A platform is a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.In order to make these exchanges happen, platforms harness and create large, scalable networks of users and resources that can be accessed on demand. Platforms create communities and markets withÂ network effectsÂ that allow users to interact and transact.
PLATFORM BUSINESS MODEL DEFINITION:Â a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.Like Facebook, Uber, or Alibaba,Â these businesses donât directly create and control inventory via a supply chain the way linear businesses do. Platform businesses donât, to use a common phrase, own the means of productionâ instead, they create the means of connection.
Successful platforms facilitate exchanges by reducing transaction costs and/or by enabling externalized innovation. With the advent of connected technology, these ecosystems enable platforms to scale in ways that traditional businesses cannot.
In the twenty-first century, the supply chain is no longer the central aggregator of business value.Â What a company owns matters less than what it can connect.We call these traditional, non-platform companiesÂ linear businesses, because their operations are well-described by the typical linear supply chain. In the case of SaaS companies, theyâre building products, not networks. As such, they donât have the cost structure and underlying economics that make platform business models successful. In general, linear companies create value in the form of goods or services and then sell them to someone downstream in their supply chain. Unlike platform businesses, linear businesses own their inventory and it shows up on their balance sheets, whether itâs a car manufacturer like GM or a subscription content provider like HBO, which either creates or directly licenses all of its content. It also includes resellers like Walmart, Macyâs or Target. [caption id="attachment_10304" align="aligncenter" width="1024"]Examples of a few well-known linear businesses.[/caption] It also includes tech companies like Netflix, which pays for or licenses all of its content. Even though its a technology company, Netflix is still a linear business and not a platform business. (For more on the difference between linear and platform businesses, go here.) Remember:Â Platform design isn't just about creating the underlying technology. It's about understanding and creating the whole business and how it will create value for and build a network. In the twenty-first century, the supply chain is no longer the central aggregator of business value. What a company owns matters less than the resources it can connect and connect to. In the old model, scale was a result of investing in and growing a businessâs internal resources. But in a networked world, scale comes from cultivating an external network built on top of your business.Â This is the essence of how platform business models work.
You canât succeed in today'sÂ economy without understanding how platforms work.In the 20thÂ century, we saw platform business models in the shopping mall and auction house. Like their predecessors, these businesses have mostly used brick-and-mortar locations to facilitate exchanges. But thanks to connected technology, platforms can now facilitate the exchange of value produced by decentralized networks of individuals. The result is that today's platform businessesÂ are ableÂ facilitate exchanges at an unprecedented scale. The threeÂ most successful platforms to date are Google, Apple, and Facebook. But they are only the tip of the iceberg. The number of platforms at the top of our economy is growing fast. In 2016, four of the top five members of Forbesâs list of most valuable brands were platform companies, as were eleven of the top twenty. And as of early 2017, the top fiveÂ companies by market cap areÂ all platforms. In fact, most of todayâs biggest IPOs and acquisitions are platforms, as are almost all of the most successful startups. In addition to the three mentioned above, the list includes Amazon, eBay, Instagram, YouTube, Twitch, Snapchat, Slack, WhatsApp, Waze, Uber, Lyft, Airbnb, Pinterest, Square, Social Finance, GitHub, Kickstarter, ZocDoc and more. [caption id="attachment_10151" align="alignleft" width="205"]Platform business models already dominate the economy.[/caption] The growth of platform businesses isnât isolated to the United States either; platform companies such as Alibaba, Tencent, Baidu, and Rakuten have taken over China and much of Asia. In fact, they play an even more prominent role in developing countries than they do in the United States. The economies of many of these countries were growing rapidly at the same time that Internet access became widespread. And because these countries didnât have the existing commercial infrastructure that developed economies did, their industries have been molded around the Internet and platforms. Alibaba, for example, has controlled as much as 80% of the Chinese ecommerce market while Baidu has more than 70% of Chinese search. Tencent, now the most valuable company in Asia, has nearly 850 million users on its WeChat messaging platform and is by many estimates the largest gaming company in the world. And Didi Kuadi, China's answer to Uber, dominates the taxi market.
