(notes on) Platform Scale by Sangeet Paul Choudary

NB. These notes contribute towards my diyMBA, my attempt to learn lots without a formal MBA programme. Check out my full reading list, and why I’m doing it DIY.

Business Models are changing. To understand how industries can interact and partner with one another we must first understand their strategic foundations.

Platform Scale: How an emerging business model helps startups build large empires with minimum investment (to use its full name) is a must-read for anyone interested in this space. Sangeet Paul Choudary ties together a wide array of theories into a cohesive narrative that’s directly applicable to the real world.

Read Sangeet’s blog or buy the book.

Other areas of interest include Ben Thomson of Stratechery on Aggregation Theory, Oisen Hanrahan of Handy.com on starting with trust, and Todd Lutwak of a16z on why not to feed the monkeys.

TLDR: Three Key Learnings

1. Pipes & Platforms
Pipes & Platforms represent two differing business foundations. Retailers (hotels, Walmart, cable TV) are built on pipes. They create or aggregate supply, using direct control to push supply downstream towards consumers, adding value along the way.

Marketplaces (Airbnb, eBay, YouTube) are built on platforms. They do not own the supply, but they do enable and leverage supply, creating a flow of interactions and value in both directions between the supplier and end user.

Retail have pipes that are often finely tuned, effective, well run industries. Incentives to perform are built in and deeply understood (eg tips for staff for good service, supplier agreements with retail). Platforms and Marketplaces are often newer, growing fast, and less well understood. To compete, Marketplaces must significantly over-deliver. Me too won’t do.

2. The Core Interaction
Marketplaces enable interactions between its constituents. A valuable marketplace will enable and monetise many different interactions with a wide range of constituents. But every Marketplace has one Core Interaction at the root of its platform where all strategy should build from. For Airbnb that’s finding guests / booking a room, on YouTube thats uploading a video / watching a video. All roads start here.

3. The Importance of Perspective
Platforms are often built from one perspective, but a thriving marketplace requires tools and rules that facilitate interactions and improve experience for both sides simultaneously. This requires the fast flow of information and insights from one side of the marketplace to the other, and for decisions and implications to be viewed from both perspectives.

My (long) Notes

What is Platform Scale?
Business scale powered by the ability to leverage and orchestrate a global connected ecosystem of producers and consumers toward efficient value creation & exchange.

Section 1: Introduction to interaction-first business

Platforms are not in the business of building software. They’re in the business of enabling social and business interactions, mediated by software.

Pipes: Retailers create or aggregate supply, using direct control to push supply downstream towards consumers, adding value along the way.

Value is produced upstream, then consumed downstream. Pipes enable value flow in a straight line, and only in one direction.

Platforms: enable interactions between producers and consumers of value to connect on a plug and play infrastructure enabling a multi directional flow of value.

Platforms perform two specific roles:
1. Provide open, participative infrastructure
2. Curate platform participants and govern the social and economic interactions that ensue.

Platforms do not create end value, but do enable value creation. Constituents produce and consume, sometimes both (prosumer).

Pipes to Platforms: Three Shifts

1. Shift in markets: From consumers to producers

Traditionally, customers were placed at the end of a pipe. Business built what customers wanted, who then paid for it. On platforms, the business does not create the end value. Participants take on both production and consumption roles.

2. Shift in Competitive Advantage: From Resources to Ecosystems

Traditionally, Retailers used pipes to compete through resource ownership and control. This led to the rise in popularity of the vertically integrated business and the idea of scaling through mergers and acquisitions. In a world of pipes, firms compete based on the control and ownership of internal resources and intellectual property.

Platforms successfully orchestrate value-exchanging interactions in this ecosystem using data about the various ecosystem participants. Ecosystems are the key enablers of value creation on platforms and a new source of competitive advantage. Platform giants will create massive value, not through their access to physical resources, but through leveraging data to orchestrate physical and digital resources across their ecosystem.

3. Shift in Value Creation: From processes to interactions

Platforms enable value creation and exchange by matching the most relevant resources from producers in the ecosystem with the consumers on the platform that need those resources.

Value is no longer created and scaled merely through processes that organize internal labor and resources. Instead, value is created and scaled through interactions that orchestrate users and resources in the ecosystem.

