Platform Strategy and the Internet of Things

In their book Platform Revolution (W.W. Norton & Co., 2016), authors Geoffrey G. Parker, Marshall Van Alstyne, and Sangeet Paul Choudary write that the platform model is the basis of some of the most successful companies operating today, from Google and Amazon to Uber and eBay. “No matter who you are or what you do for a living, it’s highly likely that platforms have already changed your life as an employee, a business leader, a professional, a consumer, or a citizen — and are poised to produce even greater changes in your daily life in the years to come,” they write.

The platform business model uses technology to connect people, organizations, and resources in an interactive ecosystem. As defined in Platform Revolution, “A platform is a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participatory infrastructure for these interactions and sets governance conditions for them. The platform’s overarching purpose: to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.”

On October 13, 2016, Van Alstyne, the Everett Lord Distinguished Faculty Scholar at Boston University, participated in a webinar about platform strategy hosted by MIT Sloan Management Review and made possible with sponsorship support from Xively. The presentation focused on the crucial role of the emerging Internet of Things as a component of platform strategy. The webinar was moderated by Steven Paul, a contributing editor at MIT SMR, and highlighted on Twitter at the hashtag #MITSMRevent. Among Van Alstyne’s key points:

Architecturally, the IoT redefines how devices communicate and offers significant economies of scale.

Before the Internet of Things, each participant in a network had his or her own device, with each device having a full stack of the functions that they use. In this architecture, “each device has to communicate with each of the other devices,” said Van Alstyne. The Internet of Things presents a competing architecture view, which “might be to put everything into a single box,” he said. “Here you get economies of scale. Everyone has access to all of the functions, and you save and economize on some of the connectivity and communications that take place.” There is a downside to going completely in this direction, he said: “While this model scales beautifully, it makes making changes more difficult.”

Folding IoT onto a platform strategy is a more architecturally ideal solution.

In contrast to the two architectural models above, Van Alstyne presented a hybrid platform model. The services that everyone uses is the shared core in an open platform. Limiting how much activity takes place on the platform has advantages: Functions have less efficiency loss, Van Alstyne noted, if they are interacting with fewer parts. Some duplication costs are made up by execution gains in speed and in modification. “If an architecture shares some of the functions, then you can also swap some modules more easily and more cost-effectively in this kind of architecture,” he said.

Companies can gain competitive advantage by focusing on how they help clients network.

“The product business model is broken,” Van Alstyne said. “Most companies compete by adding new features to products,” he said. “They haven’t been in the business of asking how to add network effects.” And that doesn’t mean just looking at technology and interfaces; it also means looking at economics. Van Alstyne cited the work of Sanjay Sarma, the vice president for Open Learning at MIT and a developer of many of the technologies behind radio-frequency identification (RFID) standards worldwide. “He has this wonderful observation, that you really need to start thinking about when things start to buy things. It’s not about interaction, but when they actually buy things.” As examples, he cites washers that refill themselves with softener or soap, printers that buy ink when they’re low, and the Nest thermostat which can buy energy on its owner’s behalf.

When “things buy things,” it changes the nature of business in fundamental ways.

“One element is basic marketing,” said Van Alstyne. “The point of interaction is no longer necessarily the person, but the platform. How are you going to coupon when it’s already been the machine that makes a decision to purchase or refill the soap or the paper?” Product manufacturers — of objects that include coffeemakers and printers — may now find themselves in the business of selling their customers a service: a coffee service, a printer service. “Each of these things becomes an interesting business challenge,” said Van Alstyne. “It’s not just the design of the device — it’s the design of the ecosystem around the device.”

Companies built on a platform strategy can create amazing value.

Van Alstyne showed the market cap value of competitive companies, where one is traditional and one is built on platforms. They included BMW (US$50B) and Uber (US$60B), Marriott (US$25B) and Airbnb (US$21B), and Walt Disney (US$146B) and Facebook (US$366B). “Facebook is now twice the value as Disney,” noted Van Alstyne. “You and I create the content for Facebook, where Walt Disney has hired these fantastic designers and storyboard artists and others to create the iconic culture we have today.” Platform companies can scale really quickly, he said, because companies “don’t bear even the marginal costs of production.” Airbnb has 40,000 listings in Paris and 8,105 in Berlin, and “it’s simply impossible for Marriott, Hyatt, or InterContinental to grow at that scale because they’d have to own the assets. It’s a different business model.”

“The transition to Internet Era firms is both like and unlike the previous transition to Industrial Era firms.”

Thirteen of the top 30 global brands, he said, are now platform companies — meaning they have the presence of a market or an external ecosystem — including Apple, Google, Microsoft, IBM, Samsung, and Amazon. And if you look at companies that are Internet-based, it’s even more stark: The dominant names, including Google, Facebook, and YouTube, are overwhelmingly platform companies. Manufacturing brands that rank as top global brands, including GE, BMW, and Nike, are adding sensors and other IoT features and capabilities to their products. What all this means is whereas the Industrial Era was defined by giant monopolies created by supply economies of scale, the Internet Era is seeing comparable monopolies being created by demand economies of scale, where users create value for users. These demand economies of scale take advantage of technological improvements on the demand side, including efficiencies in social networks, demand aggregation, and app development, to create these giant companies.

One new reality from all this: In any market with network effects, the focus of attention must shift from inside to outside the company.

“The reason for this is simple,” said Van Alstyne: “You cannot scale network effects inside the firm as easily as outside the firm, for the simple reason that there are more people and devices outside the firm than inside.” He said that while existing businesses need to adjust their strategies, new business managers must be versed in thinking about this new kind of ecosystem. “As a business school professor, almost everything we teach, whether it’s marketing, or strategy, or operations and logistics, architecture, any of these things, our training for inside the firm must now take on training for outside the firm as additional perspectives.”

“Strategy is different in the Internet Era than it was under the product-based or supply-side economy of scale.”

The traditional view of strategy, he said, is to look at the forces that are coming into the market, look at the threat of entrance, look at the substitutes, and to compete on either cost leadership or product differentiation. Companies also strive to own their core assets so that no one else can make what they make. “That’s not how platforms work,” Van Alstyne emphasized. “In platforms, the real goal is as many interactions as possible. You want to increase engagement.” It’s the demand side economies of scale that creates both the sustainability and the barrier to entry. As well, the boundaries of the ecosystem can be altered as consumers become producers — as with Uber wanting its riders to become drivers and Airbnb wanting its guests to become hosts. When this happens, Van Alstyne noted, a company’s demand becomes its supply.