8. Two-sided markets & network effects Flashcards
What is a platform
A platform is a business based on enabling value-creating interactions between external producers and consumers.
The platform provides an open,
participative infrastructure for these interactions and sets governance conditions for them.
(Parker et al., 2016:5)
WHAT IS TWO-SIDED NETWORKS/MARKETS AND PLATFORM PROVIDERS
Two user groups –the network’s sides–interact with each other through one or more intermediaries called platform providers–
A platform provides:
*architecturefor products, services and interaction –produce content
*a set of rules for interactions
A platform exhibits network effects
PLATFORM BUSINESS MODEL PROPERTIES
1) No gate keepers (fx editors)
–no owned or controlled resources
2) New sourcesof value-creation// sharing economy and spare capacity–no fixed costs or physical assets –no more linear value chain(Industry economy/ pipeline) // information is an important ingredient
3) Control of quality vs. community feedback
4) Invertingthe firm
5) Variable relationships
What are ecosystems?
Business ecosystems –providing a platform around which the ecosystem can make matches and facilitate interaction
*Platformfirm semphasize ecosystem governance –external resources are complements (Parker et al 2016, Chap. 1)
For platform business models: many complementsare left to other firms
*do not own assets
*outsource to platform participants (risk and innovation)
*partners’ deep understandingofcustomers and their need for complementary assets
What is the PFI model?
When do we need the ecosystem?
When to license or develop?
…Too general to be differentiating for business model
… Need no help protecting the business model, technology is legally protected = licensing
= licensing to ecosystem
… Need help to protect the business model with help from the ecosystemproviding specific complementary assets
What is network effects?
Source: Parker et . al (2016), chap. 2
Network effects:
*Represents an economic phenomenon driven by technological innovation
*Network effects refer to the impact that the number of users of a platform has on the value created for each user
*Effective platforms are able toexpand in size quickly and easily and thereby scaling the value that derives from network effects –growing both sides
Positive impact, growing
*large, well managed platform community to producesignificant value for each user of the platform
Negative impact, shrinking
*possibility that growth in numbers of a poorly managed platform can reducethe value for each user (flood of useless matches)
FOUR KINDS OF NETWORK EFFECTS FOR A 2-SIDED NETWORK
(PRODUCERS AND CONSUMERS)
Parker et. al. 2017: chap. 2
*Network effects refers to the impact that the number of users of a platform has on the value created for each user
same-side: more users add or subtract value of network to users on the same side
cross-side:more users add or subtract value of network to users on the other side
Same side, positive:
Consumersfrom the same side effect each other, more consumers on one side (telephone, Wow)
Producers: uses Adobe PDF
valuable matches + interactions
Cross side, positive:
Consumers from one side effectproducers on other side
More mobile pay users > more shops > more users
Riders > moredrivers > more riders
Sameside, negative:
Competingsuppliers grow, but too many suppliers > hard to make matches
Cross side, negative:
Uber: too many drivers relative to riders> driver downtime goes up; too many riders relative to drivers >too long wait (no benefits)
Media platform: more media producers > too many DRM formulas
What is “in” two-sided markets
1.Attract a critical mass: features and processes by which a platform attracts and retains active consumers and producers.
2.Match: introduce both sides before they can interact, quality of matchmaking is critical for success (timely, relevant and filtered information).
3.Connect: participants need to exchange information before moving on to the transaction stage, increases trust and reduces information asymmetry.
4.Transact: transaction stage is at the heart of the platform value proposition. Interaction that creates the most value for participants and facilitates exchange (e.g., physical product, rental contract, ride, a photo)
5.Optimise digital offerings continuously: Enables rapid innovation and experimentation due to easy access to data
TWO-SIDED MARKETS/ PLATFORMS
*
“Products and services that bring together groups of users in two-sided networks are platforms.
*
They provide infrastructure and rules that facilitate the two groups’ transactions and can take many guises.
*In some cases, platforms rely on physical products, as with consumer’s credit cards.
*In other cases, they provide services, like eBay. “
(Eisenman & Alstyne, 2006)
Cost and revenue are on both sides
–the platform will collect from both sides but may subsidy one side.
The two groups are attracted to each other = network effect
Value of platform to any given user depends on the number of users on the
other side
DESIGNING PLATFORM BUSINESS MODELS
1.Which side should you subsidizeand for how long? (pricing)
2.How to manage ‘winner-takes-it-all’ dynamics: one firm controls the platform (Windows)
*Should they fight to gain control over the platform –or collaborate? (Barnes & Noble)
*With standards: multiple firms share the platform (ARM’s microprocessor, USB-port, network protocols etc.)
3.Envelopment
*Multiplatform bundle (“convergence”, ecosystem)
- PRICING THE PLATFORM
Choose a price for each side (user group)
*how will price impact growth and willingness to pay?
Ability to capture cross-side network effects (Apple in education)
User sensitivity to price –subsidize the more price sensitive side (Spotify)
User sensitivity to quality -charge (money side) thosewho supply quality, give users through subsidizing (games)
Output costs if strong willingness to pay is not realized (Spotify)
Curate platform –exclude some users from platform (Uber)
Users’ brand value –commitment to your platform
- WINNER-TAKES-IT-ALL DYNAMICS
Share the platform or fight for proprietary platform?
What to look for:
1.Will the networked market be served by a single platform? Room for rivals?
*Multi-homing costs are high for at least one user side (adoption,operation, time)
*I fstrong cross-sidenetwork effects, users will converge on one platform, also strong same-side effects (sharing files), fxgoogle-docs in high school
*No need for special features on either side –no niche platforms
2.The market size will be greater with a shared platform–users are confident to sign up
3.Winning the battle
*Cost or differentiation advantages (Spotify, social network?) (how do we compete?)
+relations with prospective users, earned media, deep pockets
- THREAT OF ENVELOPMENT
Another platform enters your market
–with overlapping functionality and/or multiplatform bundles = lower total price
Why should your money-side stay with you?
Networked markets with rapidly evolving technology
blur market boundaries –‘convergence’»_space; Mobile phones, google taking up fitbits, watches, smart home technology, Shotspotter
* Thecustomerexperience –how your product is used with other products (Garrett & Ritchie)
Sell out to attacker or leave the field
Change business model, charge instead of subsidize, sell specialized services (system integrators, manage a platform)
Find a “bigger brother” –get into a bundle
Stay alert to threats and opportunities of envelopment
