The Business of Platforms
Innovation platforms versus transaction platforms, and why most fail.
Summary
Cusumano, Gawer and Yoffie, academics who have studied platform businesses for two decades, distinguish two types and analyse what each requires. Innovation platforms, such as operating systems, provide a technological foundation on which others build complementary products. Transaction platforms, such as marketplaces, intermediate exchanges between parties. Hybrid platforms do both, which is what the largest technology companies have become.
The strategic analysis covers the four steps of building a platform: choose which sides of the market to bring together, solve the chicken and egg problem, design a business model that captures value without destroying the network, and establish rules and governance. They are specific that the choice between innovation and transaction platform determines almost everything that follows.
The most distinctive material is on failure. The authors studied a large sample of platform businesses over two decades and found the failure rate very high, and they identify four recurring causes: mispricing on one side, failure to develop trust between users, prematurely dismissing competition, and entering too late without a differentiated approach. They also examine platforms that were killed by their own subsidies.
The final section covers regulation and the political position of dominant platforms, and it is more sympathetic to intervention than earlier work in this literature.
The book is academic in origin but written for practitioners. It is more empirically grounded than most platform books because of the failure sample, and less rigorous on the underlying economics than Evans and Schmalensee.
Key takeaways 7
- Innovation platforms provide a foundation for others to build on while transaction platforms intermediate exchanges, and the choice determines strategy entirely.
- Platform failure rates are very high, and the four recurring causes are mispricing a side, failing to build trust, dismissing competition and entering late without differentiation.
- Subsidising one side of a market can kill the platform if the subsidy attracts users who leave when it stops.
- Trust between users must be engineered deliberately through ratings, guarantees and dispute processes, because a transaction platform is otherwise unusable between strangers.
- The largest technology companies are hybrid platforms that combine both types, which is what allows them to defend positions across multiple markets.
- Governance rules determine which complementors invest in a platform, since a platform that competes with its own complementors will lose them.
- Winning a platform market requires deciding early which side to subsidise and which to charge, and reversing that decision later is extremely difficult.
Who should read it
Founders and investors building platform businesses who want the empirical failure evidence alongside the strategic framework.
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Where it sits in the reference 5
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