One of the world’s leading experts on information economics will take the stage in Santa Clara, Calif. on November 10th as the opening keynote at Dassault Systemes’ 3DEXPERIENCE FORUM 2016. Marshall W. Van Alstyne, co-author of PLATFORM REVOLUTION: How Networked Markets Are Transforming the Economy – And How to Make Them Work for You is a professor at Boston University’s Questrom School of Business and chair of the Information Systems department. Van Alstyne has made fundamental contributions to IT productivity and to theories of network effects. He is an adviser to leading executives, a frequent keynote speaker and a consultant to startups and to Global 100 companies. Van Alstyne received his BA from Yale and his MS and PhD from MIT. We caught up with Van Alstyne this week:
Q: What is a platform business?
Marshall Van Alstyne: Think of a platform business as a nexus of rules and architecture. The architecture provides a framework for exchanging and creating value. The rules govern the business of how people interact. Facebook, Airbnb, Alibaba, Uber—seemingly disparate, yet extremely successful companies – have upended entire industries by harnessing the digital platform business model. They use technology to connect people, organizations, and resources in an interactive ecosystem. They connect sellers and buyers, hosts and guests, drivers and riders, content creators and consumers. Facilitating this creation and exchange can unleash an amazing amounts of value.
Q. How did the platform business model develop? Is there one company that started it all?
Marshall Van Alstyne: Apple is probably the best known example – it’s the most valuable company in the world – but it did not invent the open business model. Such models have been around since at least the 1970s when IBM did not charge for mainframe software in order to sell more mainframe hardware. Modern platforms grew out of the software and credit card industries but have been adopted in such diverse industries as energy, shoes, dating, medicine, and even spices. The point is to tap value created outside the firm. Developers improve Apple’s products; drivers provide Uber’s rides; fitness enthusiasts improve Nike clothing; and chefs expand uses of McCormick Spice. Successful platforms build community ecosystems outside their organizations.
Q. How is “value creation” different in a platform model vs. a traditional business?
Marshall Van Alstyne: The differences are enormous. Value creation in a traditional business is done inside the firm, using resources that it controls. Value creation on a platform is done outside the firm, using a process that the platform merely orchestrates. Both are important but they operate differently. Platforms allow third parties to attach and deliver value to customers using platform resources such as cloud computing, storage, technical standards, and business contracts. Marriott owns its hotel rooms; Airbnb owns no rooms at all. Yellow Taxi leases its vehicles; Uber owns no cars at all. While Walmart has one of the best inventory management and logistics operations in the world, Alibaba has become more valuable without owning inventory at all. In addition, consumers can co-create value using platform resources, as we see on Facebook where user-generated-content (photos, stories, news, likes, comments) becomes part of the raw material that gets distributed to other users.
Q. How do ‘product companies’ become ‘platform companies’ – can you give some general advice here?
Marshall Van Alstyne: Firms can use at least two distinct methods to shift from products to platforms. The first method is to add information to and build communities around your products. This is one of the steps Nike took when adding sensors to shoes and sports gear then helping people benchmark their performance. Nike apps also help people connect with other sports enthusiasts, find running and training partners, and track performance of team mates. The 3D designs built around Dassault Systèmes represent fantastic opportunities to reuse shared modules and build communities. The second method is to open one end of your supply chain to complementary partners at the other end. John Deere sells tractors but it is also opening a platform to connect suppliers of fertilizers, seeds, pest control, and insurance to loyal farmers. This ecosystem is intended to foster valuable exchange all passing through a John Deere platform. Once a product company has a conduit to a customer, you use that channel to enable all sorts of complementary exchanges.
Q. What will the future of business look like if most companies adapt to the platform model?
Marshall Van Alstyne: The Internet economy is giving rise to really giant firms in much the same way that the industrial economy gave rise to giant firms a century ago. Facebook has over 1.7 billion users. Google has 85% market share in mobile phones and 90% market share in mobile phone search. Amazon sells two thirds of all books online despite the fact it does not even control the copyright. Platform markets become highly concentrated winner-take-all markets. This suggests that many markets will be dominated by a few large firms. Many more firms will survive via platform partnerships, transacting on platforms controlled by the dominant firms. Firms that do not adapt will be relegated to niche markets of go out of business.