Tips for 2012: Platform Carcasses – How to Keep Yours Out of the Pile

Platforms are all the rage today – the way to massive adoption and surefire wealth. IPO-ready Facebook is looking at a market cap of more than $100 billion just eight years after launching at Harvard College. With developers writing apps like crazy, the Apple and Android smartphones platforms now dominate a mobile phone ecosystem that was controlled by unambitious handset makers and mobile network operators just six years ago. PayPal’s software payments platform is busting into physical payments this year while developers flock to its APIs in order to payment-enable their applications. Ad-platfom Google’s free cash flow of (~10B) is larger than the annual sales of more than half of the Fortune 500 companies.

These success stories make starting a platform look easy.

The fact is that the business landscape is dotted with the carcasses of platforms. Hundreds of B2B exchanges started and just died around the turn of the last century for lack of a value proposition to the most critical side of that platform – the seller. Then, there are sputtering slow moving ones like Windows Mobile, which has been trying to gain ignition for more than a decade. Once supernovas, such as MySpace just three years ago, dominated the social networking scene but is on life support now as positive feedback effects went in reverse.

I have spent a lot of time working with companies that range from startups to corporate giants on starting, extending, and protecting platforms over the last two decades. Here are a few do’s and don’ts that always ring true.

(Related Commentary: Oh, Duh! Payments’ Most Obvious (Yet Overlooked) Best Practice)

DO’S

Make sure 1 plus 1 is a lot bigger than 2

Successful platforms are catalysts that create tremendous value by bringing two (or more) sides together. Would-be catalysts have to make sure their platform is creating enough value to get both sides on board and engaged that it can cover the costs of running the platform, and that it can return a profit.

A practical application of this is one of MPD’s all time favorites – NFC. Platforms built on NFC have mainly failed thus far because they haven’t created enough value for merchants and consumers outside of a few special cases like transit. By contrast, the Apple iPhone succeeded because consumers got a better/cooler phone that had a lot more functionality than just making and receiving calls, and developers got a better platform for writing applications that got more consumers interested in buying (and keeping) the phone. That set up a network effect to attract more developers, who got more consumers, and so on.

I know what you are thinking – how obvious. But, this fundamental “no, duh” is the source of failure for most platforms. For NFC, 1+1 was less than 2: in many cases by a mile. For the B2Bs, if 1+1 was greater than 2, it wasn’t greater by much.

Make sure both sides of the platform benefit

You can’t ignite a platform without having enough members of each side. To get enough members, you have to make sure that each side has a good economic proposition. They have to get more net value via the platform than they could from using the best alternatives available.

Platforms often have a “money side;” that usually consists of customers that are getting a lot of value that they can be made to pay for. And they have a “subsidy side;” that usually consists of customers that the platform needs but might have to be given an incentive to come on board.

Free television is a great example. The television networks “bribe” people to watch commercials sold to the money side – the advertisers – by inserting the ads in enticing programming.

Many of the B2B exchanges failed in the early 2000s because suppliers didn’t see any value in being part of a platform that exposed their prices to being beaten down further. And without suppliers, there were no buyers, nor was there enough value from buyers to bribe the suppliers to come.

Make sure you get the money and subsidy sides right

Another “no, duh” you say. But the surest way to kill a platform at birth is to try to make money off of the subsidy side. In fact, getting the two sides backwards is a common mistake in practice.

Figuring out the right answer requires a lot of hard work and analysis. But there are some simple rules. Sometimes one side of a platform can, more or less, dictate whether other customers also use that platform. The buyer usually gets to decide how they are going to pay so, for payment platforms, the buyer should normally get a break.  Money transfer is another interesting example. Receivers generally tell senders where they can get the funds. Not surprisingly, successful money transfer businesses have ended up not charging receivers for getting funds.

Treat the platform like a community

A common mistake that would-be platform operators make is thinking that platforms are about technology. Although technology enables platform activity, platforms are always places where different types of people and business get together and interact. To have a successful community, you have to encourage good behavior and discourage bad behavior. Successful platforms develop rules, and in fact, have elaborate governance systems.

Facebook is to have its mega-IPO instead of MySpace because Facebook not only provided great ways for people to build and maintain friendships but also prohibited bad stuff including foul language, pornography, hate speech, and people using false identifies.

Look at any successful platform and you’ll see that they have elaborate governance systems that encourage good behavior and discourage bad behavior. For more details on how and why this is important, see my Governing Bad Behavior on Multi-Sided Platforms

There are several “Don’ts” that follow directly from these “Do’s”

DON’TS

Make sure you don’t fall victim to the shiny new toy syndrome

Just because you’ve found some nifty technology that some customers might like doesn’t mean that you can create a platform. It takes two to tango in a platform world so that shiny new toy better generate enough value to make 1+1>2.

PayByTouch was a shiny new toy – what could be greater than paying with your finger – but there wasn’t enough value for either merchants or consumers. Many of the mobile payments startups look like they are repeating this same mistake. Just because you can, doesn’t mean you should.

Don’t take any group of customers for granted

It is never good to take customers for granted, but it can be fatal for platforms that get too comfortable with their customers. If customers on one side of the platform don’t get enough value from the platform, they won’t show up and the customers on the other side of the platform, even with the shiny new toy you are giving them-won’t have anyone to interact with. That’s what starts the platform death spiral.

The failed B2Bs took the suppliers for granted.

Don’t be greedy

Just because one group of customers gets value from the platform doesn’t mean you should try to make money off of them. The secret of most successful platforms is finding a group that is so valuable to another group that it makes sense to give the first group a low-ball price and charging the other group for access to them.

Successful video game console makers discovered that they shouldn’t try to make money from the people who buy the consoles.

Don’t let customers behave badly

In spite of what I said earlier about not taking customers for granted, with platforms, you better not follow the “customer is always right” adage either. Customers in a platform environment are interdependent. Bad behavior by one set of customers can harm others. That’s why Google prohibits websites from trying to game the search algorithm and eBay kicks merchants off who behave badly and get bad ratings.

2012: THE YEAR OF THE PLATFORM

In 2012, we’re going to witness one of the most incredible events in business history: an eight-year-old startup seeing a market cap possibly north of $100 billion. While it is less interesting than the story told in “The Social Network,” Mark Zuckerberg and his team has accomplished this remarkable feat by “doing the do’s” and “not doing the don’ts” I’ve described above.


David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework®, a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass. David is the Founder of Market Platform Dynamics. Read More