Platform-mediated

Business Model
Instructor: Anita Kerai
Section: G & H
Module 2(III)
 Pipeline to platform-mediated business
(Van Alstyle, Parker, & Choudary,2016)

The rise of digital economy is forcing the industry players to move away from
value-chain (pipeline approach) to ecosystem ( platform approach) to reap the
benefit to enhanced connectivity powered by internet, enhanced data gathering
and computation capacity powered by smartphone , apps, cloud etc.

Some notable changes in the industry are :

• Industry players are moving away from Resource control in a linear series
of activities to Resource orchestration in interconnected networks
• Emergence of asset-light business model that allows to quick scaling up
• Industry players are moving away from optimizing internal process (within
firm) to optimizing external interaction between different players (through
market mechanism)
• Industries are moving away from customer value focus (one-side of
business) to ecosystem value focus (multi-side of business)
 Markets and Platforms: Hospitality Industry

• An Industry incumbent with pipeline approach usually focuses on end customers as

one-sided market ( e.g. Hotels and guest): Success depends on how may rooms you own
• Most interactions are confined to only the Hotels and guest, where Hotels are main
providers of rooms and services (internalized in business model)

Market Hospitality Industry

Hotels
Guest
(Rooms) One –side of market Guest
( From typical Hotel’s
point of view)

• Challengers with platform approach usually focuses on two-side between ( Renter and Home owner):
Success depends on customer’s WTP for network effect
• The challengers with platform doesn’t focus on providing the rooms and services but it will primarily
manage the interaction between Renter (~ guests) and house-owners, thus two-sides of market

House-owners
Renters Market Hospitality Industry
(Rooms)
Two-sides of market Renter and Home owner
( From Airbnb’s point of
view)

Platform
 Pipeline approach: Hospitality Industry

Hotels ( Luxury, Premium segment) Guests

In-house In-house In-house In-house
Rooms Restaurants Spa Laundry Transport
Waiting areas,
Meeting rooms
lobby

Hotels (Budget segment) Guests

Rooms with functional
kitchen
• The business model of the traditional hotel aims to manage and control
a wide set activities such as managing rooms, restaurants etc and
capture customer’s WTP
• Traditional hotels can outsource the value-added service such as
restaurant, spa, laundry and transport to become asset-light, but mostly
continued as primary providers and managers of rooms
 Platform approach: Hospitality
Industry/ Sector
Airbnb Guests

Rooms

• The business model of the challenger (Airbnb) created new side of

market for rooms which was non-existential earlier and captures WTP of
Renters and home-owners for interaction with each other
• Platform model of Airbnb doesn’t directly control the activities such as
management of room, restaurant, laundry but on facilitates and controls
the interaction between home-owners and renters
 Luxury
Mid
Budget Hospitality Industry
High range of service

Core of the hospitality

Industry : Availability of
Room
Commercial

Leisure
Low range of service
 Pipeline approach: Personal Computer
Industry (before1980s)
End
Personal Computer
users
OS
Software - Hardware
+
Micro processor Applications,
System
General Purpose Graphic Cards
software

The PC industry evolved as a platform-based business after IBM’s push for Wintel(Window
+Intel) standard and technical compatibility, that resulted in competition and
collaboration among different industry players.

• Core of the PC market is Operating system ( Key Players: Microsoft, Mac OS,
Unix)
• IBM’s AIX, Sun Microsystem’s Solaris operating system failed to gain
prominence
• Micro-processor market is dominated by Intel and AMD
• Graphic Cards: NVIDIA, AMD
• Software: IBM, SAP, Oracle etc.
• Hardware (Assembly): Dell, HP, Compaq, Sony, Apple etc.
Platform approach: Personal
Computer Industry

End users Software

OS
+
System
software
 Platform approach: Personal Computer
Industry
General purpose Software:
Individuals Word, Excel
Enterprises: Utility Software: antivirus
Large SMEs,
Educational Specialized Software: ERP
institutes
Software Developers
End users

OS + System software

Windows Linux Unix

Mac OS
OS
Multiple companies can adopt platform-based business, but if the market is susceptible to WTA dynamism,
Only few platforms can gain financial viability and market dominance
Meanwhile other platforms will face survival challenges.

Platform
 Platform-Mediated Network
Network Components:
• Hardware,
• Software
User 1 User 2 • Service
Rules:
• Standard: Technical compatibility
• Protocols: Authentication process
Platform • Policies: Copyright content
1. Components • Contracts: Rights & responsibilities
2. Rules
3. Architecture
Architecture
 Markets and Platforms
Market Personal Computer Industry
( OS driven)

Platform Platform- Platform- Linux Platform-Mac OS

Windows Sponsored by Sponsored by
(Sponsored by LDC Apple Inc.
Microsoft

Two-sides of Individuals/ Individuals/ Individuals/

market for a Enterprises and Enterprises and Enterprises and
given platform Developers Developers Developers
 Market and Platforms

Market Video Gaming Industry

( Console + OS driven)

