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How Platforms Turned Business on its Head

This article centered on a presentation given by Boston University’s Information Economics Professor Marshall Van Alstyne, who talked about the platform revolution. He argued that platform ecosystems, which are businesses that build online networks that allow them to grow and succeed beyond the confinement of the corporation have inverted the very nature of the firm. He suggests that business models nowadays may be becoming obsolete and need to change soon. The industrial model in the 20th century, where corporate giants achieved supply side economics of sale to grow bigger and produce more at reduced costs to beat the competition, is not the current strategy for corporations to succeed. Contrastingly, platform companies now use network ecosystems to achieve demand side economies of scale–their bigger networks creates an increased value, which in turn attracts more users to the network, and again increases their value. In addition, platform businesses are able to innovate faster due to their open systems, which allows users to share ideas with others and provides more use for their products. Some examples of the value of platform businesses are how Uber is valued at 10x more than BMW, with only 10th of the amount of employees at BMW. Additionally, Airbnb, which has only 5,000 employees and no properties is worth almost the same as Mariott, which has a global network and over 200,000 employees. Based on 2017 data, 12 of the 30 most valuable global brands were platform companies; the top 5 are all platform companies.

Platform businesses are becoming increasingly popular due to the way they invite users to make their own contributions and increase their network. Venture capitalist Marc Andreesen has observed: “A platform is a system that can be…adapted to countless needs and niches that the platform’s original developers could not possibly have contemplated.” This relates to what we learned about network effects in class. From our studies about network effects, we studied how knowing the number of consumers who use a good influences other consumers to decide to use the good. We learned two different reasons why individuals might imitate the behavior of others: informational effects (since the behavior of other people conveys information that they might not know) and direct-benefit effects (you incur an explicit benefit when you align your behavior with the behavior of others). This article expounds the latter; platform businesses leverages the inputs and ideas of their consumers to create direct-benefit effects that occur when more consumers use the product. For instance, the platform business McCormick, a spice company, exploits network effects to build community. Recipes are shared between customers, and the more customers that join the platform, the more recipes and uses for spices they have to their advantage. Customers might use this company’s products rather than a competing company because of the added value of sharing recipes and ideas this network gives them.




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