Business models based on the value chain are a thing of the past and platform businesses or digital ecosystems aren’t enough. A new model is needed to create value for all participants in the field and in society at large.
I believe this business model is the interaction field model. There are three features that distinguish interaction field models from platforms or digital ecosystems.
First, interaction fields are interactional and not just transactional. Platforms are known to be a powerful force of competition. They build an infrastructure to orchestrate transactions between providers and consumers, between riders and drivers (Uber or Lyft are examples), between hosts and travelers (Airbnb), between buyers and sellers of books, for example.
Platforms learn a great deal from the frequency and number of transactions, which is why they are kind of obsessed with frequency numbers like MAU or DAU. They make markets more efficient; they remove frictions and create value for customers and consumers. They are so successful in competing against incumbents, they disrupt swaths of categories and industries.
In New York City, where I live, driving a taxi used to be a way to make money for many immigrants. It was a way to establish a new life and earn a living as an entrepreneur. Long hours were required to catch enough fares, but there was also the value of the license, called the “taxi medallion,” that would go up in value. A driver could sell this license at the end of his career, much like an entrepreneur could sell his or her restaurant, retail store, or small business after many years of labor.
If you started early in the 1960s, you could get a taxi license for $25,000. By 2005, the license cost $325,000. Five years later, it was $600,000 and in 2013, the value was over a million dollars. Then, suddenly the value of the license dropped by 45% over two years. By 2019, a medallion license was worth nearly nothing. In one auction, sixteen medallions were offered, three sold for less than $140,000 and 13 medallions had no bidders.[i]
What happened? Uber, Lyft and other ridesharing platforms had come to the city. There are now about 80,000 for-hire vehicles on the road. Two-thirds are from ridesharing platforms. 13,500 are traditional medallion taxis.[ii] There is now a lot more congestion in midtown New York City, and most drivers don’t make enough anymore since there simply aren’t enough fares out there. Economists call this phenomenon “negative externalities,” a cost that is suffered by a third party due to an economic transaction. Taxi drivers have lost their investments. If you now need to make a living in the city by driving a for-hire car, you join the gig economy. That means, minimum wage if any at all, and no benefits. As Douglas Rushkoff writes, they turn lifelong jobs into the temp jobs for the gig economy.[iii]
Uber and the other ridesharing companies of course have moved on and have become digital ecosystems. There now exists Uber Eats, which delivers food from restaurants and dozens of other businesses, for example. What is your best guess what will happen to many restaurants?
Platforms are about disruption. They see opportunity in frictions and inefficiencies or lack of innovation. It is often said that taxis were not innovative. The last innovation in the taxi industry was the taxi meter, which was introduced soon after World War II.
Platforms do two things when they are done with an industry. For one, they evolve toward ecosystems like Uber and either look for disruption in adjacent markets or they move on to another market. I could tell the same story about Amazon starting with book retailing, and when that industry was kaput, it moved to other categories one after the other. Some people say that’s the nature of business. Tough luck.
But I don’t think that is correct. Platforms and digital ecosystems can be good when they are interaction field models. Interaction field models build on collaboration and participation. They are not just transactional but interactional. An example is Alibaba. Alibaba’s mission is: “Our mission is to make it easy to do business anywhere. With our platform model, we are bringing buyers and sellers from all over the world together, and are best placed to partner with them to meet the needs of the nearly 700 million users on our platform.”[iv] Alibaba is not in the business of disrupting small retailers – they are in the business of making them efficient, removing frictions and enabling them to sell more. In China, there are 6 million small retailers, mom-and-pop shops who sell locally and operate at a relatively basic level. Alibaba offers them a retail management software, Ling Shou Tong, for free. This software helps the stores to become more efficient, optimize the assortment, and sell more across many more parts of China.
Everyone gains – Alibaba gains valuable data from millions of small stores and earns a fee for any online sales. Hundreds of thousands of merchants also can now sell their millions of products locally. Alibaba builds on collaboration, not disruption, it is interactional and benefits everyone.
