NOTHING IS MORE POWERFUL THAN A PLATFORM

July 27, 2014

                          NOTHING IS MORE POWERFUL THAN A PLATFORM 

People casually talk about “the cloud” as a platform, but it’s not. It’s just an alternative method of data conveyance.  Most simply stated, it’s a part of the pipe that gets you to and from whatever platform (think resource repository) you’re looking for where you can access, connect to, interact with, and/or extract whatever you need. The cloud has solved the classic distribution dilemma which has dogged millions of young businesses since the beginning of time. How do I get my product or service offering out there to the masses? Solving that riddle is far more possible today through multiple channels – especially the app stores – than ever before.

In the old days, the name of the game used to be all about location. But in today’s hyper-mobile world of constant connectivity, location is essentially immaterial (work itself is also no longer place-based) and effective distribution is all that matters. The cloud (basically for free to the end user) makes access ubiquitous and response time close to instantaneous. This is compelling and tremendously helpful (as well as cost-effective), but the real value and the ultimate power still resides with the parties who control the contents and the underlying delivery platform itself – not in the pipes.  We see tiny, but very clear examples of the relative power of the players every time some cable company tries to extort additional carriage fees from content providers. All these games eventually end up in the same way – the guys with the goods get the gold – and the pipe guys are sent packing and back to the woodshed.

But when I talk about platforms, I’m not talking about the basic technology platforms (iOS6, Jelly Bean or Windows 8) that run our devices; I’m talking about the data, content and transaction platforms (or you might think of them as bi-lateral networks) which are sitting on top of these enabling technologies and which connect us with the data we desire, cool content of every kind, necessary products and services or simply other people.

And by the way, if you’re wondering why there are only 3 mobile platforms (actually 2 ½ to be honest); that will tell you something important in itself about the power of platforms. Platforms are central to the “winner-take-all” realities of the world of technology and they help to create the inevitable concentration in these markets where one or two winners outdistance the field and then enjoy disproportionate and substantial profits for as long a time as their dominance persists. And these windfall and excess profits – if aggressively deployed – can further accelerate the ability of the leaders to pull away from the pack in many different ways. Excess cash can be applied to securing priority positions and placements in critical channels, crowding the channels themselves and closing out available ad inventory or other exposure available for competitors, predatory pricing, etc.

The fact is that, in markets fundamentally driven and dominated by (a) two or three central platforms, (b) mission-critical technologies, (c) ubiquitous operating systems; (d) enabling networks; or (e) products with very little, possibly zero, marginal production and distribution costs; over some reasonably short period of time, there will consistently emerge a clear and obvious winner, a strong number two and then a bunch of midgets and also-rans. There’s just not enough volume or oxygen in these intensely competitive markets to support a half dozen winners. All of the structural considerations inherent in the ways we (as customers and consumers) elect to narrow and concentrate our choices rather than broadening the scope of our inquiries and our horizons also help to reinforce and precisely dictate the result we see over and over again in these case. Whether it’s time constraints, an interest in efficiency, pure ignorance, sheer laziness or just basic human nature, we all tend to pick (and stick with) our familiar favorites.

There are a number of other contributing factors to this recurring outcome which are less personal – demonstrated economies of scale, market-dictated centralization and standardization requirements, and, of course, the power of Metcalf’s Law which first described and defined the exponential growth characteristics of networks and how that growth rapidly increased the network’s power, resilience and value. The more power and connections a business had to and with its users, the more powerful and profitable it would become.

Metcalf’s law with certain subsequent refinements and embellishments stated that the value of any network (originally consisting of connected and bilaterally communicating inanimate devices, but these days counting nodes of any kind including people and/or users) was proportional to the square of the number of connections. If anything, in today’s world of constant connectivity where every one of us is tethered to one or more devices at all times, the predictive power and nearly universal application of Metcalf is even more relevant.

So your mission is pretty clear. If you want to find the prime position for your business to capture value from whatever back-and-forth activity is going on in your industry; you’re going to want to identify the convergence points within the market – through which virtually all of the traffic and commerce needs to pass – and that’s where your business needs to be. If you can locate the hub (not the spokes) and get yourself on the gatekeeper gravy train; you will learn very quickly just how powerful a position this can be. Being paid even a little something every time anything moves over a network adds up to a whole lot of everything in pretty short order.

