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Leadership / Digital Transformation

The platform game: Tackling the challenges of digital platform business models

Why have so few traditional companies made digital platform business models a success?

Platform business models have been described as “the dominant organisational form of the digital age”. They are offered as an explanation for the towering market capitalisations of the tech giants. And not long ago, they were presented as an essential strategy for any company that wishes to survive the digital era (“Uber, the world’s largest taxi company, owns no vehicles”… etc.)

That prescription is not as convincing as it used to be. Whether Uber will ever turn a profit is still a matter of debate. And examples of established companies launching successful digital platforms are few and far between. If platforms confer such a tremendous economic advantage, why are they so difficult to pull off?

platform business models

“There’s a huge funnel of platform start-ups.” (Photo by somboon sitthichoptam iStock)

The benefits of operating a digital platform business model, in which a company connects third-party producers to a market of customers via an online marketplace, have been well documented. As a platform grows, network effects confer an unassailable position of dominance – think Facebook’s share of the social network market. Data extracted from the platform provides unrivalled insight into the behaviour of customers and potential competitors, while the operator extracts commission or rent from its participants. Who wouldn’t want to run a platform?

A handful of established companies have made it work. Ping An, a Chinese insurance provider founded in the 1980s, has founded 11 digital platforms in industries including healthcare, banking and housing, quadrupling its market value from that in 2013 to 2019. John Deere, the farming equipment maker, has opened up its IoT-enabled products as a platform for third-party app developers; Philips, Siemens and Schneider Electric have similar strategies. Last year, US supermarket giant Walmart partnered with e-commerce platform Shopify to create a marketplace connecting producers to its customers.

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The challenges of pursuing this model are less frequently discussed. "The platform business model is super-interesting because it is asset-light, it has enormous scaling potential, and you can leverage the network effects," explains Hugo Raaijmakers, global head of platform strategy and innovation at PA Consulting, and a former digital innovation executive at Philips and ING. "But it's also an extremely complex business model to embrace. It [requires] a lot of design and careful execution to make it a success."

To date, the challenges that would-be platforms have faced have been commercial and technical. But, as policymakers examine ways to counter the market power of the tech giants, regulatory hurdles may soon be added to that list.

The commercial challenges of platform business models

The first question aspiring operators should ask is whether a platform strategy is commercially viable. "It doesn't matter what your product is, you should think whether or not it can become a platform," advises Professor Andrei Hagiu, an angel investor and associate professor of information systems at Boston University's Questrom School of Business. Some products have more potential than others. "Say you have a product with multiple customer segments with different use cases, and your product covers 80% of what everyone wants. Third parties can be brought in [via a platform] and serve those remaining, heterogeneous needs."

Would-be platform companies must also assess whether their market or industry can support a platform, says Raaijmakers. "Important aspects are, for instance, if the market is very fragmented, with many players in the market but no dominant platform orchestrator," he explains. "Is there still room to find opportunities where, with a platform, you can uniquely connect customers to producers?"

Another crucial question is whether Big Tech already has its eyes on the platform opportunity in your market. "If you look at finance, for instance, a lot of Big Tech players have spotted the opportunity, and it is becoming increasingly difficult to get your position with your market offering," says Raaijmakers.

This is a quandary currently facing carmakers, says Ashok Subramanian, head of technology at software consultancy ThoughtWorks. Cars could well be a platform for digital services – so much so that Apple and Google are seeking to integrate their mobile operating systems into automobiles. "Now the traditional automotive companies [face] a choice of whether you try to build your own operating system in the car", or join the tech giants' in-car platforms.

Even if a platform is theoretically viable, the participation of producers and consumers is by no means guaranteed. "One of the primary challenges is, how do we actually get enough people onto the platform to make sure that there is something of value for everybody," says Subramanian. For an established company with a large, existing customer base, tempting other businesses – who may fear loss of control or view you as a competitor – might be the more challenging side of this equation.

Raaijmakers advises companies to follow the tech giants' lead. They make their platforms desirable by offering access to a "large curated market of consumers, where [producers] have to spend much less [on] marketing in order to get traction". They also provide insights into what customers are doing on the platform, Raaijmakers says, and access to supplementary services, such as finance or software. Shopify, for example, provides shop owners with the tools to run an online business. "If you had to build all those capabilities yourself, that's a very significant investment," Raaijmakers explains.

Uber has a much more difficult platform business model than AirBnB because Uber's network effects are local.
Professor Andrei Hagiu, Boston University

Not all platform opportunities are equally large or sustainable. Take two of the leading second-generation examples, Uber and Airbnb. Their differing fortunes reflect the need for global network effects for true market dominance, explains Hagiu. "Uber has a much more difficult platform business model than Airbnb because Uber's network effects are local," he says. "If I'm an Uber user, all I care about is the drivers in my city, or in my area. AirBnB has global network effects. So while Uber lost to Didi in China, and to Grab in South East Asia, Airbnb will continue growing, and it is the dominant platform in its space."

