1848 Gold Rush or 2001 Platform Rush: same battle
Gold Rush (1): The California Gold Rush began on January 24, 1848, when gold was found by James W. Marshall at Sutter’s Mill in Coloma, California. The news of gold brought approximately 300,000 people to California from the rest of the United States and abroad. (…)
What I will name here “the Platform rush” is a shortcut to illustrate the enthusiasm of numerous companies for platform models, whether they are commercial, technological or systemic.
The Platform Rush began on January 9, 2001 when Apple announced iTunes. The news of the new model aroused the desires of other Silicon Valley pioneers such as Amazon, Google, Salesforce, Facebook, etc.. Some were start-ups, some already big companies, all dreaming of becoming the next de-facto platform in their field. Today, as Platform Business valuation has rocketed, the Platform Rush is more than ever the shiniest goal, whether you are a start-up, a medium size company, or a big group; who does not want to become the Amazon of Mobility, the Uber of Health, or even the iTunes of Sports? You name it.
The Platform Business Model has become the new business El Dorado.
From simple to more sophisticated techniques
Gold Rush (1): At the beginning of the Gold Rush, there was no law regarding property rights in the goldfields (…) Prospectors retrieved the gold from streams and riverbeds using simple techniques, such as panning. Although the mining caused environmental harm, more sophisticated methods of gold recovery were developed and later adopted around the world. (…)
In the 80’s, there already were companies using Platform Models, as for instance car manufacturers in Japan and Germany who developed modular platform-based cars. But with the advent of technology and consumer digitalization, those models have been able to scale in ways that traditional businesses can’t, and that nobody could even have imagined (well except if you are called Steve or Jeff). Although the two concepts are generally amalgamated, it is absolutely key to make the difference between the Platform Business Model, and the Technology Platform that supports it. I will venture out to say that the latter is the easy part, and that it will not be of any use without the right Business Model… Even today, Platform Business Models are largely misunderstood, although some studies have enabled to identify key mechanisms that need to be actioned when creating or pivoting to a Platform Business Model.
So what are we talking about? Let’s take Stanford’s Pr Mendelson’s definition: “A platform is a business model architecture that encompasses a common core and a set of rules for additional components that may be plugged in to create the complete offering for end customers. These rules include technical standards, policies, and contracts, which govern the users of the platform. »
Platform Business Models can be divided in two categories: the Exchange Platforms and the Makers Platforms. And each again, in several subcategories which are well illustrated by Applico here :
In both categories, the value created has multiple facets: ease of connection and transaction, visibility on supply and demand, up-leveling and consistency of quality, market reach, pain points removal, etc.
More specifically, an Exchange Platform will facilitate direct exchanges between suppliers and customers (one to one), while a Maker Platform will enable a producer to reach a very large audience (one to many).
For instance, PayPal will enable secure payments and financial transactions between buyers and sellers (one to one), while YouTube will allow video producers to reach mass audience, or viewers to have access to a wide array of videos (one to many).
Gold Rush (1): At its peak, technological advances reached a point where significant financing was required, increasing the proportion of gold companies to individual miners.
Platform Rush : so here we go with the chicken and egg issue…
To reach the full promise, the Platform has to build up mass supply and demand: we need buyers to join the platform, and suppliers to do the same. This is called the Network effect: more buyer = more sellers = more buyers = more sellers, etc. This virtuous circle can be global, regional or local, and there are marketing techniques to “get the ball rolling”, which I won’t get into here, but wishful thinking is just not going to cut it!
And here again, technology can help turn a gold nugget into a jewel: marketing techniques that trigger the network effect can we multiplied by technology via the Data Network Effect: more users means more data; more data means better algorithms, which in turn means better products or services, and thus, more users, more data, etc.
Great wealth for a few only
Gold Rush (1): Gold worth tens of billions of today’s US dollars was recovered, which led to great wealth for a few, though many who participated in the California Gold Rush earned little more than they had started with.
Today, companies choosing a Platform Business Model are not focusing on profitability but on market share and data that they are able to collect from this market:
- take the example of Citymapper, which raised 50M$ and did not generate any revenue for 5 years: according to its venture capitalists, the goal was to collect transportation data, and then decide what to do with it.
- take Uber, still losing money, but its valuation is estimated around $72B! And Didi Chuxing at $56B in just 4 years (3). Why? Because they own huge amounts of data on personal transportation supply and demand.
- take Tesla’s market capitalization of $45B, against $47B for General Motors and $37B for Ford (3): Tesla sold some 95K cars a year in 2017 against 9.6M cars for General Motors (2); but Tesla’s cars are stuffed with sensors collecting data; hence the valuation.
- Airbnb, does not own any hotel, but it’s valuation is estimated around $29,3B (4) ; why? Same reason as Uber: granular and extensive knowledge of the supply and demand
- Toutiao/ByteDance valuation estimated today at $20B; why? Because they collect social networks data from consumers and then use large-scale machine learning and deep learning algorithms to serve those users with the content that they will find most interesting (Data Network effect)
- Meicai, a vegetable vending app in China which raised $652M and has grown to a value of $2.8 Billion in just 3 years; one of the latest emerging player aiming to disrupt traditional retail operations by cutting out middlemen. By serving nearly 10 million restaurants and vegetable stores in China, it now sits on huge amounts of consumption and agricultural data
In fact, the Platform Business Model is attractive to investors because it is the one that enables to collect the most data. More and more data. Which is where the value is.
But for these few unicorns, how many start-ups have learned the hard way that this model is highly competitive and technical? Investors are speculating, looking for the next Uber: they are trading short term profits for medium term multi-billion dollars exits. Yet not every company can be an Amazon, Didi or ByteDance. There are several business models to choose from: companies can opt for product leadership, customer intimacy, operational excellence, or platform/marketplace models; the Platform Business Model is the most competitive out of all of these, with many barriers to entry. At the end of the day, it is obvious that there can be many suppliers competing on product or service excellence, and those can do extremely well, but there can only be very few marketplaces. If you succeed however, it is a highly defendable market that can turn into a monopoly.
A true El Dorado.
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