Technology companies are a lot like contemporary art. Their valuations reflect narratives more than anything else, and it’s just as important to devise the right framework to describe a phenomenon as it is to build a beautiful product.
Two New York consultants, Alex Moazed and Nicholas Johnson, have suggested an interesting way of looking at most of Silicon Valley’s biggest tech-company successes: they are all platforms.
The European Commission defines an online platform as a business that employs “information and communication technologies to facilitate interactions (including commercial transactions) between users, collection and use of data about these interactions, and network effects which make the use of the platforms with most users most valuable to other users”.
In their book, Modern Monopolies: What It Takes to Dominate the 21st Century Economy, Moazed and Johnson have a punchier definition: “A business that connects two or more mutually dependent groups in a way that benefits all sides.”
Uber, Airbnb, Alphabet, Facebook, Amazon, PayPal, Apple, Snapchat, Alibaba, Tencent — all of them fit this definition to various degrees. There’s no need for narrower definitions such as “sharing economy”, “social networks”, “messaging services”, “app ecosystems”, “fintech”. Platforms, not software, are eating the world, despite what venture capitalist Marc Andreessen once said. Software is just a tool that helps turn a business into a platform. Last year in the US, Moazed and Johnson write, every one of the top 10 websites by traffic was a platform, and so were 58% of “unicorns”, start-ups valued at US$1bn or more.
An old-school, 20th-century company is linear in nature, Moazed and Johnson explain. It produces goods or offers services and sells them to customers — a one-way street. On a platform, that’s not the case. Value is exchanged rather than transferred down a chain. “In the old model, scale was a result of investing in and growing a business’s internal resources,” they write. “But in a networked world, scale comes from cultivating an external network built on top of your business.”
eBay, one of the first platforms, is a perfect example. It doesn’t sell anything at all; it just facilitates the interactions of a network of buyers and sellers. Similarly, Facebook depends on user content, and Apple makes it possible for developers to sell their apps to iPhone users. Platforms sell a specific “core transaction” to those who offer, create and consume goods and services.
The question that arises at this point is, what exactly is new about intermediation? Moazed and Johnson note that the concept is not exactly novel: the Roman marketplace and the modern shopping mall served the same purpose. Technology, however, has turned the platform model into a dominant one. It has allowed the winners of the economic paradigm shift from linear to platform models to combine the power of markets with that of computerised coordination. “In a manner of speaking, Google is now creating the socialist utopia that all the might of Soviet Russia could not,” Moazed and Johnson write. “Google is making you feel empowered, even though it’s telling you what you want.”
If this sounds dystopian, it should, just a little. Successful platforms are monopolies, or at least members of small oligopolies, thanks to the difficulty of getting a huge number of people to use one specific platform.
That difficulty translates to the magic sauce needed to build a successful platform: the skill of building up, then managing and policing large communities. Facebook defeated such social platforms as Friendster and MySpace because it started out by methodically signing up colleges, then high schools, facilitating communication between people who actually wanted to communicate with each other.
Moazed and Johnson point out that the much-touted “network effect”, which successful platform businesses use to grow and maintain their monopoly positions, is essentially local: the number of people on a network only matters to a user if these people are the kind he needs to be in touch with, and that often means geographical closeness — or, at best, the commonality of interests.
The skill set needed to create a platform company is essentially social. It has little to do with engineering or product design and everything to do with knowing how to get people to interact.
Uber initially paid drivers to wait around so that new users could always find a driver ready to take them somewhere. Reddit originally created or seeded all of the content it wanted people to discuss, and even set up fake accounts to make the site look populated. Airbnb leeched onto Craigslist’s existing network until Craigslist found out what was going on and made this impossible, not just for Airbnb but for anyone else who’d get the same idea. Tinder grew by holding presentations at sororities.
Even if tech investors don’t apply this framework, they feel its power intuitively. According to Moazed and Johnson, platforms among unicorns are on average valued at $4,5bn, while “linear” businesses are worth an average of $2,5bn. Apple is forgiven flagging hardware sales for showing healthy growth in its services business — the platform part of the enterprise.
It probably makes sense to push the intuition further, though. When discussing the prospects of Facebook, Twitter or other platform businesses, investors often concentrate on user-base growth. The obsession with size is wrong: the quality of the community organisation, curation and policing is likely much more important. How a company solves the user recruitment problem is a good predictor of how it will hold up. Measures of user satisfaction and ways to gauge the quality of the user experience are needed to figure out which platforms stand the best chance of making it to the top or remaining there. The tech industry is not so much technologically focused as it is socially focused. Success is based on the ability to draw — and keep — the crowds. — (c) 2016 Bloomberg LP