By: Prisca Lidya Patty (Management 2014)
Disclaimer: I do not have any association with any company that may benefit from being featured here. Nor do I own shares in any of them. Hence, be rest assured that the judgements constructed below are pretty objective.
The Innovative Disruption
Airbnb, a peer-to-peer accommodation renting service, has stood at $25 billion market capital at the end of 2015. Established only in 2008, it has dramatically surpassed Marriot, Hilton and Intercontinental Hotel Group in terms of market capital, also ousting those longstanding incumbents in the hotel industry by the number of rooms worldwide available for travelers. Its striking entrance into the marketplace and its substantial growth have left countless eyes glued to watching Airbnb phenomenon. So, what is it? For a fact, it is a kin to other platforms like Apple, Amazon, LinkedIn, Facebook and Uber. What I wish to investigate is the formula it creates to overthrow leaders in various industries with little warning. Indubitably, something major has changed and we are going to uncover that within the next few minutes.
According to Schumpeter (1934), firms can stimulate five types of innovations: new products, new techniques of production, new sources of supply, utilization of new markets and new methods to structure business. What Airbnb experiences is the latest, which is usually referred to as an alteration in business model. It marks the inception of a groundbreaking shift from pipeline business model to platform strategy. Airbnb is just one of the many firms that attest to the glimmering prospect of such platform-based business model. To comprehend it better, we should firstly contrast the offerings it proposes with what the conventional business model has to present.
The Central Differences
Technically, the conventional supply chain, or pipeline, amasses value as products shift from stage to stage. It specializes in internally controlling limited resources as assets, tangible and intangible alike, such as real estate, mines and intellectual property. Nuanced by a clear cut linear value chain, pipeline puts emphasis on minimizing unpredictable external dynamic. Hence, such traditional business model is rather stable and static. Moreover, it champions products’ distinctive features and is driven by the supply side, foisting products into marketplaces. Classic pipeline business metrics are mostly defined by Porters’ Five Forces, which are the threat of new entrants and substitute products or services, the bargaining power of suppliers and customers, and the intensity of competitive rivalry.
|Chief Asset||Internal business control||Networks involving external players|
|Property Ownership||Own tangible and intangible assets||Only orchestrate assets owned by external parties|
|Nature||Stable and static||Dynamic|
|Metrics||Porters’ Five Forces||In need of new metrics|
In contrast, a platform-based business model is highly progressive, triumphing scalability over differentiation. The advent of internet and technology advancement have served as powerful catalysts that fuel the prevalence of this undertaking. It has allowed platforms to rely on external players, instead of accumulating properties themselves. In fact, this class of business model orchestrates resources owned by the communities it reaches out to. It generates value by building mutually beneficial connections between external producers and consumers, eliminating even the marginal cost of production. Consequently, its chief asset is the network it builds to bridge suppliers and customers, which is arduous to duplicate. All in all, a platform needs to focus on increasing the value of its ecosystem and to pay more attention on its players’ activities and feedbacks. As it relies heavily on the network effect, its governance over the ecosystem needs to be of top notch to have a superior competitive advantage.
If it is burdensome to comprehend the paragraphs above, I firstly beg your pardon for using jargons and for being technical. Secondly, I hope you understand the crucial point that a platform businesses only act as an intermediator between producers and consumers. It is illustrated by how Airbnb bridges travelers and those property owners who want to act as hosts. Hence, practically, Airbnb is not a travel agent, it only sells its application, the website and the network of customers and producers. It may look like an accommodation service that doesn’t own a single room; just like Grab and Uber that appear to be providing a transportation service without owning a single vehicle; and like Alibaba that sells things which it doesn’t own; and like Facebook and Quora which are social media platforms that do not create their own content – it’s all of us, Facebook and Quora users, who do; and the list goes on.
The Forces within Platforms
Internet based economy comes with novel propositions and unprecedented forces. There are several shifts in various realms of the business sphere, as I will discuss.
