On scaling & platforms – An Interview with Sangeet Choudary
The topic of building platforms and leveraging on ecosystems and that of the implications in terms of democracy, sustainability and justice on the resulting markets always was an important aspect of the discussion inside OuiShare and a leading topic at the OuiShare Fest (to have an idea of the amount of discussion you can start from here: OSFest videos about platforms).
I personally spent the last two years researching Platform Design – following the discussion about the topic with the aim to review and update the Platform Design Toolkit originally released in 2013 – and Sangeet Paul Choudary work have always been on my reading list, together with that of John Hagel and many more platform model analysts.
These days, we’re finally understanding how platform thinking – an approach based on using new enabling technologies and ecosystem wide design thinking – can really help designer leveraging system wide incentives and rethink an increasingly large number of markets and niches, with the potential of eventyally radically reinventing our concept of work itself.
A few days ago, in correspondence of the launch of his book, Platform Scale, I reached out to Sangeet to share a few questions and get a few opinionated answers about the phenomenon of the digital platforms. His book wants to be the definitive guide to building such platform empowered startups, by especially exploring the specific traction issues that these startups face when launching a high potential platform (particularly around solving chicken and egg problems, creating network effects and generating organic viral loops).
Sangeet, beyond the buzzwords it’s always very difficult to define what is the topic we’re actually talking about. The definition of a “platform” is something we still don’t grasp 100% and probably we’ll never understand entirely. So what’s your definition of platform?
Sangeet Choudary. A platform is a business model that allows multiple sides (producers and consumers) to interact with each other by providing an infrastructure that connects them, on top of which they can build and exchange value, and governs the market that coalesces on top of it by determining which interactions are desirable and which ones are undesirable. This definition of a platform is best contrasted against the traditional model of the pipe; a linear business model where value is created and shipped out and flows from the producer to the consumer. Hotels work like pipes while Airbnb works like a platform. Television and traditional media work like pipes while YouTube and Medium work like platforms.
Pipes compete based on ownership of resources while platforms compete based on ownership of the ecosystem that coalesces around the platform. Pipes scale by scaling processes that run through the pipe while platforms scale by scaling the ecosystem interactions.
Can you explain the core idea behind your understanding of platforms? Why do platforms work?
S. C. The core idea behind my platforms thinking is the following: the goal of a platform is to enable interactions between producers and consumers. In this context, the most important activity of the platform should be about increasing efficiency and repeatability of these interactions. This essentially means that both sides should be encouraged to participate more, and more often, and the the platform should encourage higher quality interactions as it scales.
Platforms work when they succeed in scaling both the quantity and the quality of the interactions that they enable. Uber, for example, needs to ensure that every time you open the app you will get connected to an available taxi in your vicinity but it also needs to ensure that the taxi drivers and the riders who do not lead to good interactions get pushed further down the pecking order.
What are the trends that brought us the Platform Age?
S. C. I believe that there are four trends that have led us to the platform age that we are in today and these four trends are really crucial to how business is changing today. If you think of business in general, fundamental economics require that a producer and a consumer exchange value to engage in business.
Four questions determine the nature of business:
- How are the producer and the consumer connected?
- What is the mechanism by which the producer produces value and ships it to the consumer?
- How does the consumer take a decision about what he/she needs to consume?
- How does the market of these exchanges become more efficient over time?
This is basic economics and four key drivers are changing these assumptions today.
The first trend is connectivity. Because of connectivity, new markets are being created and people are being connected to each other in entirely new ways. Producers and consumers are connected to each other in entirely new models.
The second is the democratization of production. Today, the democratization of the means of production coupled with the fact that producers have a ready market to access, is leading to the creation of new sources of production that did not exist in the past. Airbnb is unearthing new accommodation options, Youtube is creating new content creators. We may call this spare capacity or cognitive surplus. The democratization of production is unearthing this at an unforeseen rate. We’ve seen this happen to creative design and we’re now seeing this happen to industrial design with the spread of the 3D printer. The rise of new producers is a hallmark of the platform age.
The rise of new producers is a hallmark of the platform age
Let’s go to the consumer side of the equation. Consumers require decision support systems while deciding what they want to consume. Traditionally, the goal of marketing has been to create this decision support system. However, with the rise of data and intelligence, we have new kinds of decision support systems today. On Facebook, your newsfeed is the decision support system that tells you what you should read and what you should not. We are going to see more of these intelligent decision support systems dominating business in the future.
We are going to see more of these intelligent decision support systems dominating business in the future
Finally, these new markets of producers and consumers needs to become more and more efficient over time. This happens because we have an explosion of data today. We have more data today than we have ever had in the past, and almost 90% of the data that exists today did not exist three years back. Data helps platforms orchestrate interactions between market participants efficiently.
These four factors – connectivity, democratization of production, intelligence, and data – are together driving the platform age.
To what extent “platform” thinking is a new knowledge framework to understand and extract value from markets? On what scale can platform thinking be applied: global? local? two sides? Multi-side? What are the parameters that make platform thinking applicable?
S. C. Platform thinking is a new knowledge framework to the extent that you’re shifting the focus of the market from the goods and services that are being created to the overall interaction that they lead to and how a focus on interactions makes the market more efficient over time. Moreover, platform thinking focuses on the design of technology that enables these markets to become highly efficient. This is where platform thinking is a new paradigm because it identifies the factors that create and enable successful markets and internalizes them into technology design. The idea of using platform thinking is to create technology that coalesces a market around it, by taking into account all the factors that lead to market efficiency while you’re designing the technology.
Connectivity, democratization of production, intelligence, and data are together driving the platform age
This is where platform thinking becomes really important because, the application of this is not just to two-sided or multi-sided markets, not just to local or global networks. It applies to any connected system. If you serve a group of connected customers today and if you succeed in engaging them in a manner that can be used to attract a whole new market of third parties to come onto your business and serve your customers, then you’ve applied platform thinking.
Do you have any consideration on the implications of the embracement of platform thinking on organizations, the skill of workers, new institutional forms that may arise in the future, new models of platform governance?
S. C. Platforms and networks are fundamentally changing organizations in many different ways. First, organizations have traditionally succeeded because people could trade their work in internal markets that existed within organizations and organizations aggregated all of this individual work towards a greater goal.
Platforms change things in two ways. On platforms, people can participate in external markets but more importantly that platforms can also combine all of these individual skills to create a larger output much like organizations have always done. This is best seen in how Wikipedia reorganizes content creation which was done in an organizational form by Encyclopedia Britannica. I would expect us to see more of Wikipedia-style models coming up in the future to challenge traditional organizations. Platforms unbundle work and rebundle it in new forms.
Platforms unbundle work and rebundle it in new forms
Platforms will forces us to rethink what can be done inside the organization and what can be done leveraging an ecosystem. The boundaries of the organizations are already changing in a world of platforms.
What are the major implications – with regards to the transformation of the firm – of including peers and partners inside the production model?
S. C. The major implications with regard to the transformation of the firm in an age of platforms is the fact that the boundary conditions of the firm fundamentally start changing. The boundaries of the firm traditionally have always depended on transaction costs and platforms make transactions costs fall drastically. As a result, the value creating actions that should be held within the firm versus those that should be opened to the ecosystem need to be reassessed.
Other changes are more subtle. As an example, traditional business development was slow, manual and contractual in nature. With the rise of APIs, business development works in a more plug-and-play fashion today. The API serves as the contract as well as the channel through which the partnership is executed. And this is where platforms with an API strategy are able to benefit from a much larger base of partners. Some partners building on top of the platform can also be acquired in the future. This is an entirely new paradigm in business development that is coming up because of platforms.
With the rise of APIs, business development works in a more plug-and-play fashion
With the rise of platforms and with everything becoming networked the whole question of what should be within the firm was and what should be phased out into the ecosystem comes in. Actions and roles that have traditionally been played by actors within the firm can now be rolled out into the ecosystem. A classic example of this is happening with logistics. Traditionally logistics players have employed hundreds and thousands of people to create a reliable logistics network, but in a world where an ecosystem can be constantly connected to your business new models of logistics are being implemented by the likes of Uber and Munchery – and this has implications on the future of multiple industries that depend on logistics today including retail.
John Hagel often points out that Learning Platforms are the ultimate stage of the evolution of platforms. Lately, Esko Kilpi pointed out that “post industrial work IS learning”.To what extent platforms are changing the consolidated concept of the “customer” and the product/service model?
S. C. The concept of the customer fundamentally changes on platforms because you do not simply have one customer who consumes the product or service. You can have multiple customers on a platform and you may also have many users of the platform who do not pay you but are critical to the functioning of the ecosystem. If you think of a model like the Nest thermostat: In the past, you just sold a thermostat to the customer and you ended the business over there. Today, the Nest thermostat gathers data which gives rise to the second customer, the utilities board, who can use that data to take decisions and will readily pay for such analytics. These models will become increasingly relevant as platforms start consolidating more learning and start packaging this learning as new assets that can be monetized further.
Can you tell us more of Platform Summit you co-chair?
S. C. The platform summit is held annually at MIT and attracts participation from Fortune 500 CXOs from around the world who are interested in building platforms and laying out a platform strategy.
Sangeet Paul Choudary is the author of the best-selling book Platform Scale, founder of Platform Thinking Labs and co-chair of the MIT Platform Strategy Summit. The book is available in Kindle and paperback format on Amazon (click here to get your copy). Also visit the book website to download the first 3 chapters for free and for additional bonus content associated with the book. For further information on all things platforms by Sangeet, visit his blog Platform Thinking (platformed.info).
If you’re interested in a set of tools to design and analyze platforms, stay tuned on the launch of Platform Design Toolkit 2.0 created by our fellow connector Simone Cicero (register here).