So, you want to be a platform?

Everyone wants to be a platform these days. And they are popping up faster than I can keep track of them. Facebook became a platform, enabling application developers to develop on top of Facebook. Next came the iPhone. Salesforce.com offered Force.com as a platform. Twitter became a platform. A few weeks back PayPal became a platform. AmEx bought Revolution Money last week, based in part on the notion that Revolution Money would become a platform for application developers. Google Wave is a platform. This week, LinkedIn is a platform. To top it all off, today AlcaLu announced it wants to be a platform. I could go on; this is madness.

This trend is not the exclusive domain of established players. It seems two out of three new investment pitches I hear have a “platform” element to them. This caused me to send the following tweet last week:

Your desire to be a platform does not make you one. Only the ecosystem around you can make you a platform.

Clearly, this topic deserves many more than 140 characters; hence this blog post. So what is a platform? Most people, particularly technologists, default to a technology definition of platform. In layman’s terms, a technology platform is infrastructure (hardware and/or software) upon which other technologies and applications can be built. This is intuitive and easy to understand. An operating system is a technology platform. And in the web-world, all of the services above fit the “technology platform” definition, because they all allow application developers to develop applications on top of something.

 The much more interesting definition from my perspective is a business definition. I favor the definition forwarded by David Evans and his co-author Richard Schmalensee in the Catalyst Code, in which they define an “Economic Catalyst” (a synonym for platform in my world) as:

An entity that has (a) two or more groups of customers; (b) who need each other in some way; but (c) who can’t capture the value from their mutual attraction on their own; and (d) rely on the catalyst to facilitate value-creating reactions between them.

I won’t steal thunder from the book - if you are interested in this trend at all, you should read it and its prequel “Invisible Engines” - but what the business definition drives home is that there is much more to being a platform than building a technology and hoping an application developer builds something on top of it. You can’t just be a technology platform; you have to make an ecosystem around the technology. In addition, the platform must serve both each of your customer groups well and must be a means to an end; that end being “a value-creating interaction” between those two customer groups.

Most of the platform examples I cited above talk about only one customer group, the application developer. That is natural in some ways as the release of these platform technologies is marketed to application developers. But this is only half of the story. We talk way too infrequently about why are these application developers build something on Facebook, Twitter, the iPhone, etc. This is important, because it is notoriously difficult to charge application developers to build on top of a platform. As I’m writing this, I can’t think of any good examples of big businesses built by charging application developers for access to a technology platform; perhaps with a little more thought I could gin a few up. Microsoft doesn’t charge application developers to develop on top of its OS. Microsoft makes its money charging software licenses to businesses and consumers who choose a Microsoft OS because of the large community of applications that are available on it. Facebook, PayPal, etc.; they don’t charge the application developer; at least not in a scalable way. You can’t just aggregate a bunch of application developers and make money.

We need to redefine success for platforms. A successful platform isn’t the platform with most application developers. The money is made by creating a value creating exchange with the customer on the other side. Therefore, a successful platform is one that facilitaties the most value-creating interractions for the two or more customer groups it serves. On that measure, all of the platforms I’ve mentioned (besides Microsoft’s OS business) are nascent. No-one has figured out a truly scalable way to create value exchanging interactions on these platforms; at least not in a way that serves the application developers well. A piece in GigaOm about the long-tail of iPhone application developers is illuminating. Om calls it “extra-long”, which means there are a very small number of applications making all the money and the rest are left fighting over scraps. Most of the examples I’ve cited have a consumer on the other side of the platform. The easiest business model for monetizing application to consumer interactions is advertising, whether on the web or “in-app”. Twitter is heading in that direction now, although they are rapidly bringing back functionality that has historically been the domain of the application developer community as they roll out their monetization strategy. You can be sure that those two trends are linked. We’ll see how the advertising model serves application developers on all of these platforms; my guess is not very well.

When a consumer is on one side of the platform, it is easier to become a platform when you have an installed base of users. Facebook had a massive user base before it opened up its platform. The same goes for Twitter, the iPhone, etc. It is much harder; some might say impossible; to start a consumer facing platform. Consumer facing platform strategies emerge from large installed bases of consumers; it may not be possible to start one explicitely, although Google is trying with Wave.

If you are an application developer on a consumer-facing platform, be sure the platform you build upon has a clear business model for helping you monetize the relationship you develop with the consumer. If not, be wary; what you do may eventually be consumed back into the platform. You may be left with no strategy for monetizing the user base you help to create.

For startups with no installed base on either side of their nascent platform, getting an ecosystem started is a bit trickier. For most, the only way to be successful is if the attraction between the two customer groups is soooo strong that the ecosystem “makes itself” around your technology platform. Some refer to this as the chicken and egg challenge of platforms. It is not mission impossible to crack the chicken and egg, but it is a challenge. This may be easier in B2B platforms than in B2C or C2C platforms. Perhaps more to come on that in future posts.

For now, on to another type of fowl; TURKEY!

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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2 comments on “So, you want to be a platform?
  1. Derek,

    This is an excellent post. I’m not sure that I agree with your comment that “a successful platform is the one that facilitates the most value creating interactions for the two or more customer groups that it serves” though. The question is value creating for whom? The Windows platform made tons of money for app developers (MS being number one of course) because the barriers to entry were high. Today, the value creation is for the platforms.

    How many iPhone developers are making any kind of money? When someone like me knows a handful of people who have developed iPhone apps and knows dozens more that could develop them, it is clear that there are no barriers to entry (the app store approval process notwithstanding). Other than rare exceptions like Zynga (most of whom got there before thee spaces became too crowded), App development for platforms as a standalone business is not likely to make much money in this world. The irony is that this has to be the case for the platform business model to work. For the platform, the audience has to come first. Once the platform has the audience, it is in the its interest to minimize the leverage of the developers. This is a classic competitive dynamic between complementary businesses.

    If I were an app developer for FB, iPhone or Android, I would start pitching my services to companies that want to use those platforms in creative ways to market their regular businesses.

    • For the most part, I think we’re in violent agreement Reid. These platforms are principally serving their own interest and not the interest of their customers (consumers and app developers) very well. What I’m questioning is how sustainable that is. There is already outcry amongst the iPhone app developer community that Apple is too difficult to work with and the monetization opportunities are insufficient. The same can be said of Facebook’s platform. Fundamentally, I don’t believe that app developers will continue to flock to these platforms if they can’t make money; they will go elsewhere. The consumers are just as portable. Already, Facebook is rumored to be losing some of its core 18-24 yr. old demo; for reasons other than the issues with app. developers.

      Point being, if these platforms don’t create value for their app. developers and their consumers, then they can’t create value for the platform. The platforms’ ability to take all the spoils may be unsustainable. We’ll see!

      This is part of the reason I prefer B2B platforms; the customers are much harder to “abuse”; making it clear that the platform has to serve its customers well to be sustainable.

3 Pings/Trackbacks for "So, you want to be a platform?"
  1. [...] now, on to another type of fowl; TURKEY!(Cross-posted @ Non-Linear VC)Posted Under : Analysis Tags Microsoft Twitter advertising LinkedIn Venture Capital Facebook [...]

  2. [...] this direction; it’s totally logical and it was foreseeable.Tacky to quote myself, but in a prior blog post I said: If you are an application developer on a consumer-facing platform, be sure the [...]

  3. [...] in this direction; it’s totally logical and it was foreseeable.Tacky to quote myself, but in a prior blog post I [...]

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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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