They are the basis of a hugely successful business model; they are everywhere and are set to remain with us in the long term. But the road to success for platforms is by no means simple, nor is it guaranteed to last forever.
“Today platforms are everywhere. Particularly in these days of Coronavirus when we’re doing everything online, we realise how dependent we are on platforms”, explains Michael A. Cusumano, SMR Distinguished Professor at the MIT Sloan School of Management and co-author with Annabelle Gawer and David B. Yoffie of “The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power” (HarperCollins), which was published last year.
Platforms for innovation and exchange
For 30 years Cusumano has been studying the platform economy and his interest has not diminished, also because in recent years “platformisation” has grown exponentially. “The world’s seven most valuable public companies in April 2020 and its first trillion-dollar businesses are built on digital platforms that bring together two or more market actors and grow through network effects”, the MIT professor explains.
The Enel Group also acted some time ago to move towards a platform-based model both concerning grids and IT infrastructure, in retail and services provided, for example, by Enel X. This development was made possible also by the move to the full cloud, which was achieved last year with the closure of the final data centre: we were, in actual fact, the first large utility to reach this milestone. Our 2020-2022 Strategic Plan explained how the adoption of a platform model will enable our Group to standardise and optimise its operational processes and foster the creation of new business opportunities.
“Platform companies are in nearly every market, and they all share common features”, Cusumano explains. The network effect is the first: they use digital technology “to create self-sustaining positive-feedback loops that potentially increase the value of their platforms with each new participant”. The value of the user experience increases with the rising number of people and organisations involved, or through complementary innovations.
“Having the best platform today is more important than having the best product,” the authors write. Indeed, the book distinguishes between “transaction platforms,” which serve as intermediaries in trade and exchanges, and “innovation platforms,” where the technological component is central, thanks to which the ecosystem ends up creating complementary products and services. But the most successful platform companies are those that the author defines as “hybrid,” which integrate the two models.
A sustainable business model
Platforms’ business model is complex and substantially different from that of traditional companies. Cusumano compares them to a game of three-dimensional chess, in which the network effect alone doesn’t necessarily guarantee success. The other decisive factor is that competing platforms should not become equally familiar in providing the same service, a phenomenon that the author calls “multi-homing”. Basically, Cusumano points out, “to have success, the platform should become like your home”, thereby discouraging the use of others.
Once up and running, however, platform companies cannot rest on their laurels: for this reason platform thinking is essential. According to Cusumano, “The path to success for a platform venture is by no means easy or guaranteed”. Just like all businesses, they need to function better, be more user-friendly and efficient than their competitors. “In addition, to survive long-term, platforms must also be politically and socially viable, or they risk being crushed by government regulation or social opposition, as well as potentially massive debt obligations”. Trust, therefore, is essential in order to achieve sustained success.
The risks of “platformania”
The rise of platforms has also boosted their popularity with startups, business people and venture capital investors. So much so that the authors talk openly of “platformania”. It is not, however, sufficient to create a new platform to be successful, nor is it enough to be the “first mover” in a particular sector: Cusumano’s book highlights the rapid disappearance of Netscape, the first web browser with a graphic interface or MySpace, the first social platform, which was soon superseded by Facebook and YouTube.
“Platformising a ‘bad’ business does not make it a ‘good’ business”, explains the MIT professor. Today most platform companies lose money, in some cases billions of dollars. “The creation of a platform is no guarantee of long-term success. The business must still be able to generate a profit and respond to change and competition”. According to Cusumano, “the problem with many new platforms is that they take a lot of money to start and they lose money as they operate and they depend on venture capital”. Sometimes, however, the problem concerns network effects that are too weak or inexistent, or competition from other platforms.
In the coming 20 years we will see changes in the platform economy that are even more disruptive. The development of emerging technologies like Artificial Intelligence, machine learning, Big Data analysis and infrastructures of services “have not yet attained their full potential. More and more individual user and transactional data will become connected with different platform services and functions, with the potential to generate positive and negative outcomes”.
Which platform model will prevail in the years to come? No one can predict the future, Cusumano admits. “However, we have identified four major trends that are likely to affect platform dynamics across industries: the emergence of the hybrid model as the dominant strategy for platform businesses, the use of AI and machine learning to produce major improvements in platform operations and capabilities, increasing market concentration by a small number of powerful platform companies, and the demand for more regulation to address problems unleashed by some of today’s platform companies”.
Time seems to be on the side of the platforms. But technological developments could make the selection tougher and entrance to the market more difficult. Once again, it will be innovation – including the innovation of business models – that is set to be the determining factor.