How do Pipes Scale?
By coordinating internal labor and resources toward efficient value creation and toward delivery of the created value to an aggregated consumer base. The management of pipe scale involves the design and optimisation of this linear flow of value from the business to the consumer.

Example: Hotels vs Airbnb

• Matching rooms and people by owning as many rooms as possible and managing supply… vs
• Matching rooms and people by owning nothing, and managing interactions

Unlike hotels (who invest in resource creation) platforms like Airbnb invest in creating better trust mechanisms that identify and differentiate good behaviour from poor behaviour whilst minimising interaction risks.

Other businesses should be able to easily connect their business with the platform, build products and services on top of it, and co-create value.

How does business change?
Scale is no longer achieved through accumulating resource or contractual arrangements. Instead, scale comes through leveraging interactions.

1. Data is the new dollar.
   Organisations must shift from a culture of dollar absorption to a culture of data absorption.
2. Community management is the new human resource.
   It requires structuring and managing incentives for participants, enabling the learning and development of producers (like HR would internally). This community is competing with traditional, linear, incentive based service offering (hotels v Airbnb) so must be of high standard.
3. Curation & Reputation are the new quality control.
   Pipes needed gatekeepers to ensure quality control. Platforms need new mechanisms to separate good & bad, eg ratings, feedback, curation.
4. User journeys are the new sales funnels.
   Purchase paths are no longer linear. Users interact with business across multiple experiences and channels (all of which should be leveraged and tracked)
5. Behaviour Design is the new loyalty programme.
   Encourage repeat engagement behaviours (eg social media)
6. Social feedback is the new sales commission.
   Users (not employees) need to be incentivised.
7. Algorithms are the new decision makers.
   They’re the arbiters of resource allocation and reputation assignment, and replace gatekeepers.
8. Plug-and-play is the new biz dev.
   APIs replace contracts.

What is an Interaction-first Business
Platforms must enable a Plug and Play design. Remove barriers to encourage interactions & participation

Pipes enable repeatable processes. Platforms enable repeatable interactions.

Pipes source, assemble (by leveraging value creating processes), and deliver.
Platforms pull (participation of supplier & user), facilitate (interactions), and match (supply & demand).

Inner Workings of an Interaction-first business
Pipes add value to each item they produce as it flows through the pipe. Therefore they create marginal costs, as value is added to each item produced.

Five Drivers of Platform Scale

1. Low marginal costs
2. Network effects (from positive feedback)
3. Behaviour design & community culture
4. Learning filters
5. Virality

Read more.

Section 2: Designing the interaction-first platform

The design of the platform business model involves the design of a core interaction followed by the design of an open infrastructure that will enable and govern this interaction.

Like LEGO — Create an underlying infrastructure on which others can build and add value.

OR/AND

Like FedEx — a network of transfer, allowing value to be exchanged on a network.

Core Value Unit & Core Interaction
The core value unit: Minimum standalone unit of value that’s created. Represents supply & inventory.

Any strategy for achieving platform scale should start with a focus on the core value unit.

When designing think of the centre not the whole.

Platforms are not in full control of the source of the value units.

Build core interaction around the core value unit. On platforms (unlike pipes), consumers also add value to the product.

Design platform around core interaction. Add info / data to the core value unit.

Read more.

Encouraging Interactions through Pull / Facilitate /Match

Pull: Organic and inorganic ways of attracting users and engagement.
Facilitate: Provide the tools and rules that enable interactions.
Match: matching the two sides together

After building the foundations of all discussed so far, the next step is to focus on value capture, possibly through:

1. Charging one side to access the other
2. Charge third party for advertising
3. Charging producers and consumers for premium tools and services
4. Charging consumers for access to high quality, curated producers
5. Charging producers for an ability to signal high quality

Platforms will emerge & evolve over time. Macro systems emerge from micro behaviours. Focus on micro first, with a view of macro.

The Importance of Perspectives
Platform must be designed by switching between two perspectives.

Outside-in: understanding producer & consumer interactions
Inside-out: understanding how internal decisions affect external experience

Differing Perspectives of the TRIE (Tools, Rules, Interactions, Experience)

Understanding and allowing free interactions enables platforms to redesign the inner tools and rules (eg twitter hashtag). Give users the freedom to play and explore your platform.

