Annie Turner looks at network effects, which when a company gets them right, make platforms super successful – and faster than anything the business world has ever seen. How can network operators benefit from network effects and create new value?
Look at the table below and the first thing that shocks is how fast these platform-based companies grew, especially when compared to their venerable ‘counterparts’. No wonder so many long-established businesses are reeling.
Professor Geoffrey G. Parker, who is widely recognized as a leading thinker on platform-based businesses and whose credentials span engineering and business, points out that the world’s biggest five companies by market capitalization are all platform companies. Apple, Alphabet (Google’s parent), Microsoft, Amazon and Facebook have displaced the oil companies and banks that held the top slots for decades.
How do successful platforms grow so fast? Through network effects, which every business needs to understand and foster. This is how it works: the more people are on your network the more valuable the business and the more effective you are.
What’s going on?
In the pipeline model, there is little in the way of network effects. Instead there is a supply chain, from raw materials to distribution. At every stage someone is paid for their contribution, and the value accrues as the process progresses. The sale price has to be bigger than the overall cost for everyone to make their margins, but there is little in the way of the network effect.
The platform model collapses that process, creating what Parker calls a triangular platform (see graphic), whereby the platform provides a marketplace for interchanges between producers and consumers. It removes pain points for both and enables all kinds of companies to create new services and value – and especially small ones that could never afford the resources and upfront capital costs on their own.
YouTube and Apple are both great examples of this. YouTube offers tools to help producers upload videos easily and quickly. On the consumption side, there is search, matching, filtering, playing and sharing. The platform deals with all the different standards and devices, to create markets that didn’t previously exist and run various business models on one platform.
In January 2017, Apple stated that in the previous year, app developers collectively earned over $20 billion. On average, the company gets about 30 percent of that as revenue share, according to Business Insider.
“The platform provides a marketplace for interchanges between producers and consumers. It removes pain points for both and enables all kinds of companies to create new services and value.”
Parker says, “Platforms drop transaction costs like a rock. Whereas you used to need an army of lawyers to get anything done, now it’s plug and play.”
Who can play?
Can any product or service become the basis of a platform business? Here’s the Parker test: “If a firm can either use information or community to add value to what it sells, then there is the potential to create a platform. This means there is a huge amount of opportunity for a lot of companies.”
Simon Torrance, Advisor, BearingPoint, adds, “It’s [already]a $4 trillion market. Today, no telco operates like this, yet we have all the assets and capabilities to do so.”
8 things to consider
Telcos inherently understand the network effect – the more people are on your network or you can connect to someone else via partners, the more valuable your business and the more effective you are. We created a global network for telegraphy then phone calls more than a century ago, we can replicate this for digital services. Here’s how.
- Forget Facebook: Parker comments, “The B2C market is largely done, we need to look towards the internet of things, smart cities and medical technologies – the B2B side. That is an $80 trillion global economy that is rapidly digitizing and the B2C stuff is an itty-bitty side show by comparison. There is huge opportunity to be there first.”
- Don’t customize, configure: Be modular is the approach TM Forum enshrines in all its assets and activities. The mantra is build open, standardized, reconfigurable systems and avoid customization. Many telcos are moving towards this ideal to reduce costs, risk and time to market, and increase their business agility while leveraging assets. George Glass, Chief Systems Architect, BT, explains what his company has achieved on this front, to great effect.
- Gain global reach: Telcos can exploit that modularity to scale by partnering with other telcos to gain geographical reach if everyone uses open APIs. As Parker says, “Put the complexity behind the scenes and have something that’s easy to attach to and pass data between”.
- Look outside: Shift attention from inside to outside the company because that’s where your users and partners are who create transactions, which is how you monetize your network. To have an external focus you must have a community strategy.
- Cherish your community: Design architecture to regulate participation – troublemakers are a fact of life, but control points in the analytics can detect them and prevent them driving others away. Put another way, promote positive interactions among partners in a multi-sided market.
- Design your business model carefully, around all your customers: Don’t introduce too many adverts, for instance. That killed MySpace stone dead because it spoiled the user experience. And don’t introduce too many onerous steps to access the platform and services, it will repel users.
- Resource orchestration, not control: In the platform world, not everything is counted nor appears on the balance sheet. Resources need orchestration as the aim is to provide a market for excess capacity that previously could not be traded. The question is, “How can we lower transaction costs so that the capacity we’ve got sitting on our balance sheet can find a market?…It’s not about locking everything down, it’s about opening it up, which is a completely different mindset.”
- And finally: Parker says, “Move from focusing just on serving that one end customer…and bargaining against a supply chain, [instead]look at the customer as an inside user and treat them as such. Thinking in terms of a dollar in the supply side’s pocket is one less in yours doesn’t work – it becomes meaningless. Rather invest in their ability to produce because that drives transactions, which is how you monetize your network.
Geoffrey G. Parker is Professor, Thayer School Engineering, Dartmouth College and Director, Master of Engineering Management Program, and Research Fellow, MIT Initiative on the Digital Economy. He is the co-author of Platform Revolution with Marshall W. Van Alstyne and Sangeet Paul Choudary. He has spoken at two TM Forum Digital Leadership/BearingPoint Summits.
This article appears in Perspectives 2017: Digital transformation opens new markets. Download the full report free here.