Platforms are disruptive: is your business ready?
- Posted on August 13, 2015
On July 31st, the Wall Street Journal reported that Uber surpassed $50 Billion in value. Why is Uber so unbelievably valuable? The answer is that it is a new type of business, a “platform”, where normal valuation methods don’t apply.
I recently attended the Platform Strategy Summit put on by MIT’s Sloan School as part of their Initiative on the Digital Economy. This day-long event presented talks from a mix of consulting, industry and academics on what platforms are, how they work and how established businesses need to get clued in before getting run over.
What is a platform? Uber is the prototypical example, mentioned in every talk. It is the world’s largest taxi company, yet it owns no cars. It simply connects a group of drivers with a group of people desiring rides. The reason it is undervalued using traditional methods is that the network effects of having a large and growing number of customers and large number of drivers is so valuable. Uber gives away a lot of free rides in order to get people to download the app. More people requesting rides motivates more drivers to offer their services, which makes the app more valuable. This virtuous cycle fuels explosive growth and Uber is looking to own this market.
This type of growth makes a platform strategy interesting to established businesses. Apple never predicted the value that they would get by making their phone a platform for applications. Even more interesting, the applications are made by people outside of the company, and yet drive value to Apple’s platform. Apple alone could never have produced the quantity and quality of apps that made their phones so valuable to millions of customers.
Established businesses have a problem in that they are bound up with legacy systems that are mired in slow-moving, conservative management structures. At the summit, we learned that a market has emerged for tools that allow companies to add a platform layer to their legacy systems that open them up to the potential for network effects that borderless industry platforms can bring. One example that we saw was in healthcare. Hospitals and labs have underutilized equipment like MRI machines due to disconnected appointment books. New platform companies are building centralized booking platforms that let doctors find openings anywhere in their system, shortening wait times and making hospitals and labs more efficient. But now, hospital networks have to decide whether they are going to connect with someone else’s platform, or build their own.
This buy vs. compete decision is one of the dichotomies that was raised by keynote speaker, Paul Daugherty – CTO of Accenture. He talked about Accenture becoming the largest cloud supplier without owning any infrastructure. They are adding a service layer on top of providers like Amazon Web Services and Microsoft Azure to simplify the cloud experience for their customers.
Understanding how to turn your product into a platform, or whether to join another’s platform play is going to be crucial in the very near future.