Modern Monopolies
Practitioner account of how platform businesses capture a transaction.
Summary
Moazed and Johnson argue that platform businesses, which connect two or more groups of users and facilitate exchanges between them, operate on fundamentally different principles from linear businesses that create a product and sell it, and that most attempts to build platforms fail because the founders apply linear thinking.
Their framework identifies four core functions a platform must perform: audience building, meaning assembling a critical mass of both sides; matchmaking, meaning connecting the right participants; providing core tools and services that reduce transaction friction; and setting rules and standards that govern participation. They argue the last is the most neglected and that a platform's governance is its product.
They classify platforms by type, including services marketplaces, product marketplaces, payment platforms, investment platforms, social networks, communication platforms, development platforms and content platforms, and argue each has different launch dynamics and different value capture mechanisms.
The practical material covers the chicken and egg problem, the methods for solving it including single-side dominance and seeding, and the reasons network effects can be local rather than global, which determines whether a market supports one platform or many.
The book is a practitioner synthesis and the framework is useful for organising a platform business. It is less rigorous than Evans and Schmalensee on the underlying economics, and the authors run a development agency, which shapes the framing. The technology company examples are from 2016 and several have since developed in ways the analysis did not anticipate.
Key takeaways 7
- Platforms create value by facilitating exchanges between groups rather than by producing a product, which makes almost every linear business principle inapplicable.
- A platform must perform four functions: building an audience on both sides, matching participants, supplying transaction tools, and setting rules.
- Governance rules determine who participates and on what terms, which makes the rule set the platform's actual product.
- The chicken and egg problem is solved by dominating one side first or by seeding one side with supply the platform controls.
- Network effects can be local rather than global, which determines whether a market supports one dominant platform or several regional ones.
- Platform value capture must be designed separately from platform value creation, since the transaction that creates value is not necessarily the one that can be charged for.
- Linear businesses compete on producing better product while platforms compete on the quality and quantity of participants, which requires different metrics entirely.
Who should read it
Founders building marketplaces or platforms who want an organising framework, with the underlying economics sought in Evans and Schmalensee.
Where it sits in the reference 4
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