Interaction fields solve new problems that are often intractable challenges or pain points that often haven’t been solved before. Platform and digital ecosystems also do that, but they typically focus on narrow, often existing, problems. GM tried it with Maven, a subscription service to compete with Zipcar. It started in 2016 solving for more flexibility of transportation or mobility. It closed the business in 2020. GM is not an exception; I could now spend the rest of my day describing other car companies’ attempts to do the same. There are several hundreds of meal kit solutions like Blue Apron and over 175 mattresses companies like Casper, many of them solving the same problem.[v]
Tesla is, in my mind, a company that isn’t about a platform or a digital ecosystem. It wants to be an interaction field company. It solves for a lot more than just electric cars, as you know. Besides, it is not even just a car company. It solves for some degrees of autonomous driving; it solves for lower CO2 emission. It is well known that a car is 95 percent idle and so it built the Tesla network where you can post your car while you travel globally. Others can pick up the car and use it during that time. It solves for better utilization, lower cost of ownership of a car, and so much more. I don’t need to tell much more; the story has been told so many times. Some things are still vision some are reality, but the direction is apparent. If Tesla has it, it will have a much more significant share of our lives, solving for multiple problems and challenges we have daily, rather just selling us another lease of a new Model 3 every three years.
Third, interaction fields are platforms and digital ecosystems that are open and welcome other participants. They propagate being inclusive rather than being exclusive. In today’s discussion of digital ecosystems, the term “ecosystem competition” has become popular.[vi] Ecosystems compete now against other ecosystems, and you as a company need to decide which ecosystem you join if you can’t build your own.
This idea is exactly what was the old idea of competition between firms, and the notion that existing companies in industries and categories need to be disrupted. In other words, existing competitive companies need to be driven into bankruptcy or some form of demise and the same logic applies to platforms and digital ecosystems.
We should be wiser. Is it really about competition between ecosystems? Is it really all about who wins and who loses? Should we really, in this day and age, just think about capturing or extracting value, driving more shareholder value through ecosystem competition? Marshall van Alystne, Geoffrey Parker and Sangeet Paul Choudary have spoken so many times about how platform firms are skilled at creating and capturing value, but not all of them are really good at sharing value or dividing up value among participants.
An interaction field company builds the governance in such a way that there is fair value distribution. As Marshall van Alstyne says, a situation where you create more value than you take.[vii]
Flatiron Health, a Roche Pharma company, enables an interaction field that brings together patients, care providers and even competing pharmaceutical companies and regulators like the Food and Drug Administration (FDA) in continuous interactions between millions of patients and care providers sharing data about every single instance of cancer treatment. The interactions are rich exchanges of learning with a depth that has enabled a larger open network of companies like pharmaceutical companies, competing drug companies, and life science companies to collaborate with the FDA to approve therapeutic solutions faster and to more effectively treat cancer patients.
Everyone in the interaction field benefits – in Flatiron Health’s case, mostly patients because the organization has made it possible for everyone to learn from the interactions that its platform captures. This has allowed for faster approval of drugs for certain cancer conditions by the FDA. Trust me, when you are one of the 1.8 million Americans who will be diagnosed with cancer in 2020 and you know that over 600,000 American die (six times more than COVID-19 deaths) this year and every year thereafter, faster approval of a cancer drug is enormously good news for you.
So, let’s stop building self-serving platforms or digital ecosystems that seek to compete, to disrupt and enrich distant shareholders, and let’s start building interaction fields.
For more details on interaction field companies and business models, I recommend my book: https://www.amazon.com/Interaction-Field-Revolutionary-Businesses-Customers/dp/1541730518
[i] Wikipedia entry: Taxi Medallion, accessed June 6, 2020. https://en.wikipedia.org/wiki/Taxi_medallion#:~:text=The%20price%20rose%20steadily.,around%202013%20at%20over%20%241%2C000%2C000.
[iii] Douglas Rushkoff, Team Human, W.W. Norton, New York, 2019.
[iv] Statement by Terry von Bitra, General Manager, Europe, Alibaba Group, Germany, page 9 of this excellent report
[vii] watch is excellent four minute video by Marshall van Alstyne. This point here has been made around minute 4:07 https://www.linkedin.com/feed/update/urn:li:activity:6674110820328243200/