Strategic Management of Multisided Platforms

Table of Contents

List of Figures

1 The Significance of Multisided Platforms in Today’s Economy

2 Definition and Generic Functions of Multi-Sided Platforms
2.1 Defining Multi-Sided Platforms
2.2 The Generic Functions of Multi-Sided Platforms

3 Special Characteristics of Multi-Sided Platform Businesses
3.1 Introducing the Network Effect and the Chicken-and-Egg Problem
3.2 How to Utilize Network Effects and Tackle the Chicken-and-Egg Problem

4 Conclusion

Lite rature List

List of Figures

Figure 1 Examples of platforms and the parties they connect

Figure 2 Common functions of platform businesses

1 The Significance of Multisided Platforms in Today’s Economy

“Platform companies are becoming more powerful” (Herrman, 2017) headlined the New York Times in March this year, putting emphasize on a digital phenomenon that has been spreading heavily since the invention of the internet (Sabourin, 2016, p. 190). Nowadays, platform businesses can be found on nearly every continent of the planet, no longer exclusively focussing on new media and light assets, but increasingly approaching traditional industries, such as healthcare or banking (Evans & Gawer, 2016, p. 4). Multi- sided platforms simplify the introduction and upscaling of businesses, wherefore especially digital platforms are suspected to change the traditional competition (van Alstyne, 2016).

In fact, there are already clear indicators for the rising importance of multi-sided platform businesses. Among others, Coca-Cola was dominating the top five of the world’s most valuable brands in 2007 with a brand value of around $65bn. At that time, only one of the five companies was active in the platform business (Interbrand, 2007). However, the same ranking in 2017 was headed by Apple Inc., reporting a brand value of approximately $184bn. In this ranking four of the top five companies were actively utilizing multi-sided platforms (Interbrand, 2017). This development underlines the increasing importance of multi-sided platforms in today’s economy. Nevertheless, in the same period, other companies, such as Yahoo!, which have also been trying to implement platform businesses, dropped out of the ranking (Interbrand, 2007; Interbrand, 2017). Hence, some of the companies managed the utilization of multi-sided platforms better than others. Consequently, it appears to be insufficient to simply introduce the new digital phenomenon to be successful, but rather important to combine it with the right strategy. The obvious question, which is inhered by this conclusion is: What characteristics of the multi-sided platform business must strategic management consider, in order to achieve and secure the success of a platform? In the course of this literature-based review, this question will be guiding through the investigation of the key functions and particularities of multi-sided platform businesses.

2 Definition and Generic Functions of Multi-Sided Platforms

2.1 Defining Multi-Sided Platforms

Narrowing down the term platform to its very meaning is not an easy task, considering the sheer extent of different contexts, in which the word is used (Reillier & Reillier, 2017, p. 20). Multi-sided platforms, two-sided ones in particular, have been part of the world’s economy for thousands of years (Evans & Schmalensee, 2016, p. 8). Since the meaning of the term simply refers to a meeting place for interdependent parties to match supply and demand and facilitate transactions (Evans & Schmalensee, 2011, p. 2; Sabourin, 2016, p. 190), every market place, mall or mail-order catalogue can be considered a multi- sided platform (Evans & Schmalensee, 2016, pp. 8,18). Nevertheless, it is not the nostalgic wish to revel in thoughts about traditional businesses that makes platforms filling news papers’ cover pages. It is digital companies like Alibaba, Apple or Facebook, bringing the “Matchmakers” (Evans & Schmalensee, 2016, p. 1) to public attention (Hagiu, 2014, p.71). According to Reillier and Reillier (2017), academic literature reveals three different definitions for the term platform, of which two are related to the mentioned kind of digital business (p. 21). While Tiwana (2014) emphasizes the technological aspect of platforms as the extensible core of a software (p. 7), most academic articles and publications highlight platforms as intermediaries for economic transactions (Reillier & Reillier, 2017, p. 21; Evans & Schmalensee, 2016, pp. 7-9; (Hagiu, 2014, p. 71). Complying with the latter approach, the paper at hand will use the word multi-sided platform or simply platform, referring to online-based, profit-oriented intermediaries, creating value by enabling two or more user groups to interact.

