Module I·Article IV·~2 min read
Ecosystem Strategies: Platforms and Network Effects
Competitive Advantage
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Platform Businesses
Traditional business (Pipeline): a company creates value by moving it along a linear chain from suppliers to buyers. Platform: creates infrastructure for interaction between two or more parties who themselves create value.
Examples of platforms: Amazon Marketplace (sellers and buyers), Airbnb (hosts and guests), Uber (drivers and passengers), App Store (developers and users).
Network Effects
Network effect: the value of a product/service increases with the growth in the number of users. This is an extremely powerful competitive advantage mechanism.
Direct (one-sided) network effects: each new user increases value for all others. The telephone, messenger, Facebook—their value depends on how many of your contacts are present.
Indirect (two-sided) network effects: the growth in the number of users on one side attracts the other side. More iOS users → more developers create applications → more applications → more users.
Data as a network effect: more users → more data → better algorithm → better product → even more users. Especially powerful in AI products.
The "Cold Start Problem"
It is difficult for a new platform: buyers do not come without sellers, sellers do not come without buyers. Strategies for solving: subsidizing one side (Uber subsidized drivers in new cities), focus on a niche market (Facebook started at Harvard), creating autonomous value for the first side.
Monopolization Through Network Effects
Winner-takes-all dynamic: markets with strong network effects tend toward monopolization. Google (95% of search), Android (72% of the mobile OS market), Facebook/WhatsApp in messengers.
Regulatory reaction: antitrust investigations against Google, Apple, Meta, Amazon. DMA (Digital Markets Act) in the EU—obliges large platforms to ensure interoperability.
Practical Assignment
Invent a platform business model for one of the traditional industries (construction, professional services, medicine). Answer: (1) Who are the two or more parties? (2) What value does each side create for the other? (3) What type of network effects? (4) How to solve the cold start problem?
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