How was the book?

How AirBnB got started? ”If you’re heading out to the ICSID/ IDSA World Congress/ Connecting ’07 event in San Francisco next week and have yet to make accommodations….” And then Chesky and Gebbia recruited a third friend, Nathan Blecharczyk, to help them make affordable room rentals a long-term business. Their first big hit at the 2008 South by Southwest festival in Austin.

– Uber was launched in San Francisco in March 2009. Today the valuation exceeds  $ 50 billion and is present in 200 global cities.

– China-based retailing giant Alibaba handles 80% of ecommerce in China, it has nearly a billion different products and is “the world’s biggest bazaar” without it’s own inventory.

– ”Facebook is arguably the world’s biggest media company—all without producing a single piece of original content”.

This book is a handbook of platform economy and the book should be part of every leaders curriculum.

What are the key learnings of the book? 

”Why network effects? The reason Instagram sold for $ 1 billion is not its thirteen employees; the reason WhatsApp sold for $ 19 billion wasn’t its fifty employees. The reasons were the same: the network effects both organizations had created.”

Network effect is a kind of:

– growth building strategy and

– new customer acquisition strategy.

Business model for a platform company is Network effect + Price effects + Brand effects = Market building tools.

”Price effects and brand effects have their place in a startup’s growth strategy. But only network effects create the virtuous cycle we described above, which leads to the building of a longlasting network of users—a phenomenon we called lock-in. Curious about what separated the successful companies from those that failed, we examined dozens of cases and found that the failures mostly relied on price or brand effects.”

Key learnings is that…

1) First the industries likely to target for the platform disruption are:

– Information-intensive industries (media/telecom)

– Industries with non-scalable gatekeepers (retail/publishing)

– Highly fragmented industries (Uber / AirBnB)

– Industries characterized by extreme information asymmetries (used cars/houses)

2) Second the industries that are not likely to be target of the platform disruption are:

– Industries with high regulatory control (banking/health care)

– Industries with high failure cost (where risk for the consumer to fail is high)

– Resource-intensive industries

3) Third key learning is that regulators must adjust and adapt their thinking from the pipe-line businesses to platform economy.

Developing the metrics for a platform company one must design those from the core interactions and benefits for producers and consumers? Measure what you are supposed to do. Not normal KPIs. Measure core interactions!

What is a platform?

”A platform is a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participative 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.”

”A platform is fundamentally an infrastructure designed to facilitate interactions among producers and consumers of value. These two basic types of participants use the platform to connect with each other and to engage in exchanges—first, an exchange of information; then, if desired, an exchange of goods or services in return for some form of currency.”

”Strategy has moved from controlling unique internal resources and erecting competitive barriers to orchestrating external resources and engaging vibrant communities.”

”Positive network effects are the main source of value creation and competitive advantage in a platform business.”

In the case of Uber, two sides of the market are involved: riders attract drivers, and drivers attract riders. So Uber has created two-sided network effects.

Eight Ways to Launch a Successful Platform

1. The follow-the-rabbit strategy. Case Intel and challenge in demonstrating the value of wireless technology.

2. The piggyback strategy.  Case Paypal. PayPal used this strategy when it piggybacked on eBay’s online auction platform.

3. The seeding strategy. Case Android. When Google launched its Android smartphone operating system to compete with Apple’s, it seeded the market by offering $ 5 million in prizes to developers who came up with the best apps in each of ten categories, including gaming, productivity, social networking, and entertainment. Winners not only got the prize money but became market leaders in their categories, attracting large numbers of customers as a result.

Case Adobe. Adobe launched its now-ubiquitous PDF document-reading tool in part by arranging to make all federal government tax forms available online.

4. The marquee strategy. Provide incentives to attract members of a key user set onto your platform. Case Swiss Post and iPads.

5. The single-side strategy. Case OpenTable.

6. The producer evangelism strategy. Case Kickstarter.

7. The big-bang adoption strategy. Case Twitter/Tinder/Foursqaure.

8. The micromarket strategy. Case Facebook.

Capturing the Value Created by Network Effects:

1. CHARGING A TRANSACTION FEE. Case AirBnB

2. CHARGING FOR ACCESS. Case Dribble.

3. CHARGING FOR ENHANCED ACCESS. Case Yelp.

4. CHARGING FOR ENHANCED CURATION. Case Sittercity.

Defining What Platform Users and Partners Can and Cannot Do

There are three kinds of openness decisions that platform designers and managers need to grapple with. These are:

– Decisions regarding manager and sponsor participation. Case Visa.

