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Platform companies: Does the chicken really come before the egg?

Platforms make the digital world go round. Apple, Microsoft, Google—they’re all platform companies. So are billion-dollar startups like Uber and Airbnb.

cusumanoBut what exactly is a platform? MIT Sloan Professor Michael Cusumano, who teaches internet entrepreneurship, among other IT-related management subjects, explains. “Platforms are foundation technologies or services that bring multiple people together for a common purpose. Platforms are where we find each other or where we transact business that would be difficult without that intermediary component. Computers, the internet, and other digital technologies have enabled companies and governments to create truly global platforms. They can perform an almost unlimited number of activities and grow at a pace never before seen in human history.”

The classic chicken and egg dilemma

Cusumano notes that, at the outset, every platform company faces the classic chicken and egg problem. “Airbnb guests won’t rent rooms unless a lot of people make their rooms available to rent. But people won’t offer rooms on a website unless it has a good reputation and a deep pool of desirable consumers. How is a brand new company supposed to establish the reputation it needs to draw both chickens and eggs?”

Airbnb’s core decision, Cusumano says, was to figure out which part of the market to corner. The company lined up a large number of people with rooms to rent, which began pulling in the other side of the equation—the guests. That inventory created the momentum that lured still more rooms attracting, in turn, even more guests. The result is an optimal environment for millions of people to make matches for themselves as buyers and sellers.

Exactly who are the paying customers?

Cusumano hastens to add that having a good business plan that fits the platform model is no guarantee of success. “Most platform initiatives fail because they can’t attract a critical mass of participants so never gain any momentum.” To succeed, a platform company also must figure out which part of the market to charge. “In many cases, a platform succeeds because it has correctly subsidized one side of the equation in order to generate sufficient revenue from the other side. You also have to nail security. No one is going to use a platform that is perceived as insecure.”

Despite the challenges, Cusumano has no doubt that we are headed toward a platform-rich future. “Platform worlds are complicated—lots of different players and lots of different ways to make money—but I don’t anticipate that we’ll see radically different models from what we see today. Smart phones and cloud-based storage will be much more powerful, and digital access to everything will be much more common. The technologies of the sharing economy will accelerate the rate at which we are all becoming providers and consumers, and we’ll be living in an evermore connected world.”

Cusumano’s latest book, translated into 17 languages, is Strategy Rules: Five Timeless Lessons from Bill Gates, Andy Grove, and Steve Jobs (with coauthor David B. Yoffie).

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