What the Power of the Platform Means for Your Company

What the Power of the Platform Means For Your Company
By Howard Tullman

Looking for a very solid business opportunity? Locate your business at the hub of a network.

People casually talk about “the cloud” as a platform, but it’s not. It’s just an alternative method of data conveyance. The cloud has solved the distribution dilemma that has dogged millions of young businesses since the beginning of time: How do I get my product or service offering out there to the masses? Solving that riddle is far more possible today than ever before.

The cloud is tremendously valuable, but the real value, and the ultimate power, resides with the parties who control the content and the underlying delivery platform itself, not the pipes. We get a taste of this power play every time a cable company tries to extort additional carriage fees from content providers. All these games play out the same way: The guys with the goods get the gold while the pipe guys are sent packing.
 

metcalfe_curve

Platforms: A Winner-Take-All Opportunity
 
When I talk about platforms, I’m not talking about the basic technology platforms (iOS6, Jelly Bean, or Windows 8) that run our devices; I’m talking about the data, content, and transaction platforms (or you might think of them as bilateral networks) that sit on top of these enabling technologies and that connect us with the data we desire, cool content of every kind, necessary products and services, or simply other people.

These platforms are central to the “winner-take-all” realities of the world of technology, and they help to create the inevitable concentration in these markets where one or two winners out distance the field and then enjoy disproportionate and substantial profits for as long as their dominance persists. Aggressively deployed, these huge profits allow the leaders to pull away from the pack in many different ways. Excess cash can be applied to securing priority positions and placements in critical channels, crowding the channels themselves and closing out available ad inventory, or other exposure available for competitors, predatory pricing, etc.

The fact is that in markets fundamentally driven and dominated by (a) two or three central platforms, (b) mission-critical technologies, (c) ubiquitous operating systems or (d) enabling networks, in short order there will consistently emerge a clear and obvious winner, a strong number two, and then a bunch of midgets and also rans. There’s just not enough volume or oxygen in these intensely competitive markets to support a half dozen winners.

All of the structural considerations inherent in the ways we as customers and consumers elect to narrow and concentrate our choices, rather than broadening the scope of our inquiries and our horizons, also help to reinforce and precisely dictate the result we see over and over again. Whether it’s time constraints, an interest in efficiency, pure ignorance, sheer laziness, or basic human nature, we all tend to pick and stick with our familiar favorites.

There are a number of other contributing factors to this recurring outcome: demonstrated economies of scale, market dictated centralization and standardization requirements, and of course the power of Metcalfe’s Law, which describes and defines the exponential growth characteristics of networks and how that growth rapidly increases the network’s power, resilience, and value. The more power and connections a business has to and with its users, the more powerful and profitable it becomes.

Metcalfe’s law, with certain subsequent refinements and embellishments, states that the value of any network (originally consisting of connected and bilaterally communicating inanimate devices, but these days counting nodes of any kind including people and/or users) is proportional to the square of the number of connections. If anything, in today’s world of constant connectivity, where every one of us is tethered to one or more devices at all times, the predictive power and nearly universal application of Metcalfe is even more relevant.

So your mission is clear: If you want to find the prime position for your business to capture value from whatever back and forth activity is going on in your industry, you must identify the convergence points within the market, through which virtually all of the traffic and commerce needs to pass, and be there. If you can locate the hub (not the spokes) and get yourself on the gatekeeper gravy train you will learn very quickly just how powerful a position this can be. Being paid even a little something every time anything moves over a network adds up to a whole lot of everything in short order.

You don’t have to be some Colossus astride the harbor to pull this off. Smart little guys can often construct effective horizontal platforms more quickly and economically than the big vertical (and siloed) players who dominate many (mainly oligopolistic) markets. You just need to understand the basic building blocks and the dynamics of what makes a particular platform prevail. And you need to plan to be a platform from day one. Believe me, it’s not something you stumble into.

What do you need to know and be thinking about in terms of creating a persistent and winning platform as you try to build and properly position your own business?

Do Something For The Market That The Major Players Can’t Do

There are any number of industries in which the major players are prevented by law or regulation from collaborative or cooperative efforts (think pricing issues) because they are regarded as predatory, exclusionary, and anti-competitive. This makes it very difficult for them to structure and organize some market solutions that might ultimately be very beneficial and cost effective for the consumer. But these situations create great opportunities and openings for little guys to come out of nowhere and create sustainable new solutions.

So, in the case of the book publishers and Apple, albeit at Amazon’s urging, government attorneys have sued, fined, and/or settled with almost all of the players for “conspiring to fix book prices.” But in the streaming music space, where the music moguls seem to have finally learned a few lessons from the Napster debacle, we have Spotify and Shazam and others providing new services to consumers. And guess what? By creating industry wide platforms for music delivery, these aggressive startups not only blew the big guys away, but even better, invited them in as investors. At last count, Spotify investors included: Sony BMG at 5.8 percent, Universal Music at 4.8 percent, Warner Music at 3.8 percent, and EMI at 1. 9 percent. Merlin also holds a small stake. The story is pretty much the same with Shazam, where Sony, Universal (Vivendi) and Warner (Access Industries) each invested $3 million. Could the message they are sending be any clearer? A very convenient and “legal” way for the very same guys who couldn’t do it themselves to do it together through smart startups building next-gen platforms.

Create Criteria (or Objective Benchmarks) That Become De Facto Industry Standards

A second path to becoming an industry platform deals with a different issue that is also common in many industries, and presents new opportunities in all of them. In markets dominated by a few majors, a common problem in organizing and improving the efficiency of the market and creating better visibility (and “apples-to-apples” price comparison capability) for the consumer is the lack of common and consistent nomenclature and the fact that each of the players has adopted (and is psychologically “stuck” with) their own numbering, identifying, and classifying systems for their products, even though the products offered by multiple players are functionally and often physically identical.

There are many reasons for this; companies that believe their branding and reputation will permit them to charge more for a product that is basically a commodity come to mind, as do those that fall into the this-is-how-we-do-it trap, or the not-invented-here syndrome, or those that are simply bound up in legacy accounting and inventory systems that makes the adoption of new standards seem too daunting.

Not surprising, the solutions that are changing markets like these are again being created by startups that are unhampered by all the historical and traditional concerns, as well as the ego issues, that make it hard to innovate. In addition to being free of the constraints of the past, these startups bring a fresh approach that can best be described by three critical words: “Good Enough Is.” They aren’t trying to write a Magna Carta for product classification, or a Geneva Convention for generating inventory lists; they just want to build a simple new solution that spans horizontally across the many market players and focuses only on the common and critical components and characteristics that matter to the market when specifications and purchase decisions are being made. It doesn’t need to be perfect, or the “be-all and the end-all.” It just needs to work and be good enough to get the job done. Things can and will always get better, but they won’t ever happen if you don’t get something started in the first place.

Need a simple example? Think about eBay way back when. No real product specifications. No serial numbers and other details. Not even photos in many cases. But it became a powerful trading platform in very short order because it was sufficient to get the job done. While customer expectations increase over time, they tend to be pretty modest at the outset of a new experience.

Howard A. Tullman is the CEO of 1871–Where Digital Startups Get Their Start, and is also the General Managing Partner of G2T3V, LLC and of Chicago High Tech Investment Partners. He is a member of the Chicago NEXT & Cultural Affairs Councils and the Illinois Innovation & Arts Councils; an adjunct professor at Kellogg; and an advisor to many start-ups. He is the former Chairman and CEO of Tribeca Flashpoint Media Arts Academy. Over the last 45 years he has successfully founded more than a dozen high-tech companies.