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Learning about pipes and platforms from Sangeet Paul Choudary

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“We are moving from linear to networked business models, from dumb pipes to intelligent platforms. All businesses will need to move to this new model at some point, or risk being disrupted by platforms that do.” – Sangeet Paul Choudary

Sangeet Paul Choudary is one of the leading thinkers in the world today when it comes to platform business models. His website has a wealth of information available about how platform business models work and why they are the future of online commerce.

In this keynote address for Point Zero, Choudary outlines why the move to platform thinking is transforming the way we do business. He starts by quoting Tom Goodwin’s now well-known summary of why platform models are a sign that “something interesting is happening”:

Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.

At Marketplacer, we see ourselves as part of this new platform world. We have created an enterprise marketplace platform that enables entrepreneurs to build online marketplaces based around niche retail areas. This is demonstrated by our success with BikeExchange and by our investments in marketplaces such as House of Home, Outdoria, TiniTrader, and Tixstar.

In his address, Choudary identifies three key transformations that underpin the rise of platforms as the most valuable business model of the internet age so far:

  1. “Democratisation of access” – The widespread adoption of devices such as smartphones has empowered people to become both producers and consumers. Choudary says in 2005 the internet was something we did sitting at a desk or staring at a monitor, while in 2015, the internet is something we are always connected to no matter where we are.
  2. “Democratisation of production” – We’re in a period of maximum production, living through an age when we have never produced so much. We’ve moved away from being consumer-only to where we are all capable of becoming producers of content, goods and services.
  3. “Democratisation of intelligence” – “Choudary says the advent of the Internet of Things and increased connectivity will continue to drive and inform our productive capacities and efficiencies. Platform models act as a means of better distributing information, resources and capacity.

“The world used to work in the form of pipes – the design of business was linear.”

Choudary says producers would push products out to the consumer, with the goal being to convince the user to consume more. This linear flow of value creation has been upended by platforms, which encourage value creation through interactions rather than a direct pipe feed from producer to consumer.

He says pipe world is the world we inherited from the industrial age, but in the post-industrial, information age, we need a different business model – platform – to better organise resources and create value.

“Because of the democratisation of access, production, intelligence, value can now be created and delivered from anywhere to anybody which is why we’re seeing we’re seeing an entirely new shape of business which is no longer this linear model.”

While technology plays an important part in creating the practical elements of a platform, Choudary says governance is just as important. This is why community and market builders should be looking for platform technologies that allow them to think about defining their community and building it rather than fiddling with the technology.

This fits in with the idea behind Marketplacer, where we have built our platform software to take the headaches out of creating online marketplaces.

Choudary says the role of the platform is fundamentally two-fold:

  1. Infrastructure
  2. Governance

“The design of business that we see with platforms … is the business acts as an infrastructure on top of which producers and consumers of value come together and interact with each other.”

Platforms always end up disrupting pipes, Choudary says:

  • Telco industry used to work as a pipe: Apple and Android changed that with the platform model
  • Hotels always worked in linear fashion, build more rooms or hotels to meet demand: AirBnB expands with near zero marginal costs of expansion

“Increasingly, all of us will be in the business of enabling interactions.”

Choudary identifies four repeated narratives of disruption in relation to platforms displacing pipes:

  1. Platforms remove inefficient gatekeepers, e.g. music, banking, education, publishing
  2. Platforms unlock entirely new sources of value. They do something fundamentally different, platforms create inventory out of thin air, e.g. AirBnB, new sources of value creation.
  3. Platforms take an inefficient, fragmented market and aggregate that industry and make it efficient.
  4. Reconfiguring an entire supply chain onto a platform. E.g. Wikipedia, takes linear supply chain, breaks it down, and puts it on a platform. This will happen in manufacturing as 3D printing becomes more pervasive.

What’s important in building platforms:

  1. You do not start with the technology. The way you build platforms is to define the interactions you are enabling. Only after you have this laid out should you think about technology.
  2. Platform needs to create pull. More difficult than just marketing. Chicken and egg problem, incredibly complex. Need to ensure you create new behaviours that make producers & consumers stick with you.
  3. Platform should facilitate interactions. Facilitation is more about governance than technology.
  4. Continue matching well. Problem with succeeding with platform is problem of abundance. Once too many things are created it becomes harder to make good matches.

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