The world is changing and so is the way of doing business - Platform Economy

Written by - Vibhav Bhat and Yash Prashant Bhave

PGDM Student - TAPMI, Manipal

From Facebook to Tinder and eventually to Shaadi.com our lives today are highly intertwined with digital platforms. Even shopping has shifted from traditional supermarkets and malls to online mode with almost everything home delivered.

But why are businesses shifting to this model? And what exactly does a platform mean?

Since the beginning of the industrial era the companies have followed the pipeline business model. The flow is of product produced by the industry to the consumer in a linear chain. This is a simple and convenient model but lacks interaction between the parties.

The digital era, with advances in the Information technology field, has offered a plethora of opportunities for businesses. With rapid strides in cloud computing, AI and machine learning fields we have capability to process large amounts of data in short periods. Driven by this many industries have shifted from traditional pipeline to platform business model.

A platform can be viewed as virtual meeting grounds for consumers and producers or distributors. Traditionally consumers visited a shop to buy television or had to wait for a taxi and then negotiate with the driver to get a ride. Platforms are intermediate applications or an interface that facilitates connection between consumers and producers. A middle man who searches for cabs in your area to offer you a ride at best prices such as Ola and Uber. One who connects with multiple distributors to get you television of multiple brands on your fingertips specific to preference such as Flipkart and Amazon. It creates value out of interaction between you as consumer and the producer by increasing the availability, convenience and service quality.

It not only connects producers and consumers but opens a continuous channel starting pre purchase to post purchase and the data stored over this interaction makes it an everlasting connection. When you order food over Zomato or Swiggy the interaction starts at the point you open the application. You have a continuous visual of your order till it reaches your doorstep. The order history is stored against your profile and based on your preferences next interactions are improved making it valuable.

Some platforms such as LinkedIn and YouTube thrive only on interactions. Users create their own content on these platforms and consume contents created by others such that overall value created increases.

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Did this move start recently?

The major benefit of creating a platform is it creates a network of producers and consumers which exist but is not accessible without use of technology. The technology brings them closer and facilitates interaction thus creating a huge marketplace benefitting both the parties. Platform term first came into existence in the second half of the 20th century. It gained momentum only in 2000 when online matchmaking and innovation platforms first came into existence. The benefit of this was clearly visible when post 2008 economic downfall the companies leveraging platform model dominated the economic activity. Mckinsey found that firms with a platform presence - either their own or via a third party - enjoyed on average an almost 1.4% higher annual EBIT growth. Hence, platform facilitation of interactions not only benefits the consumers but the producers as well.

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Companies in which sectors can leverage this platform business model?

The answer for this is any traditionally operated company can shift to this kind of business model. All one needs to do is create a presence. Either they can shift by using an in-house platform or by third-party sourcing. If we check revenue-wise top 10 companies in the world then seven out of them use the platform model.

It can be leveraged in any sector. To get a glimpse platform models exist in-

This list is not exhaustive and many other industries are or can leverage the benefit of the Platform Economy. These are some of the prominent industries in which companies can do much more by shifting from traditional or pipeline base functioning to Platform based functioning.

This model is not only for private companies. This can also be used in the public sector and NGOs. As of now approximately 90% of the NGOs have their presence on social media. This means indirectly they are taking advantage of the Platform Economy model.

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What future holds for companies using the Platform business Models?

Companies are shifting from traditional or conventional service-providing methodology to the platform economy. As for this particular research, we have taken the six companies that are dominating the platform economy market. Their revenue numbers are growing very rapidly. For example, in the case of Amazon in one decade their revenue has grown by 1029% as seen in Fig 2.

Along with the historical data forecasting till the year 2025 with conservative approach predictions can be seen in the graphs. YoY growth (as in this year) is considered to be constant for the upcoming years.

Fig 1: Apple revenue from 2010-2025 (Units in Million USD)

Fig 2: Amazon revenue from 2010-2025 (Units in Million USD)

Fig 3: Netflix revenue from 2010-2025 (Units in Million USD)

Fig 4: Facebook revenue from 2010-2025 (Units in Million USD)

Fig 5: Microsoft revenue from 2010-2025 (Units in Million USD)

Fig 6: Alphabet (Google) revenue from 2010-2025 (Units in Million USD)

Source - https://www.macrotrends.net/

These numbers are growing without external influence. With the pandemic impacting the whole world economy, to maintain and grow businesses Platform models are the perfect choice in these difficult times. It has a proven record of quick recovery and functioning as seen post 2008 financial crisis. Research also suggests that 81% of the executive prefer or suggest the platform economy model to grow the business. In the future numbers have potential to grow at higher rate than what has been currently estimated in the figures.

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What are the challenges in the Platform Business Model?

The major challenge as such to the growth of the platform economy lies in data security. With large amounts of data traded over these platforms over interactions and transactions between parties, securing this data is quintessential for platforms to thrive. It is believed that platform models are the primary reason for the development of cybersecurity.

With evolving cyber risks of data breach, platform businesses have over the time evolved to maintain the necessary standards to prevent such issues and maintain business continuity.

Another major challenge in the platform-based economy is the high entry barrier a platform can create in the sector once it has achieved scale and efficiency. If we look at LinkedIn today it dominates the business and employment-services with a large base for professional networking on their platform. It is extremely difficult for a new business to survive entry into this sector facing LinkedIn. Businesses have been called out for anti-competitive behaviors as well with the most recent being Google who has been charged with a fine of 10 billion dollars in the EU. As such there remains a question upon how much regulation must be imposed to improve competition while at the same time not affecting the positives of the business models.

The evolving data privacy legislations which vary across geography also acts as a deterrent to the operating efficiency of these platforms. Many companies have been called out for mishandling of data in the recent past. These call for frequent changes in the operating of the platforms whenever changes are called for in the regulations, always keeping them on their toes carrying an extra responsibility of ethical handling of data.

However, history has always taught us that with any rewards naturally comes risk. But it does not mean risks have to be feared. The platform-based business models have shown success in terms of improvement of service quality and availability over large audiences at low cost. At the same time risks associated with these need to be controlled and monitored. Peter Parker’s Uncle Ben in Spiderman said – “With great power there must also come great responsibility”. The platform ecosystem is here to stay and companies operating on such a level need to be responsible and ethical in the way they compete and build the sector.