And here’s the deal: you don’t have to be some Colossus astride the harbor to pull this off. Smart little guys can often construct effective horizontal platforms more quickly and economically than the big vertical (and siloed) players who dominate many (mainly oligopolistic) markets. You just need to understand the basic building blocks and the dynamics of what makes a particular platform prevail. And you need to plan to be a platform from Day One. Believe me, it’s not something you stumble into.

So what do you need to know and be thinking about in terms of creating a persistent and winning platform as you try to build and properly position your own business?

(1)   Do Something for the Market that the Major Players Can’t Do Collectively or for Themselves

There are any number of industries where the major players are prevented by law or regulations from collaborative or cooperative efforts (very often these laws specifically target pricing issues) which are almost automatically regarded by the authorities and regulators not as helpful, but as predatory, exclusionary and anti-competitive. This makes it very difficult to structure and organize some market solutions that might ultimately be very beneficial and cost-effective for the consumer and which – at least arguably - ought to be of equal interest and concern to the same regulators. At the same time, these situations create great opportunities and openings for little guys to come out of nowhere and create sustainable new solutions.

So, in the case of the book publishers and Apple (albeit at Amazon’s urging), the government attorneys have sued, fined and/or settled with almost all of the players for “conspiring to fix book prices”. But, in the streaming music space, (where the music moguls seem to have finally learned a few lessons from the Napster debacle), we have Spotify and Shazam and others providing new services to consumers. And guess what? By creating industry-wide platforms for music delivery, these aggressive little startup companies not only blew the big guys away, but – even better yet – invited them in as investors. At last count, Spotify investors included: Sony BMG at 5.8 percent, Universal Music at 4.8 percent, Warner Music at 3.8 percent and EMI at 1. 9 percent. Also Merlin holds a small stake. The story is pretty much the same with Shazam where Sony, Universal (Vivendi) and Warner (Access Industries) each invested the exact same amount of $3 million. Could the message they are sending be any clearer? A very convenient and “legal” way for the very same guys who couldn’t do it themselves to do it together thru smart startups building next-gen platforms.

(2)   Create Criteria or Objective Benchmarks that Become the De Facto Industry Standards

A second path to becoming an industry platform deals with a different issue that again is common in many industries and presents new opportunities in all of them. In markets dominated by a few majors, a common problem in organizing and improving the efficiency of the market and creating better visibility (and “apples-to-apples” price comparison capability) for consumer is the lack of common and consistent nomenclature and the fact that each of the players has adopted and is psychologically “stuck” with their own numbering, identifying and classifying systems for their products even though the products offered by multiple players are functionally and often physically identical.

There are a lot of reasons for this – companies that believe that their branding and reputation will permit them to charge the consumer more for a product that is basically a commodity come to mind as the type of player which will resist market standardization. But they are basically losers (or will shortly be) in the new world of transparency where even the laziest consumer willing to do the minimal amount of research can access almost perfect pricing data in a flash.  Another reason for the resistance to change and improved market organization and efficiency is simply company pride of authorship and the “not invented here” syndrome. This is “how we do it” and we always will do it this way – flash – until the market tells them otherwise by moving quickly away from them. And a final complication is simple overkill. Many companies for reasons ranging from tradition to the requirements of antiquated legacy accounting and control systems have way too much information associated with every product in their inventory and accounting systems. This does nothing good for anyone and, in fact, creates additional impediments to the company’s speed, competitive responses to changed market conditions, etc.

Not surprisingly, the solutions which are changing markets like these are again being created by startups who are unhampered by all the historical and traditional concerns (as well as the ego issues) that make it hard to innovate and improve the old ways of doing things in the big businesses that dominate these industries.

And, in addition to being free of the constraints of the past, these startups bring a fresh approach which can best be described by three critical words: “Good Enough Is”. (See my Inc. post: http://www.inc.com/howard-tullman/keep-it-simple-stupid.html). They aren’t trying to write the Magna Carta for product classification or the Geneva Convention (worthless as that may be in its own right) for generating inventory lists; they are just interested in building a simple new solution that spans horizontally across the many market players and focuses only on the common and critical components and characteristics that matter to the market when specifications and purchase decisions are being made. Nothing needs to be perfect – nothing needs to be the “be-all and the end-all” – the solution that gets you started just needs to work and be good enough to get the job done. Things can and will always get better, but they won’t ever happen if you don’t get something started in the first place.

