Monday, April 08, 2013

Multi-Sided Platform Strategies

A multi-sided platform business has the following characteristic features.

1. The platform serves two or more distinct categories of customer. For example, a credit card platform serves both cardholders and merchants. For example, a heterosexual dating agency serves both men and women.

2. The platform provides a mechanism for connecting customers from different categories. The credit card increases the potential interaction between cardholders and merchants, as well as processing the transactions. And the dating agency brings men and women together.

3. The value of the platform to one category of customers depends on the quantity and quality of the other categories. For example, the value of a credit card to the cardholder depends on the number of merchants that accept the card. Meanwhile, the value of the card to the merchant depends on the number of cardholders.

Under certain circumstances, it might be possible to build one side of the platform first. For example, if you had some brilliant idea for a entirely new kind of credit card, and had a lot of funding and a persuasive sales team, you might conceivably be able to recruit a large number of merchants into the scheme before you had any cardholders at all. Or imagine persuading a group of men to invest all their spare time for two years building a nightclub that would (when finished) attract the hottest women in the city. But this strategy requires a considerable degree of confidence and trust. So in practice it usually makes sense to build up both sides at the same time.

There are various strategies that can be used to create a multi-sided platform. Sometimes it is possible to start small. When Frank McNamara created Diners Club in 1950, he started in a small geographical area (Manhatten), with 14 merchants and a few hundred cardholders. Within a year, he had 300 merchants and 40,000 cardholders.

When American Express wished to enter the market in 1958, it needed to create something quickly that could compete with Diners Club. One way to do this was to acquire and consolidate some existing schemes. But the key element to the American Express's success was a marquee strategy - recruiting the most desirable customers (e.g. business travellers on expense accounts) and the most desirable merchants (e.g. high status hotels, restaurants and stores).

A marquee strategy depends on a degree of exclusivity, real or imagined. In a multi-sided market, you don't gain directly from the number of people on your own side, since they may be competing with you for the attention of the people on the other side.

American Express is now much larger than Diners Club. So much for first-mover advantage then. The most desirable customers are not necessarily the ones with the greatest willingness to experiment with a novel platform. Novel platforms tend to attract early adopters and low-value customers (AltaVista, MySpace, OnSale). Once the platform concept is understood, a new entrant may be more successful in recruiting the high-value and mainstream customers (Google, Facebook, eBay).

Among users of Facebook and Twitter, a gulf is emerging between celebrities and other users. Facebook is currently experimenting with charging a fee for ordinary users to send messages to celebrities. According to the Independent, Facebook plans to keep this money itself. Presumably the only benefit to the celebrity is helping to filter incoming messages. And of course many celebrities are now dependent on Facebook and Twitter for maintaining their public profile, so they are not able to walk away.

The growing distinction between different categories of user marks a transition from same-side network effects (which assume a single category of user) into a multi-sided platform. Linked-In is another platform that is making this transition. Linked-In gets much of its revenue from the recruitment business, so it is essentially a market-making platform. Whereas Facebook and Twitter remain largely audience-making platforms.

(For the distinction between market-making and audience-making platforms, as well as a third category of demand-coordination platforms, see David S Evans.)

I shall be talking at the IASA UK Architecture Summit on 26th April on Architecting the Multi-Sided Business. There is more extensive coverage in my Business Architecture Workshop. Please contact me if you have any practical challenges in this area.

Pieter Ballon, Platform Types and Gatekeeper Roles: the Case of the Mobile Communications Industry (2009)

Mark Bonchek and Sangeet Paul Choudary, Three Elements of a Successful Platform Strategy (HBR Blog Network Jan 2013)

David S. Evans, Managing the Maze of Multisided Markets (Strategy+Business Fall 2003)

David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets (Yale Journal on Regulation, 2003)

David S. Evans and Richard Schmalensee, Failure to Launch: Critical Mass in Platform Businesses (Sept 2010)

Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne, Strategies for Two-Sided Markets (HBR October 2006)

James Legge, Facebook now charges you for messages sent to celebrities and people you aren't friends with (Independent 7 April 2013)

Lisa O'Carroll, Facebook starts charging users up to £11 to contact celebrities (Guardian 8 April 2013)

Geoffrey Parker and Marshall Van Alstyne, A Digital Postal Platform: Definitions and a Roadmap (MIT Jan 2012)

Richard Veryard, The Component-Based Business: Plug and Play (Springer 2001)

Understanding LinkedIn Business Model (BMI Matters May 2012)

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