Platform Innovation // Blog

What is Platform Innovation?

Platform innovation is the practice of rapidly iterating upon the platform business model by either creating new platforms or improving upon an existing platform.

As a service, platform innovation is Applico’s repeatable process that is provided as an outside advisor to a linear or platform business needing external guidance or assistance with platform innovation. However, platform innovation can also come from inside a business as well. Startups and modern monopolies alike essentially engage in their own versions of platform innovation. Traditional, linear enterprises need platform innovation, but have very little expertise in-house.

There are four main approaches to deliver platform innovation: in-house, acquisition, advisory and private equity.

In-House

Every existing platform business is practicing platform innovation day in and day out. From big companies like Facebook and Google to startups with little to no funding. They are all in pursuit of improving their platform business. As the initial platform business model hits maturity and becomes a modern monopoly, it makes sense to entertain new platform models and starting new platforms from scratch. Facebook did this with Facebook Messenger and Facebook Watch internally. Alibaba has done this with Taobao and Tmall. And Amazon has done this with its Marketplace, AWS and now Alexa. Some platforms have more well-defined processes to iterate on their platform business models than others.

Acquisition

Linear companies can look to acquire platform innovation as well, like Wal-Mart. It initially launched Walmart Marketplace in 2009, which failed. However, Walmart still knew that it needed a marketplace platform to be competitive in the 21st century, so it acquired Jet.com in 2016. If platform innovation had succeeded internally at Wal-Mart, it certainly would’ve been much cheaper and much faster to market than waiting to acquire Jet.com. Either way, build or buy, Wal-Mart needed to be successful with its platform innovation efforts otherwise Amazon would continue its modern monopoly status in e-commerce unchallenged. Walmart’s success since its Jet.com acquisition shows that acquiring platform innovation, while expensive, can be well worth it.

Similarly, platform companies that fail to launch new businesses internally can look to acquisitions. Google acquired YouTube after failing to launch its own video-focused content platform, and it acquired Android to solidify its presence on mobile. Similarly, Facebook acquired Instagram for its focus on younger users and WhatsApp for its international focus. And Amazon acquired Twitch as it shifted to a focus on content to give it a successful content platform and a key source for its growing advertising revenue.

Private Equity

Many private equity firms buy underperforming businesses, optimize their operations and then generate a return on their investment over a 3-7 year period of time. The same model can be applied to the delivery of platform innovation. As the platform innovation model becomes more proven, private equity funds will be raised with the intention of buying linear, traditional businesses that could better utilize their assets in a hybrid linear-platform business model.

The private equity firm would purchase the linear business and then proceed to apply its platform innovation process and create a platform business model alongside the existing business. The private equity firm would act as both an owner and an outside advisor to the core business while building a new platform from scratch. Whether or not the private equity firm realizes a positive return on its investment will depend on the product-market fit for the new platform business model as well as how well the strategy is executed to evolve the existing business model to a hybrid linear-platform blend.

If executed successfully, the new hybrid business will be able to achieve significantly better multiples on similar levels of revenue.

Advisory

External advisors can help both linear and platform businesses unlock their platform innovation potential.

Linear enterprises that don’t have a platform or platform expertise need help to the understand where the best opportunities lie for them to create a new platform business model. And operating in traditional industries, they often struggle to attract experienced platform talent that typically resides in the tech sector. Building and scaling a platform business is very different from scaling a linear one. It requires radically different mental models and approaches. Finding external sources of platform knowledge and experience can radically accelerate the path to market and to scale.

Additionally, existing platform businesses that are falling behind to the competition can benefit from bringing another set of eyes to internal processes and approaches to help re-establish the competitive edge the platform has been lacking. This need is especially strong when the business is looking to expand outside of its initial core transaction or platform type, or if that initial core transaction is showing signs of slowing growth. Advisors with broad experience in platform innovation can help identify the best new opportunities or the existing weak points that can be difficult for internal operators isolate on their own.

When working with large enterprises, advisors practicing platform innovation should assess the pros and cons of building or buying a platform. Usually, large enterprises will have a significant advantage to build a platform from scratch and use their existing scale to help solve the chicken and egg problem. But depending on the state of the industry and the competitive landscape, buying an existing platform may be the best way forward.

Processes

Applico’s Platform Design process and frameworks are an example of a platform innovation process, as is our Platform Execution process. As the market for platform innovation expands, more processes will become formalized by in-house platform businesses as well as advisory or private equity firms. These processes could become specialized on certain types of platform business models, especially exchange versus maker platforms, as well as certain functions of a platform like the core transaction, audience building, rules and standards, etc.

The platform innovation as a service industry is still nascent. As platforms continue to make up an ever-growing portion of the 21st century economy, the need for both in-house and external expertise will only increase. As the first firm to focus exclusively on platform innovation as a service, Applico and its teams of platform innovators and operators bring a unique mix of platform experience and knowledge to our clients.

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