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What is platform economy?

By | on June 29, 2016 | 0 Comment

A platform business can be defined as a medium which lets others connect to it. MIT Professor Michael Cusumano defines a platform economy as follows

A platform or complement strategy differs from a product strategy in that it requires an external ecosystem to generate complementary product or service innovations and build positive feedback between the complements and the platform. The effect is much greater potential for innovation and growth than a single product-oriented firm can generate alone.”

Although a new concept in economic and business writing, platforms have been in vogue since 1960s, particularly in the information technology industry. In 1964,IBM introduced the common hardware and architecture and operating system in their mainframe computers. Consequently the users were able to add on hardware and software without rewriting the complex programmes for these additionalities. Being a pioneer in this field helped IBM to dominate the computer industry for nearly two decades.

Later on in the 1980s, development of microprocessors by Intel Corp and the a nearly universal operating system by Microsoft gave tremendous boost to the development of affordable yet highly efficient and versatile personal computers. Soon a whole new field of hardware and software developers emerged. During 1990s and 2000s, internet resulted in a quantum jump for the development of platform economy. Within a decadei nternet-based platforms connected large numbers of PC users to a wide variety of websites and online applications.

In recent times, the outreach and power of platforms have grown even more dramatically with billions of users now connecting via smart mobile devices to all kinds of cloud-based applications and services.Resultantly, platform businesses can be found in a growing number of industries such as

  • social networking (Facebook, LinkedIn);
  • internet auctions and retail (Amazon, eBay, Angie’s List);
  • on-line financial and human resource functions (Workday, Elance, Freelancer, WorkFusion),
  • urban transportation (Uber, Lyft, Sidecar),
  • mobile payment (Mahala, Square) and
  • clean energy (Sungevity, SolarCity, EnerNOC).

Once small and novel, platform businesses have grown substantially in recent years to become a much larger part of the economy. In addition, many platform businesses have moved from being domestic in focus to operating in multiple countries. According to recent survey there are more than 175 platform companies around the world with an individual valuation exceeding $1 billion. With an aggregate market value of over $4.5trillion, there are four major types of platforms:

  • Innovation Platforms: Innovation platforms enable the platform leaders to attract a very large pool of external innovators and serve as the foundation on top of which developers offer complementary products and services. Examples of such platforms are Apple Inc.’s iOS and Google’s Android which have established very large innovation ecosystems of app developers for their various mobile devices.
  • Transaction Platforms: These type of platforms help individuals and institutions find each other, facilitating their various interactions and commercial transactions. E-commerce platforms like Amazon and eBay are best examples of this type of platforms. Recently a variant of Transactions platforms have also become popular. Known as on-demand platforms, these entities like Uber, Zipcar and Airbn enable the exchange of goods and services between individuals.
  • Integration Platforms: These are basically few large companies like Apple and Google which offer the capabilities of both transaction and innovation platforms. Both of them have established innovation platforms for their developer ecosystems, whose apps are then made available in their respective transactional platforms. Similarly, Amazon and Alibaba serve as transactional platforms for their individual users, and as innovation platforms for the many vendors who also sell their wares on their e-commerce platforms.
  • Investment platforms: These are the holding companies who manage a portfolio of platform companies. The Priceline Group, for example, is focused on online travel and related services, including Priceline, Kayak and Open Table.

While predominant in the US and China, platform companies have an increasing global presence and are the major drivers of innovation. The top such companies are setting the standards for the digital transformation taking place around the world. Asia has the largest number most of which are in China, followed by the U.S.A. which though leads in aggregate market value with over 70%, compared to Asia’s 22% and Europe’s 4%.

With the passage of time Platform economy is booming largely due to new innovations taking place in the information technology and rapidly globalizing world. Transforming our global business landscape in multiple ways, these are affecting the lives of citizens all over the world. Their rapid speed and scale of operations are creating opportunities on the one hand and pose challenges on the other. These platforms tap into an unprecedented level of global internet connectivity, and a large supply of talent and software skill to develop the platforms of tomorrow. However they are also an existential threat to the traditional companies who have to now respond to these challenges by setting up their own platforms through acquisitions and alliances and offer a variety of cloud-based apps and services

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