Platform Strategy

Platform strategy has become one of the defining competitive approaches of the 21st century, as documented extensively by Marshall Van Alstyne, Geoffrey Parker, and Sangeet Paul Choudary in their 2016 book 'Platform Revolution.' Unlike traditional 'pipeline' businesses that create value by producing and selling goods through a linear supply chain, platforms create value by facilitating exchanges between producers and consumers. The platform itself does not typically own the means of production; instead, it orchestrates an ecosystem of participants and captures value by enabling their interactions.

The economic engine of platform strategy is network effects, the phenomenon where the value of a platform increases as more users join. These effects can be same-side (more users attract more users, as on a social network) or cross-side (more users on one side attract more users on the other side, as when more drivers make a ride-sharing app more valuable to riders, and vice versa). Network effects create powerful competitive moats because they make established platforms increasingly difficult to displace. A new entrant must somehow convince both sides of the market to switch simultaneously, a classic chicken-and-egg problem that protects incumbents.

Apple's App Store exemplifies platform strategy at its most powerful. By opening iOS to third-party developers in 2008, Apple transformed the iPhone from a product into a platform. More apps attracted more users; more users attracted more developers. According to an Apple-commissioned study by Analysis Group, the App Store ecosystem facilitated about $1.1 trillion in billings and sales in 2022, most of it from physical goods and services. Apple captures a fraction of this value through its commission structure while creating far more value for the ecosystem as a whole. This leverage, creating disproportionate value relative to the platform owner's direct investment, is the hallmark of successful platform strategy.

Solving the chicken-and-egg problem of getting both sides of a multi-sided platform off the ground is the central challenge of platform strategy. Different platforms have used different approaches. Amazon built its own retail selection before opening its Marketplace to third-party sellers. Uber used venture capital to subsidize riders with below-cost fares in new markets. Adobe gave away Acrobat Reader for free to build a base of PDF consumers, then charged businesses for the creation tools. OpenTable first sold restaurants reservation management software that was useful on its own, building supply before marketing to diners. Each strategy addressed the fundamental bootstrap problem: no side wants to join a platform that has no participants on the other side.

The competitive dynamics of platform markets tend toward winner-take-all or winner-take-most outcomes because of the self-reinforcing nature of network effects. However, as Feng Zhu and Marco Iansiti of Harvard Business School have shown, multi-homing (the ability of users to participate on multiple platforms simultaneously) can weaken these dynamics and sustain competition. Riders can have both Uber and Lyft on their phones; restaurants can list on both DoorDash and Uber Eats. Platform strategists must therefore not only build network effects but also create switching costs and unique value propositions that discourage multi-homing among their most valuable participants.