The challenge of digital platforms

Scrolling down the list of companies with the highest capitalization on global markets, jostling for the top six spots at any given moment are: Apple, Microsoft, Alphabet-Google, Amazon, Facebook, and Alibaba.

What’s immediately clear is that these companies operate in highly technology-intense sectors; but there’s another characteristic that in some way represents a common denominator: all six base at least a part of their business model on the concept of a digital multisided platform (MSP) (albeit not always used to its full potential.) Simply put, this refers to a digital business that generates value primarily by facilitating the interaction between two or more groups of customers affiliated with the platform.

To illustrate this, we can point to the Amazon Marketplace, which allows sellers and buyers to seamlessly exchange value. Sellers utilize the platform and the traffic on it like an online store window; buyers have a convenient way to browse around in this enormous market, finding the same offering as a shopping mall, Portobello Road and a high-tech retailer – all in one place. The party that controls the platform plays the orchestrator and referee of this digital market and sets down the ground rules.

The ranking we mentioned at the start of this article highlights the fact that digital is the driver of these business contexts, making them scalable globally and giving them massive impact in some sectors. Just think of Airbnb or Booking.com in hospitality, or Uber in the world of transportation. But what advantages can incumbents gain from understanding the business models of these new players? What factors inherent to a given market would lead us to expect a digital platform to be a major disruptor? And how can consolidated players reap the benefits of certain fundamental principles of MSPs?

The recent report A guide to Platform Economy for Incumbents. How to Understand and Assess Platform Disruption, published by the DEVO Lab at SDA Bocconi School of Management, explored these questions and the chief managerial consequences for traditional players and final customers.

Multisided platforms have radically changed the way some companies serve their customers. And this change isn’t just about the product offering, but the market context as a whole along with the rules that regulate it. But what exactly are platforms? Actually nothing more than digital market infrastructures that attempt to alleviate certain frictions arising from the traditional processes of value exchange and value generation.

Thanks to our empirical study of several direct experiences, and conversations with company managers in Italy and other countries, we were able to identify three classes of factors that measure the potential impact of a digital platform on a market. The first centers on information, which can represent a huge obstacle to the efficiency of the market. Here are some examples:

• If we want to rent a holiday home for a family vacation in a faraway country, we might not be sure about the kind of accommodation, the security, the reliability of the host or the details of the rental contract. All this would undoubtedly put us at an information disadvantage with respect to the property owner. We call this situation “information asymmetry.” The greater the obstacles that information asymmetry creates with regard to exchanges, the bigger the benefit and the impact that a platform - with its regulatory mechanisms – can provide.
• If a company wants to insure against corporate risk, the process starting with initial contact with a specialized broker and ending with the actual insurance policy is a long one, replete with complicated contract clauses. We call this problem “information complexity.” The higher the complexity of the information, the more powerful the potential impact of a platform that establishes sector standards.
• If we want to organize a trip and we need to book international and domestic flights, rent a car, and so forth, rather than information complexity here the problem we’ll be facing is too many choices. The name we use for this situation is “information fragmentation.” The more fragmented the information we need for a transaction, the greater the potential for aggregating and matching information, which platforms can do.

Added to the information factor is the second element that characterizes an offering. In some markets products and services are highly modular, that is, they can be broken down into smaller parts. In these contexts, multisided platform can furnish a new offering by disaggregating these subcomponents and reaggregating them, making it possible to create a new value proposition. Examples here are Androids and iOSs, which have reinvented the cell phone by disassembling the functions into a number of subcomponents that are open to app developers.

Lastly, multisided platforms can offer considerable benefits in terms of value creation where consumers show highly heterogeneous preferences and an impelling need to co-create products/services. Here we can look to the world of entertainment, where some platforms allow users to select individual programs they’re interested in, satisfying the preferences of consumers with a wide range of ages and tastes.

In addition to these factors, we should never forget that the creation and operation of a digital platform take place within a regulatory context; in fact, clashes with regulators are not rare (see AriBnB, Uber, and Helpling). Although this is not a direct indicator of the potential disruption that MSPs can have a given sector, the regulatory framework contributes to defining the feasibility, in some cases restricting the range of action of the players involved. Various legislative scenarios are possible: the laws in force may not be applicable to new players, or these laws may be extended by ‘analogy’ to similar cases, or the rules may explicitly restrict platforms. The bottom line is that careful scrutiny of the regulatory context is crucial.

Figure 1 Market factors influenced by multisided platforms

But when a platform enters a market, what is the impact on the companies that already operate there?

In some cases the impact is ‘limited,’ so to speak, to substituting the class of assets which aims to capture the value generated on the market, such as sales or marketing activities. Examples here are Booking.com or eDreams in the travel sector. In other cases, substitution also impacts core assets, that is, driving to the heart of the company offering where value is created (for example, in some Fintech platforms, or referring again to hospitality, Airbnb).

While it’s true that platforms do not represent a risk for everyone, neither are they an opportunity to seize at all costs. In any case, the fact remains that some aspects of platforms give us food for thought with regard to alternative methods for generating value.

For example:

• In some cases, creating an open, regulated market infrastructure with a platform model can represent a strategic option worth considering, either alone or, with appropriate strategies and governance mechanisms, with partners and/or competitors.
• In others, when an incumbent has an extensive infrastructure, opening a platform to input from third parties could trigger a value-generation mechanism that enhances overall benefits to final customers.

The study of these platform-inspired strategies may point the way for future research streams and investigations by DEVO Lab at SDA Bocconi School of Management.