Platform Mediated Business Models PDF

Platform Mediated Business Models QMB 69 30 : MANAGEM ENT INFORMATION SY STEM S : LECTU RE 1 B ANUJ KUMAR, UNIVERSITY OF FLORIDA 1 Two sided Markets/Platforms Platforms are products and services that tie together two (or more) distinct groups of users in a network Examples: Credit...

Platform Mediated Business Models QMB 69 30 : MANAGEM ENT INFORMATION SY STEM S : LECTU RE 1 B ANUJ KUMAR, UNIVERSITY OF FLORIDA 1 Two sided Markets/Platforms Platforms are products and services that tie together two (or more) distinct groups of users in a network Examples: Credit cards, Newspapers, HMOs, Computer Operating Systems … In a traditional value chain, value moves from left to right: the left side of the company is cost, and the right side is revenue. In two-sided markets, the costs and revenue are on both sides because it has users on both sides 2 Two sided Markets/Platforms Network effects – the value of a platform to a user grows with the number of users on the other side (i.e. AirB&B, Uber) Platforms enjoy increasing returns to scale because of network effects – users pay more for access to a bigger network, so margins increase as the user base grows Traditional businesses experience diminishing returns for growth beyond some point The Winner-Take-All phenomenon in platforms Leader can leverage their high margin to invest more in R&D, offer lower prices, etc., to drive competition away. Examples: credit cards, OS markets 3 Two sided Markets Platforms serving two sides are not a new phenomenon Mall, Newspaper, retail electricity market But digital technologies have made platforms more prevalent due to two factors 1. Lower search and tracking costs in digital technologies facilitate efficient matching between the two sides of the platform. E.g., Google, Apple, Airbnb, Uber. 2. Lower reproduction and verification costs of digital technologies also increase the efficiency of trade between the two sides of the platform. E.g., applications on software platforms can be quickly developed via SDK and reproduced at zero costs to serve specific customer needs. 4 Why is Airbnb so Popular? http://rentingyourplace.com/airbnb-101/ ANUJ KUMAR, UNIVERSITY OF FLORIDA 5 Airbnb Growth ANUJ KUMAR, UNIVERSITY OF FLORIDA 6 Marriott Versus Airbnb http://blog.thinque.com.au/futurist-keynote-for-the-hospitality-industry-part-1/2 http://saragbrodersen.dk/how-the-leisure-industry-will-survive-sharing-economy/ ANUJ KUMAR, UNIVERSITY OF FLORIDA 7 IT Enabled Asset-less Giants https://www.pinterest.com/pin/123286108528135231 / ANUJ KUMAR, UNIVERSITY OF FLORIDA 8 IT Enabled Asset-less Giants created by Marshall vanAlstyne ANUJ KUMAR, UNIVERSITY OF FLORIDA 9 IT Enabled Two-Sided Platform Examples ANUJ KUMAR, UNIVERSITY OF FLORIDA 10 Anatomy of Platforms Platform components User groups– interact with each other through the platform Platform provider Platform provider provides Products, services, and infrastructure for user interactions Set of rules –protocols, rights, and pricing – that govern user interactions 11 One-Sided Network Effects The value of a product/service increases when more customers use the same product/service. Example: Telephone services 12 Two-Sided Network Effects The value of a product/service increases when there are more customers/suppliers on the other side. Airbnb is more valuable to guests when there are many rental properties listed. Airbnb is more valuable to hosts when there are many potential guests. 13 Network Effects in Platforms 1) Same-sided network effects Increasing the number of users on one side increases (decreases) the value for users on the same side Examples of positive (negative) same-sided network effects: video game players, social media users (suppliers on Amazon.com) 2) Cross-sided network effects Increasing the number of users on one side increases (decreases) the value for users on the other side Examples of positive (negative) cross-sided network effects: Airbnb (TV viewers preferring fewer Ads). 14 Uber’s Growth : Cross-Sided Network Effects ANUJ KUMAR, UNIVERSITY OF FLORIDA 15 Uber’s Growth : By David Sack ANUJ KUMAR, UNIVERSITY OF FLORIDA 16 Key Decisions in Managing Platforms Three key factors that managers should consider in designing/managing their platforms 1. Platform pricing 2. Managing Winner-Take-All (WTA) dynamics 3. Threats of envelopment 17 Platform Pricing How is a product priced in traditional industries? Marginal cost, consumer willingness to pay But, on the 2-sided, How do we price the two sides of the platform? Price each side, factoring in the impact on the other side’s willingness to pay and growth ‘Subsidy Side’ – a group of users who, when attracted in volume, are highly valued by the ‘money side’ – the other user group Charge premium from the ‘Money (Revenue) Side’ and charge nothing (or less) from the subsidy side to obtain strong cross-sided network effects 18 Subsidy /Revenue Side of Platform: Why? ANUJ KUMAR, UNIVERSITY OF FLORIDA 19 Platform Pricing How do we price the two sides of the platform? The money side may be willing to pay a premium for higher numbers on the subsidy side But higher numbers on the money side may also be more attractive to the subsidy side as well A higher number on one side of the platform may make it unattractive (or attractive) for other users on the same side Thus, guidelines needed to make pricing decisions 20 Pricing Strategy to Build Network Introductory pricing: charging a low price to attract new customers and suppliers Once the platform is built and network effects kick in, prices can be raised to recoup the initial investments. If the network is large enough, customers/suppliers are willing to stay even with higher prices. 21  Factors Determining Platform Pricing Ability to capture cross-sided network effects Subsidy side can transact with the money side of rival platform –Subsidized Netscape browser did not increase the sales of Netscape servers. Here the cross-sided network did not kick in because the platform could be used in other platforms. User sensitivity to price Subsidize more price-sensitive side and charge the side that values the higher number on the other side more – Adobe Acrobat subsidized PDF readers but charged PDF writers. The reader is free. But to do more you have to pay. User sensitivity to quality Subsidize the side that demands high quality and charge the side that supplies high quality – video game developers (revenue side) require a large number of customers (subsidy side) to recoup high fixed costs required for developing high-quality games. You want the people developing games developing high quality games. Here our gamers have two requirements (quality) and (price sensitvy), so charge the developers more to be able to sell their games on the Microsoft platform ---but as microsfot im keeping my developer numbers low. So I charge the gamers (who want low price and high wuality) $10. and charging the gamers $4. 22 Factors Determining Platform Pricing: thinkning about these factors when pricing Output costs When the costs of providing products/services to the subsidy side are non-trivial, what if a strong willingness to pay does not materialize on the money side – Free PC. this targets price senvitive customers who are unlikely to react to the ads. Same-side network effects In case of strong negative same-side effects, the platform should consider limiting the number of users on a side by granting exclusive rights – Online car-buying services Autobytel earmarked a geographical territory to a single dealer to avoid negative same-sided network effects Users’ brand value All users on the platform may not be equal; marquee users can attract users on the other side of the network – anchor stores in shopping malls 23 STOP Managing WTA Dynamics Whether to share the platform or fight for proprietary control? Two-step process Ask whether the market is destined to be served by a single platform Decide whether to fight or share the platform Conditions for WTA Multi-homing costs are high – costs to use multiple OS Strong and positive cross-and same-sided network effects Users don’t have a preference for special features to allow differentiated offerings – Amex cards with no preset spending limits 24 Managing WTA Dynamics Example DVD industry High multi-homing costs for consumers and studios Strong cross-sided network effects for both sides Opportunities for technical differentiation are minimal as DVDs connect to standard TV sets Industry participants pooled their technologies to jointly develop a DVD format and share the market Higher total market size Lower marketing costs 25 Managing WTA Dynamics Prerequisite for proprietary control Costs and/or differentiation advantages are the minimum requirement Preexisting relationship with prospective users – Adobe PDF launch utilized a user base for PostScript printing products Reputation of past prowess - Microsoft Deep pockets matter First mover versus late mover advantage – Google learned from errors of web-search pioneers 26 The Threat of Envelopment When a rival platform can offer the platform functionality as part of a multiplatform bundle The money side may perceive that the rival’s platform delivers more functionality at a lower price Convergence – envelopment opportunities that blur the market boundaries Mobile phones – Camera+ Credit card+ Video + Music Google – Google talk + Google Checkout + Google base Microsoft NT server – WMP + File + print + Email + Web 27 How to Face Threat of Envelopment? Change Business model Real’s response to Microsoft: leveraged existing relations with consumers to launch music streaming services called Rhapsody – charge consumers rather than subsidizing them Find a “bigger brother” Real’s relationship with cable TV and cellular operators to counter Apple Sue – use antitrust laws Real’s anti-trust case against Microsoft ANUJ KUMAR, UNIVERSITY OF FLORIDA 28