Unlike pipelines that are supply-driven, platforms are more customer oriented. To be demand-driven means to hinge on the network effects, which have been the significant force behind platform ecosystem. Thanks to the advancement of technology that progresses rapidly as defined by Moore’s Law, platform can tap on these effects more efficiently by practicing effective social networking, developing app initiatives and undertaking other enterprises in order to enlarge the networks. To increase the value of its networks, platform should focus on the accretion of participants within the ecosystem. Networks with high volume of producers and consumers have a high chance of matching the supply and demand, as higher volume of data aggregates offer better matches. As a result, the overall system generates higher average value per transaction. Little wonder firms with aggressive network expansion are hard to match, since potential platform participants will incline to join the more valuable networks. This circumstance breeds companies like Google which accounts for 82% of mobile operating system and 94% of mobile search; Facebook, currently the universe’s presiding social platform; and Alibaba that gobbles up 75% share of e-commerce transactions in China. For Asia, the aggressive market penetration is especially apparent in Alibaba’s case. It utilizes mobile channel and the current trend of marketing such as flash sales promotions to gain more market share. One example of such moves was when they rode on the popularity of the Singles Day in China by promoting a single day online sales. This further amplified the eminence of that holiday, generating a total $5.75B of revenue on one day. What puts the cherry on top is the fame of 11/11 Singles Day has gone so viral that other online shops to date follow Alibaba to offer special sales on that holiday. All these moves successfully aided Alibaba to expand its network, eventually escorting it to annihilate the IPO record as the biggest in the world in 2014. This substantiates the notion that platforms can be a potent player within an industry, simply by growing extravagantly quick.
Another characteristic of platform strategy is that it is a fluid ecosystem. Unlike conventional business model whose players have doggedly fixed roles, participants of the platform-based firm – consumers and producers – are able to swap roles. On one day you can travel to Iceland as a backpacker and find an accommodation through Airbnb. Here you act as a traveller, the customer. In another holiday season, however, you can swap role to be the host in Indonesia, receiving guests from all around the world at your doorstep. Here you have become the producer who supply the accommodation. Viola! That’s a fluid ecosystem right there. Consequently, such ecosystem is able to harness all assets owned by each participant to be exploited. This helps to explain the $ 26 billion value of the consumer in the peer-to-peer rental market in the USA alone, attracting 10 million couchsurfers worldwide, while receiving $3 billion worth of funding raised by crowdfunding in 2013. Although promising, this fluid nature of platform-based business poses challenges to regulators at many countries. If you have been following the
Civil War brief clash between Indonesia’s Ministry of Transportation and some platforms namely Uber and Grab, you might have witnessed how these platforms challenge the regulators to question the current regulations to follow the prevailing needs of businesses. As Prof. Dr. Drs. Henri Subiakto, S.H., M.Si. from the Ministry of Communication and Informatics (MENKOMINFO) mentioned in the discussion at Faculty of Law (UI) a while back, “Regulations follow after”. Further detail about this conflict with the regulators will be discussed in the later section of this piece.
Coming back to listing the upside of platform strategy, there is one other force the network effects can boast about. They allow platform to unexpectedly penetrate industries which may not be interrelated. Observe how Google is no longer just a web search. Currently, this company that specializes in artificial intelligence also provides mapping service, constructs mobile operating systems, designs smart homes, engineers driverless cars and even voice recognition. Consequently, it poses serious threats to the incumbents in various industries. Witness how even Swatch needs to battle Apple head-to-head today. Platform is capable to do so as its chief asset is its network, which is versatile enough to offer various products and services through it. No wonder Go-Jek is currently not limited to providing service of fetching customers on bikes, but has ventured out into Go-Car, Go-Mart, Go-Glam, Go-Tix, Go-Busway, Go-Pay, Go-Food, Go-Send, Go-Box, Go-Massage, Go-Clean and Go-I-Don’t-Know-What-Else-It’s-Going-to-Sell. This being said, you can sell virtually anything on platform! It’s a safe bet to think that there are tons of entrepreneurs out there who have thought of building their own networks. If you are one, I suggest you hurry and build one with the most extensive network. It is of high risk, of course. Nevertheless, like the wise saying said: Nothing ventured, nothing gained.
The Downfall of Platform Strategy
Speaking of risk, what are the uncertainties which can cost platforms some losses?