Section 3: Building Interaction First Platforms

Platform Scale is achieved by maximising the repeatability and efficiency of the platform’s core interaction.

Section 3 explores the design, engineering and management choices that help achieve this.

Elements of Execution

1. Choice of interaction space — how the space is organised affects their motivations
2. Production incentives
3. Building long-term cumulative value
4. Strong curation mechanisms and trust
5. Strong filters and relevance
6. Ownable interactions

Interaction Drivers
What can drive an interaction between a creator and a user?

Connection: do they have a pre-existing connection?
Content: is there a shared interest of content?
Clout: does one have greater influence?
Coordination: are there instructions to interact?
Competition: are they competing?
Culture & Code: eg a shared cult

Multihoming: How easy/expensive is it for a producer to be active on all platforms, not just one (the largest).

High multihoming costs strengthen network effects. (Eg fax machines were expensive, different social media sites are not)

How do you lock Creators into your platform?

1. Reputation (building multi platform takes time)
2. Influence (building takes time)
3. Collection (portfolio, eg albums, photos)
4. Learning filters (eg newsfeed)

About Trust
Trust drives interactions. Within business today there are many who enable Trust (lawyers, banks, institutions). But they also increase increase friction between the creator and the user.

A thriving marketplace should have low-friction trust. Do this through:

• Confirmed identity
• Centralised moderation (before scale)
• Community feedback (at scale)
• Codified behaviour
• Culture
• Completeness
• Cover / Insurance

Interaction Failures
Sometimes interactions fail. Know what they are, and track them.

Eg Freelancers who don’t get business in x days. Or a potential customer who can’t find an appropriate freelancer.

The importance of these failures depends on the multihoming costs.

Section 4: Solving Chicken and Egg problems

How do you get producers and consumers on your platform when you know that each constituent will only join when the other is already present?

On-boarding of two sided marketplace may require building two separate companies.

Producers help bring in new users. Give producers tools to harvest their audience from other networks.

If supply won’t come, make your own supply first (eg Apple App Store).

But be fair, don’t promote your own services too heavily on other producers will not be incentivised to join.

Start niche (eg Facebook in campuses) and focus on key interactions.

Solutions

1. Find a compelling bait to start the loop
2. Ensure the feedback loop has no friction
3. Minimise time to crucial mass by limiting market size (eg Facebook at Harvard)
4. Incentivise the role that’s more difficult to attract
5. Staging the creation of two sided markets (eg Opentable offering restaurant management software before users signed up)

Section 5: Scale in a networked world

Virality is a business design problem, not a marketing or engineering effort. It requires design before optimisation. Make an engine, not bumps.

Bumps: PR, Advertising, Events (no scale)
Engine: Scale fast, exponential growth. Designed to grow as consequence of usage (eg instagram)

Viral growth based on 4 questions

1. Sender Incentives: why do they send units? Align with core interaction.
2. Spreadable units: what’s the minimum that can be transferred externally?
3. External Network: where are units transferred?
4. Recipient Incentives: why will an external user convert? Include Value Pitch and Call to action

Section 6: Reverse Network Effects

What limits Platform Scale?

A decrease in quality or quantity of production, inefficient filters, or weakening culture.

Manifestations include

• user abandonment
• output abuse
• echo chambers (overly effective curation)
• crowd as a herd (people think the same)
• rich get richer (volume flows to top producers)
• long tail abuse

Platform Scale for Pipeline Businesses

Retail businesses
- are organised for maximum repeatability and efficiency of a well defined process, but lack agility
- are impatient
- lack user / data focus

Therefore they will struggle in switching to a marketplace model. But they have advantages, and can win through these steps:

1. They already have access to huge data sets, so build a culture of data, and harvest it from existing users (eg Netflix)
2. Integrate all internal data centrally
3. Leverage data to serve users better
4. Build user communities
5. Enable interactions

Data comes first, as opposed to building a marketplace where the infrastructure is built first (though always underpins the infrastructure and Network-Marketplace Community).

To finish: The platformed world is here to stay.

Before you go…

If you’ve bothered to read this far, you REALLY REALLY should read Sangeet’s blog and buy the book.

If you enjoyed these notes, please give this article some claps and follow me on Medium where you’ll find other book notes alongside some more original musings. Oh and Twitter too.