In the latest episode of “The Business of Platforms,” we are thrilled to be joined by one of the world’s leading thought leaders and consultants on platforms, Sangeet Paul Choudary. In conversation with Vivaldi founder and CEO Erich Joachimsthaler, Sangeet reflects on the main themes in his book, Platform Revolution, on the shift from pipelines to platforms over the past five years, analyzes the current landscape, and looks into the future of platform businesses. He believes that huge potential lies in industries that are moving towards a digitized platform economy as they unlock new values by building business models that manage data as an asset. Not only does Sangeet apply platform thinking to industries, he is also confident that a platform strategy can help countries attract data flows and become competitive in a connected world.
See below for highlights from their conversation:
Q: In 2013, you wrote an article called “Pipelines vs. Platforms,” can you explain what pipelines and platforms are and what has happened in these past 5 years?
A: I came up with the metaphor of pipelines to explain the fundamental shift that platform economy was bringing. Traditional businesses used to work in a linear pipeline-based model, where you have factories or service businesses creating goods and services, pushing it down a pipeline, and taking it to the end consumer, and the consumer pays using money. What’s changed is that as the world gets more connected, more of us participate on the internet, creating data. Thus, we start seeing a new business model, where the business no longer creates the product or the service and just ships it out to the end consumer. The business now connects external producers and consumers with each other, and provides the common infrastructure and organizing mechanism to which the producers and consumers can exchange value with each other. And so instead of being the sole creator of value and owner of the means of production, platforms possess the means of orchestration and organization of the ecosystem of producers and consumers. That’s the difference between what used to happen and where we are headed.
Q: In your Harvard Business Review article, you talk about a “revolution.” What is that revolution now?
A: In the pipeline world, orchestration happened contractually. You would orchestrate an entire value network, or loose network of supply chain actors through different forms of contracts. The other form of orchestration was using standards. For example, Sony would create a standard and the entire electronics industry would work around it; Intel would create the PCI and USB standard and the software industry organized around it. But what we are seeing with platforms is that they use other forms of organization mechanisms, such as data. For example, Uber orchestrates drivers and riders using location data, reputation data, route optimization data, etc.
In addition, industries that were resistant to moving in the platform direction, have also started shifting towards platforms, and that’s been driven by a few different factors.
- Asset-intensive industries have become increasingly digitized because of censors, driving data that has been generated as the business processes move into the cloud. Traditional asset-intensive B2B industries have started coming onto platforms.
- Highly regulated industries, such as banking, have started getting deregulated. In UK, Europe, and Australia, banks are sharing data with third parties, embracing APIs, and when that starts happening, banking products start getting unbundled from the bank, creating opportunities for new platforms to de-organize these products and serve them to consumers.
- The emergence of new layers of interoperability – The internet was the layer of interoperability, but we don’t have an internet for global trade or global medical data sharing. However, with blockchain technologies, an interoperability framework with shared governance models, ownership models, etc. can be created between different players within a certain industry ecosystem. This then allows new platforms to emerge.
It’s a combination of these three factors that has really changed industries over the last several years.
Q: Is there an example of a perfect business model that others can learn from, or is this all still work in progress?
A: In consumer industries, it’s much faster to create network effects because there are fewer barriers to network creation and much more homogenous cases across different geographies and regulatory paradigms. In traditional industries, it’s much more difficult to make that happen. It’s a combination of the complexity of the network effect as well as the fact that the first step towards digitizing these industries happened only within the last five years. There are more works in progress at this point, but we’ve already seen a lot of value being unlocked, which can be done in many levels. You can unlock value by pure digitization, whether you’re building platforms or not. You can unlock value by managing data as an asset and creating business models around that data. Or, you can unlock new values by creating a level of intelligence and transparency about ecosystem actors and their actions. This final level is what’s still a work in progress in a lot of these industries.
Q: In the Platform Economy Summit, you said, “There are new forms of digitalization, consumption, identity, location, reputation, machine performance, and business processes.” Can you speak more about this?
A: The impact or the extent to which the platform economy has taken over has been driven by the digitization of specific elements required to make these platforms useful. If we trace back this history, we see digitization of consumer data first by companies like Amazon and Netflix, who used this data to figure out what consumers wanted. This created different opportunities not just in terms of personalization, but also in terms of anticipation of what consumers wanted, before consumers knew they needed it.
The next key element that got digitized was identity, and this happened when Facebook started insisting that users have to start using university or corporate email addresses to register for a Facebook account. Following the creation of Facebook Connect, we started seeing an explosion in platforms that allowed real world interactions between people, like Uber and Airbnb.
Then came the digitization of location. From 2007, Smartphones started becoming pervasive. 2007 onwards, Google had acquired Keyhole and created Google Maps. A combination of strong mapping data and the ubiquitous smartphone allowed the digitization of location.
As we move towards other parts of the economy, we start seeing how digitization of the reputation of workers helped create labor platforms, how digitization of machine performances helped create industrial platforms. For example, Maertz is now digitizing its business processes and B2B life cycles, essentially creating the next generation of platforms. The argument is that, if you follow the technologies that are driving digitization and extracting value out of the digitization, you start seeing where platforms are going to come up next, which industry, and at what point in time.
Q: In one of your year-end reviews on looking forward, you talk about countries as platforms. Can you speak more about this?
A: That’s been a big theme in my work over the last years. If you look at countries like Switzerland, they’ve always been at the hub of flows of capital, and countries like Singapore have been at the hub of trade. As the world gets more connected, we’re also starting to see flows of data. It’s similar to what we see in an industry, where you have small startups disrupting the large, asset-heavy incumbents. Countries that are able to attract data flows will potentially be more competitive than countries who have the resources but don’t have the data to make intelligent utilization of these resources. Today, more countries realize this, and smaller countries around the world are using regulatory arbitrage to attract technology and IP in their direction.
Q: Where are things headed for you and what else would you like to leave the audience with?
A: There are a few things that I believe will become more important going forward. I’m interested to see how platform regulation plays out, because a lot of platforms have mushroomed in the wild west without being properly regulated, and now the regulators are catching up. So we have to see which business models get weakened and which get strengthened because of those regulations.
Another important theme is countries as platforms. We are in a connected, data-rich world and countries have to think about data to stay competitive rather than think about resource holding and talent holding only.
Lastly, we should observe how traditional industries will see commoditization and competition. When platforms come into a certain industry, they increase competition in all other layers of the value chain, except the layers that they want to play in. In doing so, they start commoditizing all these layers. When Facebook and Google emerged, they commoditized content, which heavily impacted media companies. When Apple and Google entered the telecom industry, they commoditized over-the-top services, which led to telecom companies’ loss of revenue. As we see this happening in trade, finance and healthcare, we need to think about where commoditization will happen next and where the profit will move to.
Meet The Expert
Erich Joachimsthaler, Ph.D.
CEO & Founder