The next wave of billion dollar platforms won’t be startups

By Nicholas L. Johnson

Today’s top tech startups are almost all platform businesses. Rather than creating products or services, like the linear tech companies of old, these platforms focus on connecting users. These dominant tech companies include large public companies like Apple, Google and Facebook, as well as those soon to join their ranks like Uber, Airbnb and Snap Inc.

For decades, almost all of these platform companies have hailed from Silicon Valley and the tech sector, and they’ve been built by startups challenging and disrupting existing incumbents.

The next wave of billion-dollar platforms won’t just be built by tech startups. Now, large, incumbent enterprises are starting to get into the game.

However, over the next decade, this trend will start to shift. The next wave of billion-dollar platforms won’t just be built by tech startups. Now, large, incumbent enterprises are starting to get into the game.

What’s changed? For one thing, the blueprint for building a platform business is no longer a Silicon Valley secret. As we detailed in our book Modern Monopolies, platforms have a clear recipe for success. Building a platform isn’t easy – and as with any new business venture, it involves some risk – but the fundamentals of the underlying business model are remarkably consistent across different platform types and different industries.

Additionally, over the last decade and a half, tech has spread from a niche industry separate from most of the economy, to a key part of almost every industry. Connected technology is now table stakes in every industry – if you aren’t already established on mobile and thinking about your IoT strategy, you’re behind the competition.

Meanwhile, attracted by large addressable markets, platforms have migrated from just consumer-facing business into the business-to-business sector. Many incumbents, in industries that range from automotive and telecom to industrial supply and freight logistics, are feeling the threat from both startups and large tech companies like Amazon, Apple, Google and Facebook. These incumbents now not only see the opportunity represented by platform business models, but they’re also feeling the threat from potential Silicon Valley competitors if they don’t act now.

The Incumbent Advantage in Platform Innovation

Incumbents in many of these old-school industries actually have major advantages in their favor. In fact, they have a big advantage on 5 of the 7 key challenges that platform businesses face.

1. User Acquisition: Since the enterprise has existing knowledge of the customer, user acquisition is much less of a challenge. In addition, the enterprise already has one side of the market in place – the consumer side – and has the ability to jumpstart its marketplace and overcome the chicken and egg problem in a way that startups cannot.
2. Deep Industry Knowledge: In order to make a platform work, the platform operator needs to have deep industry knowledge. You need to understand the value proposition for both the consumer and the producer. Having already operated in the industry, existing enterprises are primed to create a solution that will attract both consumers and producers.
3. Funding: Access to capital is an obvious but often overlooked advantage. Platforms often have to subsidize their users early on, so enterprises with access to capital are naturally at an advantage compared to capital-starved startups.
4. Trust and Quality: A big challenge for platforms is the potential to lose trust and quality as the network scales. Existing enterprises understand what operators in their industries will look for in terms of quality, so they have the advantage compared to startups that are often less attuned to potential industry concerns.
5. Platform Leakage: A major concern for any platform is platform leakage – when your users connect on the platform and then complete the transaction outside of your network. A key way to prevent platform leakage is to provide additional value outside of just the matchmaking component. For example, Uber and Airbnb provide insurance and logistics support for producers. Similarly, established enterprises can open up some of their existing commercial and logistical infrastructure to producers on their platform. Many of these producers don’t operate at the scale that the existing enterprise does, so getting access to enterprise-level tools and services can save them money, make them more efficient, and even replace many of their back office functions and staff.

The Challenges for Incumbents – And how to Overcome Them

So if existing enterprises have such big advantages when it comes to building platforms, why have platform companies been almost all startups?

Creating modern monopolies isn’t just a Silicon Valley game anymore.

For one, the mental model for building a platform is very different than the one for building a linear business. But now that the blueprint is out there in books like Modern Monopolies, these enterprises have the ability to change their business model quickly.

Second, agility and speed are paramount when building platforms, and existing enterprises often lack in these areas.

However, putting in place the right organizational structure and culture for a platform business, particularly by giving the new business the necessary independence from the existing core business, can help an existing enterprise overcome this challenge.

Given the size of the opportunity around platform businesses, you can expect that more and more established businesses will start to dominate their industries by building platforms over the next five to ten years.

Creating modern monopolies isn’t just a Silicon Valley game anymore.

---

Filed under: Platform Innovation | Topics: enterprise, platform innovation