– Decisions regarding developer participation. Case API’s and Amazon.

– Decisions regarding user participation. Case Wikipedia / ETSY.

Policies to Increase Value and Enhance Growth

Three fundamental rules of good governance:

1. Always create value for the consumers you serve;

2. Don’t use your power to change the rules in your favor

3. Don’t take more than a fair share of the wealth.

How Platform Managers Can Measure What Really Matters

Startup phase and core interaction: ”In the startup phase, it is critical to have simple measures to guide decision-making around key questions of platform design and launch, including the design of the core interaction; the development of effective tools to pull users, facilitate interactions, and match producers with consumers; the creation of effective systems of curation; and decisions about how open the platform should be to various kinds of participants. The startup phase must track the growth of their most important asset: active producers and consumers who are participating in a large volume of successful interactions.”

Monetization phase and conversion. ”Once the platform has reached critical mass and users are gaining significant value from the platform, the focus of metrics can shift to customer retention and the conversion of active users to paying customers. This is the phase in which monetization becomes a crucial issue.”

Innovation phase and innovation: ”Finally, as the platform matures and a self-sustaining business model has been developed, the challenge of user retention and growth requires the platform to innovate. This is the best way to maintain and enhance the business’s value proposition relative to competing platforms.”

Measure what matters:

1. Revenue. ”Platforms whose revenue is based on claiming a share of the value of any interaction—a commission fee based on a percentage of the interaction, for example—may choose to measure interaction capture.”

2. Content. ”Platforms that focus on content creation require different metrics. For example, some measure co-creation (the percentage of listings that are consumed by users) or consumer relevance (the percentage of listings that receive some minimum level of positive response from potential consumers). These metrics focus on interaction quality and reflect the skill with which production is being curated.”

3. Market access. ”Platforms focus on market access—the effectiveness with which users have been able to join the platform and find or connect with one another, regardless of whether a complete interaction has occurred.”

4. Producers. ”Some measure producer participation—that is, the rate at which producers join the platform and the growth of this rate over time. Dating and matrimonial sites often talk about number of women registered, since this metric serves as a useful proxy for the value that other users of the site can expect to receive. In a somewhat different fashion, OpenTable tracks restaurant reservations.”

Try to avoid:

”Overcomplex metrics make management less effective by introducing noise, discouraging frequent analysis, and distracting from the handful of data points that are most significant.”

“Vanity metrics,” such as total sign-ups—a relatively meaningless statistic that often increases even as the volume of interactions is flat or actually declining. Vanity metrics fail to indicate accurately whether the business is really achieving critical mass or the liquidity it needs.”

How should we change according to the book?

We should consider two things – unicorns and multipliers.

Why China and USA has the most unicorns? Because of the single market….. How to compete? What could EU do to enhance European platform companies?

Which of these companies you want to be? Deloitte published research that sorts companies into four broad categories based on their chief economic activity:

•                             Asset builders (Ford/Walmart),

•                             Service providers (Accenture),

•                             Technology creators (Microsoft),

•                             Network orchestrators (AirBnB).

A bonus is that platform businesses on average enjoy a market multiplier (based on the relationship between a firm’s market valuation and its price-to-earnings ratio) of 8.2. Technology creators multiplier is 4.8, 2.6 for service providers, and 2.0 for asset builders.

What should I personally do? 

Three things:

1) Design core interaction

2) Design the platform design

3) Curation

1) Participants + Value Unit + Filter → Core Interaction

Platforms are designed one interaction at a time. Thus, the design of every platform should start with the design of the core interaction that it enables between producers and consumers.

When designing a platform, your first and most important job is to decide what your core interaction will be, and then to define the participants, the value units, and the filters to make such core interactions possible.

The core interaction involves three key components:

•                             The participants,

•                             The value unit, and

•                             The filter.

2) Pull + Facilitate + Match → Platform Design

”The platform must pull the producers and consumers to the platform, which enables interactions among them. It must facilitate their interactions by providing them with tools and rules that make it easy for them to connect and that encourage valuable exchanges (while discouraging others). And it must match producers and consumers effectively by using information about each to connect them in ways they will find mutually rewarding.”

”Platform designers should always leave room for serendipitous discoveries, as users often lead the way to where the design should evolve.”

3) ”Quality through curation”

”These early days in the life of a platform can be difficult. However, over time, as the curation mechanism starts to work, the platform improves its ability to match consumers with relevant and high-quality content, goods, and services from producers.”

Summary

The book in six words – ”Measure core interactions! Not normal KPIs”.