One of my goals here is to better understand tech platforms and disruption. When I started thinking about why some platforms succeed spectacularly and others don’t, I realized I first needed to define the word because almost every company today likes to call itself a platform! To customers, it communicates vision. Choose us and you’ll have a partner that will anticipate your every need in the space! To investors, it communicates ambition. We’re not just building a product, we’re building infrastructure for the future!
How do you separate the pretenders from the true platforms? What makes a ‘platform’? Bill Gates offered a perspective a few years ago that Ben Thompson commented on:
Over the last few weeks I have been exploring what differences there are between platforms and aggregators, and was reminded of this anecdote from Chamath Palihapitiya in an interview with Semil Shah:
Semil Shah: Do you see any similarities from your time at Facebook with Facebook platform and connect, and how Uber may supercharge their platform?
Chamath: Neither of them are platforms. They’re both kind of like these comical endeavors that do you as an Nth priority. I was in charge of Facebook Platform. We trumpeted it out like it was some hot shit big deal. And I remember when we raised money from Bill Gates, 3 or 4 months after — like our funding history was $5M, $83 M, $500M, and then $15B. When that 15B happened a few months after Facebook Platform and Gates said something along the lines of, “That’s a crock of shit. This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”
A platform, according to Gates, is any company that creates more economic value for its customers than it captures for itself. I’m not saying this is a conclusive answer. There are bound to be exceptions to this rule, and its terminology could be explained better. Gates doesn’t exactly define ‘economic value’. If you consider it to mean revenues, the App Store and Google Play are fantastic platforms — they generated $34 billion dollars in the first 6 months of 2018. That’s revenue that would not have existed without Apple and Google. Even after you subtract their 30% take, they still create more value for developers than they capture. But if you include profitability or business model sustainability, things start to look worse. While the 30% take is pure profit for Apple and Google, it’s impossible to build a business based solely on app store revenues, with the exception of games or music or video streaming. Are they actually capturing more economic value than they’re creating in that case?
Nonetheless, this definition provides me a good starting point as I explore what it means for a company to be a platform.
I also think true platforms must be disruptive to succeed.
Just like with ‘platform’, I want to have a definition in place for ‘disruption’ that I can use in my writing. And just like ‘platform’, ‘disruption’ is extremely overused today becoming synonymous with any type of Silicon Valley-style innovation. But the major difference between the two is that disruption already has an academic definition. Clayton Christensen wrote three books about it!
The thesis of Christensen’s Disruption Theory is that upstarts are able to gain a foothold in a market when certain customer segments are either ignored by incumbents, or when others are being over-served by them. After achieving success in the market, incumbents get locked into serving their most profitable customers. Teams within these organizations are incentivized to develop products that can maximize short-term profits. Their efforts result in what Christensen calls ‘sustaining innovations’ — incremental improvements to existing offerings designed to improve margins. Incumbents start seeing the world through the eyes of their most profitable customers, making them vulnerable to two kinds of disruption — New-market disruption and Low-end disruption.
Low-end disruption happens when customers are ‘over-served’. Incumbents start raising their prices to maximize profits from their largest customers by adding features that other customer segments don’t need. Start ups, usually fueled by a new technology or business models, which are increasingly enabled by new technology or consumer behaviors, start by serving these segments. Their technologies and business models tend to be immature, and incapable of serving the most sophisticated customers. But they tend to be good enough for the low-end, and are cheaper, allowing start-ups to establish a growing business by targeting segments over-served by incumbents. If these technologies or business models are able to get better over time to catch up with those used by incumbents, successful start ups are able to leverage their dominant position at the low-end to make forays into the profitable markets served by incumbents and disrupt them.
I often think of this as a way to look at Twilio’s entry into the contact center space. When I started in 2015, Twilio didn’t have the features or the scale to support an enterprise-grade contact center. But there were some companies, mostly other startups, that valued Twilio’s flexibility over its shortcomings and decided to use it for their contact centers.
New-market disruption is exactly what the name suggests — disruption that originates in new markets. They don’t exist yet because it’s not profitable to serve customers in these markets using the technologies and business models available to incumbents. Similar to low-end disruption, start ups gain a foothold by serving these customers with relatively immature new technologies or business models. To borrow from Christensen’s terminology, they are ‘competing with non-consumption’. Disruption takes place when the New Market turns out to be larger than the Old Market, swallowing it up and the incumbents’ business with it.
Stripe is a great example of this. They started by focusing on Internet businesses that needed a simple and flexible way to accept payments online. They built a standard web API and charged on a pay-as-you-go basis allowing these companies, mostly startups, to start accepting payments without needing to integrate proprietary technologies or long-term contracts. This New Market was not served by incumbents, and today is on track to swallow up the Old Market as every business becomes an Internet business. Stripe’s launch of card issuing and physical PoS terminals is a clear indicator of this.
There’s definitely more nuance to explore here, but asking ‘Does it create more value than it captures?’ and ‘Is it disruptive?’ seems to be as good a place as any to start understand what successful platforms are made out of.