it started to create value above and beyond a simple search function that it became a profitable business. There’s no free lunch. Value creation is simply not something you can run a successful business without.

In a similar vein, Amazon allows you to access ecosystems of retailers and that’s incredibly helpful and powerful, but its competitive advantage is its distribution system. If all it was doing was showing you offers, anybody could compete with it on an even playing field and that would make it very hard for the company to make money.

So don’t be fooled. Leveraging the power of platforms can be an excellent way to extend and improve a strong business model, but it cannot replace one.

Tech