A recent article in the Economist, “Something to stand on,” shows how digital platforms are the heart of the new economy, and by extension the strongest opportunities for entrepreneurs and investors. Platforms provide the basis for people and companies to build businesses, services, features or just about anything. The core building blocks remain stable so that the other parts can evolve more rapidly by combining, recombining, and adding new ones.
Platforms are not a new concept; they exist in the non-digital world but started garnering attention as the software industry exploded in the 1980s. In the physical world, railways could be considered a platform as they allowed services such as mail order to develop. The power grid is another platform, as it facilitated the creation of multiple electrical household appliances. Shipping containers (those big crates on ships) were a platform that boosted global trade.
Platforms, however, started getting attention as an economic driver (and source of business success) with the rise of the software industry. Microsoft identified—much earlier than its competitors—that power and profit rests with those who control the operating system (in its case, Windows). It also saw that the key to creating a successful platform is building a thriving ecosystem around it to gain a network effect. The more programs that run on Windows, the more users will want it, and therefore the more attractive it will be to developers.
The iPhone is an even more recent and relevant example of the power, and profitability, of platforms. Rather than focusing on a great product that revolved around the telecommunications infrastructure (itself a platform), Apple built the iPhone as an ecosystem for apps. The more apps, the more users wanted the iPhone, thus making it more attractive to developers and further differentiating it from other phones.
Digital platforms as the foundation of the new startup world
The Economist article points out that the key to platforms, their ability to allow remain stable and allow others to build by combining and recombining various parts, is powering the startup world. New firms combine and recombine open-source software, cloud computing and social networks to come up with new services. Sometimes these new services are APIs (application programming interfaces), which themselves are mini-platforms that form the basis of another digital product, creating endless permutations.
The tech space lends itself to this treatment because bits and bytes can be easily rearranged and replicated at little or no cost. Systems with vertically integrated components, such as the mainframe computer, give way to architectures with separate horizontal layers such as the PC. The tech space looks like a very flat inverted pyramid: The bottom, where economies of scale rule, is made up of just a few powerful platforms; the top, where creativity and agility are at a premium, is becoming ever more fragmented. There is virtually no middle space.
Philip Evans of BCG predicts that by lowering transaction costs, tech will force other sectors of the economy to reshape themselves and turn into what he calls “stacks:” Industry-wide ecosystems that will have large platforms on one end of their value chains and a wide variety of modes of product at the other, from startups to social enterprises and communities to user-generated content.
Examples outside the tech space
As I noted at the beginning of the post, digital platforms are moving to the center of the economy, not just the tech space. A new power grid in the Netherlands is set up in such a way that startups can use it to develop energy-saving applications. In the banking space, smaller banks are acting as digital platforms for online banks while big payments processors (e.g., First Data and TSYS) are expected to open up their networks.
The Economist article points out this “platformization” is spreading even to the foundation of life. Synthesizing DNA, although more expensive than sequencing it (but with costs rapidly decreasing), is starting to form an ecosystem for this ultimate platform. Half a dozen cities are now home to bio-hackerspaces where genetic hackers learn how to build simple biological machines.
The impact of platformization
Companies eventually will need to either become a platform or evolve into agile ecosystems, complete with start-ups and accelerators. Coke is planning to launch accelerators in nine cities. Efforts such as these will change the understanding of what constitutes a firm.
The spread of digital platforms will bring radical changes for employees, turning them into founders or employees of start-ups. As Thomas Malone of MIT’s Sloan School of Management said, “They will be laborers in the technological gardens where a thousand flowers bloom, but only a few will grow to become really big.”
Most importantly for many readers of this blog, this evolution will change the startup environment. With thousands of flowers but only a few that can grow big, from the beginning you will need to decide whether to build a beautiful flower that can be a profitable business or try to create one of the very few platforms. The former path will also become even more competitive, as startups will be built around platforms, the barriers to entry tumble down and you are faced with thousands of competitors. For those building the platforms, which as Bill Gates showed is where the bulk of the profits and power go, only a few will flourish so your platform will need to provide tremendous unique value.