B-Platform Mediated Business Models

Platform Mediated Business Models

• Platform models connect two or more distinct user groups within a network
• Examples include credit cards, newspapers, HMOs, and operating systems
• Traditional value chains have costs on the left side and revenue on the right side
• Two-sided markets have costs and revenue on both sides due to their dual user structure

Two-Sided Markets/Platforms

• Network effects increase platform value with more users on the other side (e.g., Airbnb, Uber)
• Platforms benefit from increasing returns to scale as user bases grow
• Traditional businesses experience diminishing returns beyond a certain growth point
• Platforms with high margins can invest heavily in R&D and lower prices for market dominance
• Examples in this area include credit cards and operating systems

Two-Sided Markets

• Platforms serving two sides are not new (e.g., malls, newspapers, and electricity markets)
• Digital technologies have increased platform prevalence due to two key factors:
• Lower search and tracking costs improve matching efficiency between sides (e.g. Google, Apple, Airbnb, Uber)
• Lower reproduction and verification costs of digital technologies boost trade effectiveness (e.g., software platforms, SDKs)
• Cost savings in these areas allow faster and cheaper delivery to customers

Why is Airbnb so Popular?

• Airbnb's guest nights booked have increased dramatically (from millions to tens of millions)
• Bookings in a day, weeks, minutes, seconds are on the order of those numbers as well
• This shows exponential growth and rapid increase in popularity

Airbnb Growth

• Airbnb demonstrates solid growth attracting investor interest
• 2015 estimated revenue: $1 billion; and estimated nights booked: 78 million in 2015
• 2015 projected revenue: $900 million
• Data shows the company is a growing entity in the market

Marriott Versus Airbnb

• Marriott, a decades-old company, has 697,000 rooms in 80 countries.
• Airbnb, a newer company, has 650,000 rooms in 192 countries.
• Marriott intends to add more rooms within 2 weeks
• Data suggests significant growth and evolution from both companies

IT Enabled Asset-less Giants

• Companies like Uber, Facebook (Meta), Alibaba, and Airbnb are examples of asset-light ventures leveraging IT

• Uber, the world's largest taxi company, does not own vehicles

• Facebook, a media giant, does not create content

• Alibaba, the most valuable retailer, doesn't have inventory

• Airbnb, the world's largest accommodation provider, has no real estate

IT Enabled Asset-less Giants (Data)

• This section presents key data on various companies including year, employees, market capitalization and firm
• Ex: Uber in 2009 had 5,000 employees with a market cap of $60B
• Ex: Airbnb in 2008 had 3,000 employees with a market cap of $21B

IT Enabled Two-Sided Platform Examples

• Illustrative images showing Airbnb and Uber logos.

Anatomy of Platforms

• User groups interact through the platform
• The platform provider supplies products, services, and infrastructure for users' interactions
• Rules, protocols, rights, and pricing govern user interactions

One-Sided Network Effects

• Product/service value increases with more customers
• Example: Telephone services

Two-Sided Network Effects

• Product/service value rises with more customers and suppliers on each side
• Airbnb example: value to guests increases with more rental listings; value to hosts increases with more potential guests

Network Effects in Platforms

• Same-sided network effects: one side increases in value with more users
• Cross-sided network effects: one side's value increases with the other
• Examples of these effects include Airbnb and TV viewers.

Uber's Growth: Cross-Sided Network Effects

• The projected global bookings of Uber increased 141% between 2015 and 2016
• Uber's global bookings revenue rose from $0.69 billion to $10.84 billion over the period

Uber's Growth (By David Sack)

• Faster pickups, lower prices, less driver downtime, and more geographic coverage contribute to Uber's growth
• Increasing demand and driver base lead to more geographical coverage & saturation.

Key Decisions in Managing Platforms

• Managing platform pricing
• Managing the Winner-Take-All (WTA) Dynamics
• Understanding and mitigating threats of platform envelopment.

Platform Pricing

• traditional pricing (marginal cost, consumer willingness to pay)
• two-sided pricing: price each side based on impact on the other and growth potential
• "subsidy side," high volume and valued by others
• Charge premium from revenue side and less from subsidy side for cross-sided network outcomes

Subsidy/Revenue Side of Platform (Examples)

• Illustrates examples of platforms that adopt a subsidy model (e.g., homebuyers/sellers, passengers/drivers, employers/employees)

Platform Pricing (Further details)

• Money side willingness to pay a premium for larger numbers in a subsidy side; numbers in the monetized side are attractive to the subsidy side.
• Large numbers in one side can make the other unattractive (or appear more attractive to users) in terms of platform usability.

Pricing Strategy to Build Network

• Introductory pricing to attract customers/suppliers and then increase for investment recovery
• Successful network size creates customer/supplier willingness to continue even at higher prices

Factors Determining Platform Pricing

• Ability to capture cross-sided network effects (e.g., leveraging rival platform functionality)
• User sensitivity to price and quality influencing the platform business model.

Factors Determining Platform Pricing (deeper context)

• Subsidizing one side of the platform with the money side of the platform affecting a platform's pricing strategy
• User sensitivity to quality of a platform

Factors Determining Platform Pricing (deeper context cont.)

• How well a product/service is subsidizing one side of a platform can affect the prices and the pricing strategy
• User sensitivity to what is being offered on the platform may have repercussions on platform pricing
• Understanding output costs can be a critical part of platform pricing, and it influences the types of users participating in the platform

Output Costs

• Output costs arising from providing products/services to the subsidy side are crucial
• Platform pricing includes whether customers are willing to pay for these products/services

Same-Side Network Effects

• If users increase negatively in quantity, it can affect platform decision-making

User's Brand Value

• User brand value (e.g., marquee users in shopping malls influencing user choices affecting pricing)

Managing WTA Dynamics

• Two-step process to decide to partner or fight for control over a platform:
• Decide platform service/products
• Whether to battle each other or to operate as part of a whole

Managing WTA Dynamics (Examples)

• Example of DVD industry showing how participants pooled resources for a shared market, boosting total market size and reducing marketing costs

Managing WTA Dynamics (Prerequisites)

• Minimum requisite for proprietary control: cost/differentiation advantages
• Pre-existing relationships with users (e.g., Adobe PDF)
• Prior successful products (e.g., Microsoft)
• Deep pockets matter
• First-mover advantage (e.g., Google with web search)

The Threat of Envelopment

• Rival platforms, offering more functionality or services, may draw away platform users.
• Convergence and blurred market boundaries in technologically complex offerings.

How to Face Threat of Envelopment

• Change platform business model to counter rival platform competition
• Forming strategic partnerships with other significant entities that provide user bases
• Utilize lawsuits and anti-trust laws for competition reasons.

Explore the concept of platform mediated business models that connect distinct user groups, such as credit cards and operating systems. This quiz highlights the dynamics of two-sided markets and the effects of network growth on platform value. Assess your understanding of traditional versus platform business models and their implications for market strategies.