Platform Platform- Platform- Platform-

Xbox(Sponsored PlayStation GameCube
by Microsoft Sponsored by Sponsored by
Sony Nintendo

Two-sides of Gamer and Gamer and Gamer and

market for a Developers Developers Developers
given platform
 Markets and Platforms
Market Taxi-Hailing industry
(Matchmaking)

Platform Platform-Uber Platform- Ola Platform- 9211

Sponsored by Sponsored by Sponsored by
Uber Microsoft Taxi unions in
Mumbai

Two-sides of Rider and Driver Rider and Driver Rider and Driver
market for a
given platform

Industry player with pipeline approach will own the assets and internalize all/ most of the activities such as owning cabs,
taking booking, actual transport and payment whereas industry player with platform approach will have asset-light business model.
 Markets and Platforms
Market Web Search Engine

Platform Platform-Chrome Platform- Bing Platform-Safari

Sponsored by Sponsored by Sponsored by
Google Microsoft Apple Inc.

Two-sides of Web Searcher Web Searcher Web Searcher

market for a and Advertisers and Advertisers and Advertisers
given platform
 Two-sided network loop

More More
Users Contributors

More Improves
Applications Performance

Attracts
Application
Developers

Feedback loop in Linux community ( Baldwin, O’Mahony, & Quinn, 2003)

 Network Effect

Cross -side

User 1 Developer 1

p1
User n Developer n

p0 s
Same-side

Platform

Where
po- user’s WTP for OS
p1-user’s WTP for app
S- subsidy for platform participation
 Winner-Take-All(WTA) market
- If one platform captures substantial market share ( both side of market), leaving very little market
share for other competitor platforms.

A market need to fulfil all the three conditions:

Criteria Video Game Taxi-Hailing Hospitality
Presence of strong Gamers will attract Cab drivers will attract more Renters will attract more
Network effects – more software riders and vice versa home-owners and vice versa
Increases customer’s developers and vice
willingness to pay for versa
participation in a
platform

High Multi-homing cost Gamers / Software Rider/ Drivers will affiliate Renter/ Home owner will
(e.g. Upfront cost, developers will affiliate (mono-homing) with one affiliate (mono-homing)
ongoing cost, re-training (mono-homing) with platform ( Uber or Ola if with one platform ( Airbnb
cost, termination cost)- one platform (Xbox or they face high multiple or Homestay or Flipkey they
Reduces customer’s WTP PS or GameCube) when homing cost face high multiple homing
to change platform they face high multiple cost
affiliation/ maintain homing cost
multiple affiliation

Platform differentiation- Gamer/ Software Rider/ Driver need is met by Renter/Home owners need
Increases customers developers need is met one platform is met by one platform
willingness to pay for a by one platform
particular platform
 Winner-take-all(WTA)/ Winner-take-most market

If one platform captures substantial market share ( both side of market), leaving very little market share
for other competitor platforms.

A market need to fulfil all the three conditions:

Criteria Video Game Taxi-Hailing Hospitality

Presence of strong Market is Taxi service market is evolving Hospitality market is

Network effects predominately from pipeline to platform based evolving from pipeline to
platform based. approach of competition. platform based approach of
Currently platform-business competition.
Individual platforms model is more prominent in Currently platform-based
High Multi-homing
(Xbox/PS) can shared riding. business model is more
cost ( Upfront cost,
demonstrate strong prominent in leisure segment
ongoing cost,
network effects but of hospitality sector.
termination cost)
all 3 criteria are
necessary to fulfil
likelihood of WTA
Platform market dynamism. Platforms-based companies (Uber/Airbnb) can gain first-mover’s
differentiation advantage to capture the network effect. However, to become
WTA, they need to differentiate their platforms (difficult to
replicate offerings) and create multi-home cost (e.g. lock-in) to
avoid poaching from new platforms (sponsored by either new
players or industry incumbents).

Source: Eisenmann,T.R. ( 2007). Winner-Take-All in Networked Markets. HBS 806-131

 Platform-mediated business: Challenges
A company can opting for a platform-based business will face following challenges :

How to Protect
How to Build a How to Grow your How to Sustain
your platform
platform customer base your platform
from competitors

Network mobilization: Increasing the adoption Avoid Envelopment

Platform control rate of your platform Interoperability
: Proprietary or 1. Pricing Strategy-Subsidization/Staging Licensing
shared platform 2. If your market is susceptible to Winner-
take-all Scenario: Establish your platform
before competitors ( Can be new players
or industry incumbents) to gain first
movers advantage

IBM and Linux Electronic Arts Google Case

Airbnb, Etsy, Uber (Platforms face threat
( In addition to new players, the platforms in Taxi from neighbouring
service/ Hospitality Industry can face competition in platform player e.g.
Rider/ Renter side of market from industry incumbents eBay/ Amazon can face
with pipeline approach envelopment threat from
google in e-commerce)

Eisenmann, Parker, & Van Alstyne (2006). Strategies for two-sided market. Harvard Business Review,92-101