Evidently, not every company can be a platform orchestrator – but there are still ways to profit from the model. "You may need to consider a more humble position, whether that is to be a participant in a platform, or maybe to leverage your own capabilities," Raaijmakers says. "For example, you could imagine a finance company providing the payments capability in a platform. Those plays are less profitable, but there is still the [opportunity] to profit from the volume and scale of the ecosystem."

The technology challenges of platform business models

There is no single technology that enables platform business models, and platforms are typically built on standard web technologies. So companies don't need the technical chops of Amazon or Google to consider a platform strategy – but there are some technological capabilities that are essential.

Chief among these is data, says Raaijmakers. So much of the value of a platform derives from the collection, distribution and analysis of data. Philips, for example, was able to launch its HealthSuite platform, which allows third-party app developers to integrate with its medical equipment, thanks to the strength of its approach to data, Raaijmakers explains, leveraging its ecosystem data sources and capabilities. "You need to make sure data is captured, managed and governed in a way that it can become part of any sort of digital ecosystem."

Approaches like test-driven development, continuous integration and continuous delivery are essential.
Ashok Subramanian, ThoughtWorks

Once built, a platform needs to be reliable, secure and to evolve with the needs of the market. Doing this at scale requires leading-edge software development practices, says Subramanian. "Approaches like test-driven development, continuous integration and continuous delivery are essential," he explains. "And not just for software, but also databases, integration points – even the underlying data structures have to evolve in a similar manner, all of which necessitates these practices being applied to all aspects of [development]."

For these reasons, Raaijmakers says, few traditional companies can launch a successful platform business model without first undergoing a digital transformation. "There will always be this digital transformation that you have to go through in order to innovate," he says. "There are companies that build [a platform] from scratch along with a digital transformation, but it's a very long and costly journey sometimes."

Although there is not currently a single defining technology for platforms, Hagiu predicts that blockchain will change the economics of the business model. One of the functions of the platform operator, he explains, is to foster trust between market participants, by establishing a rating system, for example, or by guaranteeing transactions. Some of these functions can be performed on a blockchain, making transactions transparent and collectively verified.

There are some "blockchain maximalists" who predict the demise of platform companies altogether, Hagiu says, but this underestimates the many other functions that they provide. "There's a good reason why platforms are successful – they are coordinating supply and demand, and making search possible." Nevertheless, Hagiu predicts the blockchain will significantly reduce the commission that platform operators can charge, from around 30% in the case of Apple's app store to closer to 3%.

Indeed, blockchain could enable new and more collaborative ownership models for platforms. In 2018, ThoughtWorks was involved in the development of a blockchain-based commodities trading platform for VAKT, a consortium of banks and energy suppliers. The platform allows competing energy companies to trade commodities such as crude oil, reducing the need for internal transportation costs. "They are all players in the same space, but there was a [shared] need for all of them," Subramanian explains. "They decided to build a solution based on a distributed ledger. That was the thing that actually managed to get people together to say, yes, we can actually trust [the platform]."

Regulatory challenges to the platform business model

Any business considering a platform now is doing so at a time when the future of the business model is uncertain. The EU's proposed Digital Markets Act aims to promote competition in the digital economy by curtailing the power of 'gatekeepers' – digital platform operators with revenue or market share above a certain threshold. In its current form, the Act would outlaw some of the dubious practices that make platforms so lucrative, such as 'self-preferencing', in which platform operators give their own products particular prominence within a marketplace, and 'anti-steering', preventing producers from linking out to their own sites or alternative payment mechanisms.

And the EU is not alone. Regulators around the world are scrutinising in-app payments and anti-steering policies in Apple and Google's app stores. In a high-profile case brought against Apple in the US by video game developer Epic Games, a judge ruled that Apple can no longer prohibit third-party developers from using alternative payment mechanisms (Apple is appealing the judgment).

It remains to be seen whether these rule changes will damage the viability of the platform business model overall – one economist warned that cracking down on in-app payments would force Apple to "charge developers in different ways" – or, by curtailing the tech giants' dominance, open up the platform market for more innovation.

Hagiu predicts the latter. "If you look at the Apple vs. Epic case, or all the regulatory concerns about Apple, I actually think that's probably good for some of the software companies that depend on [the company]," he says. "Because Apple can no longer be as restrictive as they were before, maybe that opens up the possibility for interesting new types of platforms to emerge on mobile." Indeed, Epic Games has its own platform play: it develops the Unreal 3D graphics engine, and earlier this year raised $1bn to fund its vision for the metaverse.

One of the key issues is the lack of digital leadership in traditional companies. This often leads to a poor understanding of the opportunities and threats.
Hugo Raaijmakers, PA Consulting

More platforms are coming, says Hagiu. "There's a huge funnel of platform start-ups." That may inspire more traditional companies to tackle these challenges – or buy their way into the platform industry. But many risk missing the opportunity, warns Raaijmakers. "One of the key issues is the lack of digital leadership in traditional companies," he says. "This often leads to a poor understanding of the opportunities and threats. Making sure the leadership has the same understanding and unified vision around platform opportunities will significantly help fast track the organisation’s progress in the short term."

Pete Swabey

Pete Swabey is editor-in-chief of Tech Monitor.