First and foremost, impulsive deregulation puts start ups at a highly vulnerable position. The poster child here in Indonesia is Go-Jek. It has not yet been profitable, yet counterattacked by the conventional ojek drivers. On top of that, it has been reprimanded by the regulators on violating national public transportation rules. Fortunately, for now it is saved by the bell, thanks to the enthusiastic groundswells that find Go-Jek catering to their burgeoning demand for transportation well and consider it thus far successful in increasing their utilities. Start ups encountering similar experience with the regulators should consider dealing with them at the outset or midway during the deregulation. Being at peace with the regulators from the very beginning means to take time studying the regulations and to ensure its compliance. This approach is rather risk-averse and time consuming, but it can aid to avoid conflict with the regulators. However, in the case of Go-Jek, deregulation should not be a prioritized problem for now. I personally suggest them to stay risk-aggressive by keep expanding its network instead of waiting for the government to approve its operation wholly (Take note, though, I’m not suggesting them to rebel against the regulators outright. Best to cooperate with them to settle the legal issues while expanding its networks). To keep the first mover advantage, especially in a competition with Grab, it needs to gain assets by increasing the value of its ecosystem. The same advice goes to other platforms in Indonesia like Uber and Grab just to name a few.
Platforms as such can afford to do so since firstly, I believe that they have the upper hand as they have won a pool of fans benefitting from their platforms. Moreover, they may build allies with the local governments at ease once they have committed themselves to a portion of tax contributed to the domestic governors. Most importantly, the confidence that regulators will follow is also based on the prediction that there will be about US$7 trillion of potential world market for such innovation before 2020. By then, 50 billion devices will have been connected by the network, pressuring the current regulators to keep up with the meteoric technological advancement. Over and above that, the Ministry of Communication and Informatics has set an ambitious goal to incorporate e-business into micro and small enterprises and to support e-commerce, in Indonesia’s pursuit of that middle income status by 2025. Such forward movement may be achieved if regulations suit the need of the contemporary business model. To substantiate this point further, let me reveal that successful stories of companies overcoming the deregulation issue are prevalent. One classic example is Google’s extensively used Youtube. There was a time when widespread copyright-violating content hosted by Youtube was confronted vigorously by record company executives. With the only apparent alternative being outright piracy which compensates them zilch, record companies over the long haul surrendered willingly to technology and accepted humble royalties in return.
Other potential problem can rise from disintermediation. The inherent risk comes from the nature of the business model with platform as its pivot. At anytime, players within the system can opt to create a marketplace offline, after their first transaction. For example, I can just call up the previous hostel in Peru in which I stayed, without booking a room through Airbnb. On another instance, after I tried the manicure service from Go-Glam, I can call the manicurist myself, eliminating Go-Glam as the intermediator. This is disintermediation, which shouldn’t be a big problem. It can be prevented by recalling that customers and producers turn to platforms looking for two things: security and comfort, when performing transactions. Hence, they just need to take preemptive actions to always provide both. If platforms fail to do so, they can bid farewell to their players since those will take the transaction off the platforms. Hence, as long as platforms charge participants for a reasonable price, they will stay. Moreover, ensure that platforms help to sell a wide array of offerings, which is invaluable to customers. Completing these with a secure network for transaction, participants for sure will stay within the online marketplace for good.
What to Expect in the Post-pipeline Era
All the aforementioned cases to a high degree illustrate the era of blitz-scaling, during which companies need to respond quickly towards challenges and to remain nimble. Losing touch with technology and the shift in business model may not only mean losing a portion of profit. It plausibly, to a great extent, translates into bankruptcy. The brave new world may seem to be unforgiving especially to the incumbents. However, as we look deep into the business scene, the rapid progress with which technology drives the development of business models is irrevocable. The transmissible zeal bodes favorably for the future of platforms and I am convinced that they will continue their upward flourish. The golden years of platform ecosystem are yet to come.
Prisca Lidya Patty (Management 2014) is a journalist who is intrigued by the multi-dimensions of the world. As a Senior Analyst and Kajian Online Editor-in-Chief at B.O. Economica, she strives to raise youths’ awareness of the multi-faceted issues which are current and essential.
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