How much did the business world shift in the last century?
article By Lital Marom
1917: The Industrialist Era
Steel is often cited as the first of several new areas for industrial mass-production, which are said to characterize a "Second Industrial Revolution".
1967: The Hardware Era
Fast forward 50 years, and oil is still big. Aside from energy, the 1967 list seems dominated by companies that make tangible things. IBM was making some of the first and most advanced computers, GM was the largest U.S. auto manufacturer, and both Kodak and Polaroid made cameras. General Electric, made everything from computers to jet engines at this time.
2018: The Platform Era
Fast forward to now, the top companies by market - Amazon, Apple, Facebook, Google, and Microsoft— have upended entire industries by adopting a single phenomenon: the platform business model. Together, they are worth more than$3 trillion in market capitalization.
Platform business models aren’t new. Platforms are as old as human civilization itself – going back to early marketplaces and bazaars in ancient Rome. What’s changed in this century is that information technology has profoundly reduced the need to own physical infrastructure and assets. Information technology enables us to create and scale up platforms in a much simpler and cheaper way, enabling network effects, and enhances the ability to capture, analyze, and exchange huge amounts of data that increase the platform’s value to all.
It’s important to remember that a platform is a business model, not just a piece of technology. Also, not all tech companies are platform businesses. Technology is a key enabler for platforms, but using technology and data does not automatically make a business a platform. The most common misuse of the term “platform” is when it’s used to describe an integrated suite of software products. This is especially common among SaaS companies. In such cases, the word “platform” really is just being used as a marketing term and refers to linear businesses.
Linear companies have a very closed ecosystem. All of the titans of industry from the early twentieth century were linear businesses, including Standard Oil, General Motors (GM), U.S. Steel, General Electric, Walmart, Toyota, and ExxonMobil. Platforms, as opposed to linear businesses, don’t own the means of production – instead, they create the means of connection.
A platform is a business model that creates value by repeatedly improving the quality and quantity of the interaction between two or more interdependent groups, usually consumers and producers. Platforms create communities and markets that allow consumers and producers to interact and exchange value.
Producers will use the resources provided by the platform to create value for consumers. This way developers create apps on top of Android and iOS, writers create articles on top of Medium, hosts create room availability on top of Airbnb, sellers create goods on top of Etsy, eBay, Amazon and Alibaba. Consumers then access the platform and are served what they’re looking for. And finally, once a market is created, the platform sets the rules of governance that determine what gets encouraged and what gets discouraged.
Why Platforms Scale Better than Linear Businesses
This is the most important driver for platform scale. More production activity on the platform attracts more consumption, which, in turn, attracts more production. More apps availability on the App Store attracts more consumers, which, in turn, attracts more app-developers, leading to higher apps availability.
Near-zero Marginal Costs
For decades, competitive markets have focused on driving productivity up and marginal costs down, enabling businesses to reduce the price of their goods and services to compete against each other and win customers. Today, the focus is changing. The Internet has always allowed near-zero marginal costs of distribution. This helps digital businesses scale in general, but platforms scale even better because they also benefit from near-zero marginal costs of creation.
A successful platform has close to zero marginal cost, while thanks to network effects, the value it delivers continues to grow as more users join its ecosystem. If a hotel has to add more rooms, it has to create buildings, own rooms and service them regularly. Airbnb can add more rooms at near-zero marginal costs of adding a new room. This is why non-inventory-based models like platforms scale so well.
Let’s not confuse virality with marketing. For example, Instagram grew viral because new users discovered it every time someone shared it on Facebook. So by virtue of using Instagram (the service), consumers help expand and grow Instagram’s business.
The platform economy has exploded into a $5 trillion plus market and is no longer confined to digital industries like social media and ecommerce, as wildly divergent industries like banking (fintech and blockchain), insurance (wellness apps), and health care (medical data) - leverage the power of platforms to connect consumers with products and services.
It’s also important to note that platforms can be misused because of the amount of data they produce and process, so policing needs to be strong on that front. And we haven’t even seen the full effect of emerging and exponential technologies like artificial intelligence on platforms of the future. This raises the question: what will the next 50 years hold – and how many of the top companies will remain?