Platforms

Market Platforms > Platforms

WHAT THEY ARE

Matchmakers make it easy for two or more groups of customers, like drivers and riders in the case of Uber, to get together and do business.  They operate platforms that make it really easy, and really efficient, for people and businesses to connect and exchange value. Some of those platforms are physical, such as shopping malls, while others are virtual, such as operating systems.

Matchmakers are mainly about selling one group of customers, like restaurants with spare tables, access to another group of customers, like people who want to go out to eat. And often, as in the case of ride-sharing apps, members of both groups value access to members of the other.  Sure, platforms sometimes sell products and services, like regular (single-sided) businesses, but they are mainly about selling ‘access’.

A lot of traditional business rules don’t hold as a result of this difference. For instance, the basic principle that a business should almost never sell products or services at less than cost doesn’t hold for multisided firms.  Matchmakers often find it most profitable to subsidize one group of customers to participate in the platform so they can make money from charging another group for access to them.

For more reading see: Forbes Five Questions on Matchmakers with Evans and Schmalensee

Today, we’re living in the matchmaker economy and interacting with an ever-increasing range of platforms. The matchmaker ecoomy is a bigger and more pervasive part of our lives than many imagine.

Five of most highly valued companies in the world—Amazon, Apple, Facebook, Google, and Microsoft—make much of their profits from connecting different groups, like developers and users in the case of Apple. So do seven of the most valuable unicorns—startups worth more than $1 billion in their latest funding round—such as Uber, Airbnb, and Flipkart. And then many other companies that have IPO’d in the last decade, like Visa, which connects cardholders and merchants ultimately, and Facebook, which connects friends, advertisers, and developers.

And it’s not such these humongous companies. Westfield Malls operates shopping malls that help retailers and shoppers to get together. Then there are all the ad-supported media that troll for eyeballs so they can sell them to marketers.

The matchmaker business model is hardly new.  Visa will turn 50 this year, the London Stock Exchange is more than 200 years old, and the Grand Bazaar in Istanbul more than 500.  Today, though, matchmakers are turbocharged—powered by the cloud, broadband, microprocessors, software, and other modern technologies. Companies like Uber wouldn’t exist, for example, without the development of mobile broadband, mobile software platforms, and the Internet.

These turbocharged platforms, boosted by other turbocharged platforms, are marching around the globe, trampling both traditional businesses and older platforms. No business is safe in the path of this most recent gale of creative destruction.

Whether you are an investor, an entrepreneur, work at a traditional firm or an established platform, you will need to learn what the oldest business model, newly turbocharged, means for you.

For more reading see: https://hbr.org/2016/05/what-platforms-do-differently-than-traditional-businesses

Why They Matter

New Economics

Matchmakers play by different rules than traditional firms.  So if you want to run a successful platform business, you can forget about many of the formulas you studied in basic micro, or at business school, or that are the subject of most books on business strategy.  There’s a new economics, with new math, that shows how these businesses work, and a robust body of empirical data that shows this new math is right, and the old economics is wrong.

The following are just some of the key economic features of matchmaking platforms.

  • They don’t buy inputs, make stuff, and sell it. They sell access. They get different groups on their platforms.  Those are their inputs. Then they sell each group access to the other groups.
  • They make it easy for members of these different groups to find each other and exchange value. They are the businesses we depend on to reduce market frictions.
  • To do this, they have to build a critical mass of participants. They have to get enough members of each group to make the platform interesting to the other group. If they do that they ignite. If they don’t, they die.
  • Often, they subsidize some to participate. Maybe for free, maybe even with rewards.
  • They make rules, and enforce them, to prevent participants from doing bad things to each other.
  • They make money by charging participants for helping them make valuable matches.

Whether you are an investor, or an entrepreneur, or a policymaker these differences between matchmakers and traditional businesses are critical for how you make the right decisions, the right judgments, in today’s economy.

For more reading see: https://www.amazon.com/Matchmakers-New-Economics-Multisided-Platforms/dp/1633691721