Stepping up: the rise of the platform economy

Platform business models represent a large proportion of the overall total but what do we mean by platform?

MIT Professor Michael Cusumano defines it as follows: “A platform or complement strategy differs from a product strategy in that it requires an external ecosystem to generate complementary product or service innovations and build positive feedback between the complements and the platform.”

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The platform economy has transformed the way goods and services are produced, shared and delivered.

Gone are the days where individual firms are competing for customers. A newer, flatter and more participatory model has emerged, whereby customers engage directly with each other.

Quid pro quo

There are stark differences between the traditional business model, where value creation is linear and one-way, and the platform model.

The Platform-Driven Business Model demands efficiency, is two-way and continuous.

Take for example, Uber, a company that is thriving in the new digital economy. An Uber driver creates value by announcing their availability and sharing their location. By sharing information about themselves, it helps match them with the right user, in the right location, and at the right time.

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The platform business model represents a great opportunity to create growth in the digital economy.

According to Harvard Business Review: “With a platform model, the critical asset is the community and resources of its members.” There is a clear shift from the control of resources to orchestrating them. 

Essentially then, Uber is really just a transaction broker.

Disruptive innovation

In December Uber was valued at $68 billion, having taken only five-and-a-half years to surpass the valuation of 107-year-old General Motors. Uber has clearly disrupted the taxi industry. There are now as many Uber drivers in London as taxis.

Likewise, Airbnb with a valuation over $25 billion has shaken up the global hospitality industry. It is now the world’s largest hotel chain.

What do these Unicorns have in common?

They are network orchestrators and transaction brokers. They create a network of peers in which the participants interact and share in the value creation. They provide a service, build relationships, share advice, give reviews, collaborate and co-create.

Network orchestrators receive valuations two to four times higher, on average, then companies with varying business models.

What else do the likes of Airbnb and Uber have in common?

Both companies have extremely light balance sheets. Uber doesn’t own a fleet of vehicles or employ any drivers. Airbnb doesn’t own any houses.

Classified as ‘no-ownership companies’, they are disrupting decades-old industries and rendering old notions of asset ownership obsolete. Instead, both companies are simply allowing users to connect to complete a transaction.

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In the technology world of today where a developer can conceive, build and publish a new idea in a few weeks at minimal cost, companies want to ‘host’ less themselves and don’t want be anchored to costly, inflexible hardware or have to license and maintain multiple, siloed software solutions.

Instead they want to leverage ‘best in breed’ platforms and combine the outputs of these together, as and when needed to quickly provide the best solutions to ever more complex, evolving business challenges.

In this innovative new world, the annual license fee is dead and consumption based pricing is the new king.

Sourced from Peter Pugh-Jones, Head of Streaming Analytics, SAS UK & Ireland