The top fiveÂ companies by market cap areÂ all platforms.In India, Amazon is competing with local platforms Snapdeal and and Flipkart for control of India's rapidly growing ecommerce market. Paytm is the dominant payments platform, and Ola Cabs is vying with Uber and Didi for dominance in India's transportation sector. Whether youâre building a platform business or not, you canât succeed in today'sÂ economy without understanding how platforms work.
Investors value platforms moreÂ than their linear business competitors.Itâs no wonder, then, that platforms are worth more than linear businesses. According to our research, investors value platforms more highly than their linear equivalents. Looking at the S& P 500, pure platform businesses or businesses for which a platform is a significant part of their business have an average revenue multiple of 8.9. In contrast, linear businesses are valued between two to four times revenue on average, depending on their business model. Other research has found a similar valuation gap between platforms and linear businesses. [caption id="attachment_10305" align="aligncenter" width="639"]Platform businesses in the S& P 500 over the last forty years.[/caption] This gap is actually widening over time, and thereâs a good reason. Platforms perform better over both the short and the long term along key financial dimensions. For example, they deliver faster growth, better return on capital, and larger profit margins. As a result, since the early 2000s, platforms have quickly overtaken other business models at the top of the economy.
Platforms will make up 5 percent of the overall S& P 500 by 2020 and will have the majority of the top valuations.According to current trends, platforms will make up about 5 percent of the overall S& P 500 by 2020. Theyâre also on track to make up the majority of the top valuations in the S& P 500 within the next five to ten years. Once you take a look at whatâs happening in the startup economy, these projections make even more sense. The next wave of large public companies is made up of far more platforms than in the past. Nearly 60% of today's billion-dollar "unicorn" startups are platform businesses.Â If you look internationally, the numbers are even more surprising. In Asia, 31 of 36 unicorns are platforms, or about 86 percent. This includes China, where 81 percent of 21 unicorns are platforms, and India, where 8 of 9 are platforms. [caption id="attachment_10306" align="aligncenter" width="639"]âUnicornâ company data: platform businesses vs. linear businesses.[/caption] Platform businesses also receive higher valuations than linear startups. The average valuation for platform unicorns was $ 4.51 billion compared to $ 2.49 billion for linear unicorn companies. In other words, the average linear unicorn is valued at a little more than half of comparable platform companies. Not surprisingly, platform businesses also have most of the funding raised by these unicorn startups. Billion-dollar platforms have received more than twice as much funding as their linear competitors, with $ 46.24 billion in funding for platform unicorns compared to $ 21.96 billion for linear companies. To top it off, platforms also got more favorable terms from investors.
The next wave of large public companies worldwide will be dominated byÂ platforms.Platform unicorns were valued about 12 percent higher relative to the fundingÂ they received when compared to linear platforms, indicating that investors are more confident in the upside of their platform investments. Obviously, not all of these unicorn companies will survive. But the trends in both public and private markets show that platform businesses are quickly overtaking linear companies. In particular, the huge shift toward platforms among unicorn startups suggests that the next wave of large public companies worldwide will be mostly platforms.
Getting the core transaction right is the most important partÂ of platform design.The core transaction is the platformâs âfactoryââ the way it manufactures value for its users. It is the process that turns potential connections into transactions. Getting the core transaction right is the most important partÂ of platform design, as the platform business will need its users to repeat this process over and over to generate and exchange value. [caption id="attachment_9828" align="aligncenter" width="495"]The four steps of the core transaction.[/caption] However, although a platform enables the core transaction, it doesnât directly control its usersâ behaviors. The challenge is a unique one: how to get potentially millions of people to behave the way you want them to. [caption id="attachment_10310" align="aligncenter" width="651"]The four functions of the platform business model.[/caption] First you must attract users to join, then you aid them by matching them together, providing the technology to facilitate the transaction and establishing the rules that govern the network in order to build trust and maintain quality. These are the four core functions of a platform: