This trend is not the exclusive domain of established players. It seems two out of three new investment pitches I hear have a “platform” element to them. This caused me to send the following tweet last week:
Your desire to be a platform does not make you one. Only the ecosystem around you can make you a platform.
Clearly, this topic deserves many more than 140 characters; hence this blog post. So what is a platform? Most people, particularly technologists, default to a technology definition of platform. In layman’s terms, a technology platform is infrastructure (hardware and/or software) upon which other technologies and applications can be built. This is intuitive and easy to understand. An operating system is a technology platform. And in the web-world, all of the services above fit the “technology platform” definition, because they all allow application developers to develop applications on top of something.
The much more interesting definition from my perspective is a business definition. I favor the definition forwarded by David Evans and his co-author Richard Schmalensee in the Catalyst Code, in which they define an “Economic Catalyst” (a synonym for platform in my world) as:
An entity that has (a) two or more groups of customers; (b) who need each other in some way; but (c) who can’t capture the value from their mutual attraction on their own; and (d) rely on the catalyst to facilitate value-creating reactions between them.
I won’t steal thunder from the book – if you are interested in this trend at all, you should read it and its prequel “Invisible Engines” - but what the business definition drives home is that there is much more to being a platform than building a technology and hoping an application developer builds something on top of it. You can’t just be a technology platform; you have to make an ecosystem around the technology. In addition, the platform must serve both groups well and must be a means to an end; that end being “a value-creating interaction”.
Most of the platform examples I cited above talk about only one customer group, the application developer. That is natural in some ways as the release of these platform technologies is marketed to application developers. But this is only half of the story. We talk way too infrequently about why are these application developers build something on Facebook, Twitter, the iPhone, etc. This is important, because it is notoriously difficult to charge application developers to build on top of a platform. As I’m writing this, I can’t think of any good examples of big businesses built by charging application developers for access to a technology platform; perhaps with a little more thought I could gin a few up. Microsoft doesn’t charge application developers to develop on top of its OS. Microsoft makes its money charging software licenses to businesses and consumers who choose a Microsoft OS because of the large community of applications that are available on it. Facebook, PayPal, etc.; they don’t charge the application developer; at least not in a scalable way. You can’t just aggregate a bunch of application developers and make money.
We need to redefine success for platforms. A successful platform isn’t the platform with most application developers. The money is made by creating a value creating exchange with the customer on the other side. Therefore, a successful platform is one that facilitaties the most value-creating interractions for the two or more customer groups it serves. On that measure, all of the platforms I’ve mentioned (besides Microsoft’s OS business) are nascent. No-one has figured out a truly scalable way to create value exchanging interactions on these platforms; at least not in a way that serves the application developers well. A piece in GigaOm about the long-tail of iPhone application developers is illuminating. Om calls it “extra-long”, which means there are a very small number of applications making all the money and the rest are left fighting over scraps. Most of the examples I’ve cited have a consumer on the other side of the platform. The easiest business model for monetizing application to consumer interactions is advertising, whether on the web or “in-app”. Twitter is heading in that direction now, although they are rapidly bringing back functionality that has historically been the domain of the application developer community as they roll out their monetization strategy. You can be sure that those two trends are linked. We’ll see how the advertising model serves application developers on all of these platforms; my guess is not very well.
That said, there are two clear lessons for me:
- When a consumer is on one side of the platform, it is easier to become a platform when you have an installed base of users. Facebook had a massive user base before it opened up its platform. The same goes for Twitter, the iPhone, Salesforce.com and the others. It is much harder; some might say impossible; to start a consumer facing platform. Consumer facing platform strategies emerge from large installed bases; they cannot be started explicitly.
- If you are an application developer on a consumer-facing platform, be sure the platform you build upon has a clear business model for helping you monetize the relationship you develop with the consumer. If not, be wary; what you do may eventually be consumed back into the platform.
For startups with no installed base on either side of their nascent platform, getting an ecosystem started is a bit trickier. For most, the only way to be successful is if the attraction between the two customer groups is soooo strong that the ecosystem ”makes itself” around your technology platform. Some refer to this as the chicken and egg challenge of platforms. It is not mission impossible to crack the chicken and egg, but it is a challenge. Perhaps more to come on that in future posts.
For now, on to another type of fowl; TURKEY!
(Cross-posted @ Non-Linear VC)