Need a simple example? Think about eBay way back when. No real product specifications. No serial numbers and other details. Not even photos in many cases at the beginning. But it became a powerful trading platform in very short order because it was a sufficient system to get the required job done. While customer expectations are definitely progressive over time; they’re pretty primitive and modest at the outset of a new experience.

(3)   Offer the End Users/Customers Independent and Consistent Evaluation Documentation

A third type of platform is one which creates a resource for buyers and sellers to access accurate, independent, and consistent documentation about the location, availability and costs of various products (often used or refurbished) which is not often available from the sellers or manufacturers of new equipment. In theory, the best type of platform for this particular need would be an active marketplace, but because it is often difficult and time-consuming to assemble a critical mass of buyers and sellers at the outset and sufficient transaction volume as well – the marketplace is a nice and desirable tool for generating the pricing and supply/demand data about various products – but it’s not necessarily the only solution in the short term.

Better and more accurate information is always preferable, but in some cases, any information that helps the parties make smart and more informed choices is better than nothing. When I started CCC Information Services in 1980, the goal was exactly this – to provide in digital formats better, more accurate, and more timely information about used car prices for insurance adjusters and ultimately for consumers to use in settling insurance loss claims. 35 years later, the same basic platform that I built back then is still in use and CCC is still the industry leader in the insurance vehicle valuation space.  

What’s so great about working with innovative startups every day at 1871 is that I get to see new and exciting game-changing examples of businesses addressing some of the same issues I dealt with decades before, but applying them to new markets and opportunities.  One case in point is MarkITx (an early 1871 company) which is building a platform to permit Fortune 1000 companies to efficiently value and then buy or sell the billions of dollars of used IT equipment that they have to update and dispose of every year.

Right now, in 90% of the cases, my impression is that the only important consideration for these companies is getting rid of the old stuff (someway, somehow) in order to quickly make room for the new stuff. The fact that they regard it as “junk” and that they have foolishly written the equipment down far too quickly on their books results in them leaving tens of millions of dollars on the floor of the shipping dock while some junk dealer drags the old stuff away.

A system like the one MarkITx is already putting in place for major firms with enormous dated equipment inventories that simply and accurately not only shows them the actual residual value of the pieces that they were about to pitch, but then also painlessly enables them to sell those items for cash on the barrel head has been a long time coming.  But it’s here now. And, just as you would expect, once you’ve got your shop set up on this kind of an automated system with a disposal schedule, etc. and you can just look forward to the “found money” rolling back into your coffers on a regular basis, you don’t even think about doing something else or going elsewhere.

(4)   Invest Your Resources in Infrastructure Individual Market Players Couldn’t Justify or  Afford to Create for Themselves

Another of the opportunity spaces for platforms are in markets not dominated by a few big guys, but consisting instead of a million little guys – none of whom are in a position to make the commitment or the capital investments (as well as absorbing the people costs) of funding the costs involved in launching, marketing and operating a central organizing platform for their industry or marketplace. As I said above, platforms don’t happen accidentally and getting the word out about a centralized and ubiquitous utility platform is very tough and very expensive.

I’m somewhat surprised that even sophisticated business journalists often don’t really get what’s going on in these spaces. One writer whose opinions I generally respect commented on Uber and said he wasn’t even sure that Uber was a technology company. He acknowledged that they used smartphones, but so, he said, did every other business these days including taxi companies. Frankly, he just didn’t understand that it wasn’t about the phone you used, it was all about the classic Ghostbusters question. Who ya gonna call? That’s the name of the platform game. Sure everyone in the city could just call some random cab company on their phone from wherever they happened to be and hope for the best, but that’s not a solution that anyone with any smarts thinks is a winner.

To solve this riddle, you’ve got to be top of mind with the consumer; have immediately responsive city-wide coverage; have a critical mass of participating drivers – 24/7; build a system to instantly connect them all thru a single distributed platform; and then have lots of cash and staying power and hope for the best. Anyone who thinks this isn’t a technology business won’t know a Tesla from a Model T.

 

So, at the end of the day, one thing is absolutely clear. It will be the companies driving and controlling the centralized and coordinated connections we need through the hubs, the networks, and the other emergent channels which will be the ones which can extract market-driven premiums from the communications, transactions and commerce moving through them. These gatekeepers (many of them startups who built the critical platforms) will keep a very fair share of the gold. Nothing primes a platform.