They make it look so easy! Platform businesses like Alibaba, Airbnb and Uber have been so remarkably successful that one would think that building a platform business was child’s play. But for every success there are more failures and, when it comes to platforms, Apple and Google have both fallen flat on their face. The cause is almost always that managers do not understand how platforms work and compete.
Platform businesses bring producers and consumers together to exchange goods or services in some shape or form. In the case of Uber, drivers meet passengers, on YouTube viewers meet videographers and on Dental CPD Pro, learners meet educators. Apart from facilitating the exchange of goods and services, platforms create network effects and the site’s value increases are in direct proportion to the growing number of platform users.
Failure by platform managers to allow free exchange will most certainly spell the demise of the platform.
There are a few key errors that must be avoided at all cost:
- Failure to Create Effective “Openness”
As platforms are fuelled by the exchange between participants, managing the platform’s “openness” is crucial. The degree to which consumers, producers and others can access the platform, and what actions they can take must be carefully managed.
Platforms allowing too little access will keep potentially desirable users out and make network effects stall; Platforms awarding too much access tend to become devalued because of poor quality contributions.
Managing openness at Apple in the 1980s was not one of Steve Job’s fortes. On his platform developers had to pay for toolkits, didn’t want to do so and stayed away: the platform failed. By charging for the toolkits he put off the very software producers that he should have welcomed to Apple’s platform. Apple learnt a bitter lesson and the iOS platform grants easy and free access has been highly successful as a result.
Bill Gates was smarter and saw the necessity for facilitate a collaboration between software and hardware developers when launching Windows, and now Windows is the world’s most used desktop platform because Microsoft facilitated an open collaboration between software and hardware developers.
However, platforms can also allow too much access and core assets must be protected in order to provide financial gain. Google found this out the hard way.
Amazon and Samsung fragmented Google’s open Android platform and went on to create their own version that quickly overtook Google sales. Google reacted by creating the Google Play Store and restricting access to certain services. Difficult-to-replicate applications and important APIs (application programming interfaces) were restricted and transferred to Google Play.
- Not Engaging Developers
Openness alone will however not suffice. Platform operators must also entice contributors (software developers, video producers, educators etc) to use the site. In 2013, Johnson Controls sought support from developers for the construction of Panoptix, an energy efficiency platform for office space and buildings. By early 2015, however, the company ceased to accept new submissions and stopped their API support for external developers. Panoptix had failed to attract sufficient new apps to justify continued investment in the platform.
Platforms will only be successful if contributors gain from its use. They must be provided with innovative ideas, feedback on performance and design and be rewarded for participation. All users must gain from participation and the platform must deliver top benefits for all.
- Failure to Share the Benefits Equally
A platform will only succeed if all users can gain – most usually financially, but time can also be an important factor. The consumer, the producer and the platform operator will all be happy as long as they make or, in case of the consumer, save money on it. If one party fails to gain, their reason for participation will disappear as a result of which they will no longer frequent the platform and the platform will collapse.
In 2000, a group of car manufacturers, including Daimler-Chrysler, GM, Ford, and Nissan etc. joined forces in the creation of Covisint, an online marketplace for auto parts. But Covisint’s platform heavily favoured car companies and drove suppliers into a price war, reducing their earning power to next to nothing. The platform failed to be profitable and was eventually sold for close to $7 million, a small fraction of the huge $500 million investment made by the car manufacturers. Generally, platform operators should refrain from keeping too large a cut and instead share earnings fairly with all users.
- Lack of Clear Focal Point
Platform managers must carefully choose a focal point for their site when launching it. Platforms can be consumer, product or consumer & product focused.
Despite much fanfare, Google Health failed. Google’s aim was to provide a premier site for consumers to access health information. The company focused on the consumer, neglecting doctors and insurers, and failed miserably.
Consumers might have used the platform if doctors and insurers had been willing to engage. But the loss of control over their own data didn’t go down well and the site failed.
- Failure to Prioritise Critical Mass Over Money
Another example of an epic failure is Billpoint, the payment platform introduced by eBay before the inception of PayPal. Starting off as the frontrunner, Billpay should never have allowed PayPal to gain pole position. But the creators of PayPal made smarter choices. While Billpoint was busy focusing on fraud prevention, PayPal prioritised ease of use and value, in order to increase the number of people using the service. Billpoint’s higher transaction fees failed miserably against PayPal’s $5 and $10 gift payments to users who signed up other users.
Fraud prevention shouldn’t have come at the cost of putting customers off despite the fact that such measures may bring some savings. By contrast, at Paypal fraud costs were absorbed by the company. The simplification of transactions combined with the reward system for consumers helped it grow exponentially and it soon it overtook Billpoint as the number one payment system.
EBay ended up buying PayPal for $1.4 billion and quickly phased out Billpoint. Lessons had been learnt and growing user numbers is now very much a priority.
On platforms, the larger the number of users, the greater the gains for all involved.
- Lack of Imagination
If the platform itself fails to attract users, it is doomed to fail. A platform that overemphasises a product rather than provide and ecosystem will not be successful.
Sony, Hewlett Packard and Garmin all made the mistake of focusing solely on the product rather than create a fruitful business and product ecosystem.
Before the birth of smart phones, HP was the #1 calculator supplier. Today, consumers simply purchase calculator apps on iTunes or on Google Play – at a fraction of the cost of a handheld device and consequently HP lost its market.
Within their ecosystems, Apple and Google provided a platform connecting app producers and consumers who need calculators.
Sony, though it had been the dominant force in both the portable music and gaming space, failed to create a successful music or gaming platform despite its technological prowess. Consequently, it allowed other players in the market overtake and outdo its music and gaming provision to consumers.
Garmin Satellite Navigation devices were also pushed out of the way by clever ecosystem creators. Initially, the company managed to sell lots of devices until the day, Apple, Google Maps and Waze established an ecosystem that allows users to easily use their mobile phones for their mapping needs. Of course, smartphones outsold Garmin Sat Navs quickly and the vast majority of people now choose mapping apps over dedicated sat nav devices.
Both iOS and Android platforms have established highly effective ecosystems and collaboration between producers, developers and consumers much to the chagrin of traditional manufacturers of products like cameras, voice recorders, flashlights and fitness trackers. Thanks to this platform-based collaboration, consumers are now in the lucky position of using one device for a plethora of functions.
Platforms and ecosystems are an entirely new way of providing consumers with traditionally one-dimensional products and producers and promoters of such products must broaden their horizons and embrace this new product and service provision method.