Platforms: Of Governance and Taxes

I like analogies. This week, Brad Burnham of Union Square Ventures wrote a thoughtful post based on an analogy between software powered platforms and governments. Bob Warfield of the SmoothSpan Blog did a follow-up post claiming that application developers should seek platforms that act like Switzerland; something Warfield has apparently been saying since 2007. The government-platform analogy is good, albeit imperfect. The most salient aspects of the analogy are in the area of governance.

Governance is a critical role for any platform provider. David Evans, who I consider a leading expert on platform strategies, has long said that platforms have three primary roles in their ecosystem, “building, stimulating and governing”. From Chapter 2 of Catalyst Code, a book Evans co-authored:

Catalysts create communities, and communities need governance lest they devolve into anarchy. Catalysts enact rules and impose punishments, and they promulgate standards of behavior.

Evan’s use of the term Catalyst is synonymous to platform. So how do you know if the platform you are working with is going to play fair? As with most governments, it’s all about the rule of law and taxes.

The rule of law

The platform gets to make the rules, codified in the terms of service. Evaluate them carefully and ask these questions:

  1. Are the terms of service stable over time or do they change frequently?
  2. Do they restrict your freedom to operate or do they enable your fee will?
  3. Do they bind you to monetization services offered by the platform, or do they offer you the opportunity to work with monetization schemes provided by third parties?
  4. Do they enable the platform to compete with you, or do they make clear that the platform was established to help you become successful?

Taxes and platform monetization

Governments get their revenue from the collection of taxes; and the government gets to set its own tax code. The same goes for platforms, they get to determine how they will monetize their platform. If you are building on a platform, make sure the tax code is well established, stable and predictable. If the tax code is not clear, you are at risk.

Lots of Twitter application developers wrote their applications well before Twitter knew how it would monetize its platform. Said in the context of the government analogy; the Twitter platform emerged before Twitter had a tax code. The increasing tension between Twitter and the application developer community can be traced back to ambiguity in Twitter’s monetization strategy in the early days of the platform’s emergence. As Twitter’s monetization strategy has become more clear, Twitter has been forced to evolve its platform strategy. I’ve argued that we should no longer view Twitter as a platform, but rather as a consumer application. In Twitter’s case, it is clear to me that they have decided that the best way to monetize Twitter is to own and control the consumer experience, enabling them to offer advertising capabilities. Facebook suffers from the same tension as it is both consumer application and platform. If you don’t understand how your platform will monetize itself, your business model may very well be at risk.

To summarize, make sure you understand how your platform partner will govern. The rule of law and the tax code will tell you whether or not the platform is there to help you succeed or if it may compete with you one day.

Derek Pilling is a Managing Director at Meritage Funds, a growth equity firm. Derek invests in technology-enabled services businesses in the Internet Infrastructure, Cloud Computing, Digital Media and SaaS sectors.Derek lives in Denver with his wife and his three children. In his spare time, Derek enjoys coaching youth soccer, skiing, hiking, spinning and hopping on his rowing machine in the morning.

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Derek Pilling

About Derek

I'm a Managing Director with Meritage Funds, a growth equity investment firm based in Denver, CO. I've been working with growth stage businesses my entire career. When I'm not working, I ski, spin, coach youth sports and spend time with my beautiful wife and three kids.

I blog because the process helps me crystalize how I frame the world. I want to hear what you think. Please comment.

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