The return of platforms (and how to not fail at building one)

A digital platform uses technology to connect people, organizations, and resources in an interactive ecosystem. The platform is taking the business world by storm: Three of the five largest companies by market capitalization are platforms (Apple, Google, and Microsoft), and the valuation of ride share startup Uber (founded in 2009) rivals that of General Motors (founded in 1908).

Geoffrey G. Parker, a visiting scholar and research fellow at the MIT Initiative on the Digital Economy, is the co-author of Platform Revolution: How Networked Markets Are Transforming the Economy – And How to Make Them Work for You, along with MIT's Marshall W. Van Alstyne and Sangeet Paul Choudary. Here Parker discusses the rise of the platform economy and outlines how to take advantage of the opportunities that platforms offer. In addition to his appointment at MIT Sloan, Parker on July 1 will join the faculty at Dartmouth College's Thayer School of Engineering.

You and Marshall Van Alstyne have been writing about the concept of the platform since the late 1990s. What first caught your eye?

During the last dot-com boom, there was a puzzle of pricing. We asked why there was so much stuff for free on the internet. Did it make sense, and if so, how and why? For example, Microsoft distributed Internet Explorer for free and Adobe distributed Acrobat Reader for free. To answer the question, we first generated 30 to 40 examples. Then we looked at the network economics literature and saw that there was a gap which indicated the need for us to develop the theory of two-sided networks. It actually made sense for firms to give away goods and services, so long as other types of customers got to foot the bill. That’s what Google has done by giving away search to seekers by monetizing through selling advertising.

What allowed platforms to take off even after the dot-com bubble burst?

The people who have done a lot of work in platform scholarship are interested in science and engineering. We tend to think of systems, of product and software development. You need developers, or else there won’t be any consumers, and there won’t be any consumers if there aren’t any developers.

Computer operating systems, gaming consoles, credit cards, and health maintenance organizations (HMOs) were examples in the early 90s. We were thinking, “How do people attach to these systems? How do they grow?” This is a really big, powerful idea. And by the mid-2000s, the market came roaring back. Google, Facebook and Amazon were growing fast, and Microsoft and Apple had resurged.

Why are certain pipeline businesses, which operate in a linear process with an input and an output, turning a blind eye to the platform?

Some industries that have not been growing have not provided opportunities for the next generation of leadership to come in — the people who have a natural tendency to innovate. Their leadership came up in a pre-platform era. Of course they’re aware of what’s happening, but they don’t find it as natural as some might. The generation that grew up on Facebook is not the generation that grew up on Microsoft Office, which is not the generation that grew up on mainframes. The willingness to embrace a wider variety of participants is different by industry and also by generation. But, at this point, I think just about everybody is getting there.

How can companies avoid the common pitfalls of platforms that you write about in the book, such as a failure to optimize openness or a failure to engage developers?

Firms need to invest much more in capabilities that will help them to better manage outside resources. A key point is that platforms coordinate or facilitate work that’s done externally. Anyone can connect to common application performance interfaces (APIs) or standards. Developing an ecosystem management capability is absolutely essential.

It’s also critical to think about governance. You need to have a light touch where necessary but step in to stop the behavior that causes negative behavior effect. You don’t want to solve a problem that may not exist, but you do want to avoid a problem that will be expensive to grow out of. Otherwise you can sow the seeds of your own destruction. MySpace offers a case in point. They had a technology challenge because their core infrastructure couldn’t handle the explosive growth they experienced. But, they also had a governance challenge. When garish advertising, spam, and pornography became the norm, users began to abandon the platform in droves.

The lesson is clear: Platforms must invest in governance mechanisms in order to encourage good interactions while preventing bad ones.