2.2 The Generic Functions of Multi-Sided Platforms

Aiming at the identification of strategically important particularities of the multi-sided platform business, it is key to understand the primary functions of platforms and how platform businesses generate value.

Generally, platforms are intermediating between users and producers (Bonchek & Choudary, 2013), while their specific functions can be tailored towards the intended purposes (Reillier & Reillier, 2017, p. 5).

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Figure 1 Examples of platforms and the parties they connect ¹

Figure 1 illustrates the intermediate function of platform businesses, how diverse users and producers of platforms are and how wide the platforms’ purposes differ. Airbnb’s users and producers, for example, are guests and accommodation owners, respectively, aiming to accomplish a transaction. Twitter’s information publishers, on the contrary, are searching for appropriate recipients. Unlike singles on Tinder or Match.com, who are exclusively searching for “the right person”.

Based on similar observations, Evans (2003a) differentiates platforms into market- makers, audience-makers and demand-coordinators. Market-makers, such as Airbnb or Uber, connect users and producers to match supply and demand and facilitate transactions via the platform. Audience-makers, however, bring together recipients and producers to enable consumption and distribution of information, such as Twitter or YouTube do, for instance. Demand-coordinators manage to match the demand of their users, such as Tinder or credit card companies (p. 195). Completing the picture, there are also mixtures of these ideal-typical types (Letaifa, Gratacap, & Isckia, 2013, p. 104). Driven by their different purposes, these types of platforms also differ in the specific features they need to provide. Airbnb’s users, for example, need to be provided with available time slots of accommodations, while Spotify’s clients need to find the song they want to enjoy and Uber depends on its guests, revealing their location. The requirements on these platforms’ producers’ sides show comparable variety. Consequently, platforms need to supply different features to fulfil their purpose and to create value for their respective users and producers. Hence, platforms seem to function completely different, depending on their type.

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Figure 2 Common functions of platform businesses ²

However, analysing the purpose of these types of platforms and abstracting from their specific features, it strikes that they share three common functions, regardless of the platform type. Figure 2 shows that all the mentioned platform types connect, match and facilitate users and producers in one way or the other (Parker, Van Alstyne, & Choudary, 2016, p. 77; Reillier & Reillier, 2017, p. 5 Bonchek & Choudary, 2013, p. 3). Thus, these three functions can be considered as the generic functions of all multi-sided platforms. Moreover, as these functions are crucial to fulfil any platform’s purpose, this implies that these functions represent the foundation of platforms’ value generation and, consequently, of their success. Therefore, it can be assumed that these functions play an essential role in the platform companies strategies.

3 Special Characteristics of Multi-Sided Platform Businesses

3.1 Introducing the Network Effect and the Chicken-and-Egg Problem

Since the year 2000 academic literature on multi-sided platforms has discovered a variety of differences, compared to traditional pipeline businesses (Evans & Schmalensee, 2016, p. 2). The sector’s particularities range from the very basic concept of intermediating transactions (Cennamo & Santalo, 2013, p. 1331; McIntyre & Srinivasan, 2016, p. 141) to multihoming, a term that describes a phenomenon of platform users of either side of a platform engaging in multiple, competitive platforms (Rochet & Tirole, 2003, p. 991). However, two characteristics of the platform business are highlighted almost throughoughtly, especially in strategy-focused publications: the network effect, and the chicken-and-egg problem (Evans & Schmalensee, 2016; McIntyre & Srinivasan, 2016; Boudreau & Jeppesen, 2014; Tiwana, 2014; Rochet & Tirole, 2003). Hence, these two specifics seem to be of special interest for the strategic management of multi-sided platform businesses, making them the ideal candidates for a closer look.

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