Vinod Jain is an expert in global and digital business, former business professor, consultant, speaker, and author of Global Meets Digital.
FreeMarkets, Inc., founded in Pittsburgh in 1995, is often considered to be the first platform for industrial purchases. The company created online B2B (reverse) auctions, whereby industrial companies needing certain supplies or services would post their requirement at freemarkets.com and suppliers of such products and services from anywhere in the world could bid to supply them. By 2000, FreeMarkets had hosted over 5,000 auctions, in which 5,600 suppliers from 50 countries had participated. So, where is FreeMarkets now?
FreeMarkets was acquired by Ariba, Inc. in 2004 for $493 million, which itself was acquired by SAP SE of Germany in 2012 for $4.3 billion. Today, the SAP Business Network considers itself to be the world’s largest trading platform serving millions of companies from 190 countries. It’s a broad-based platform for most business-to-business transactions, including e-procurement, e-invoicing and working capital management, among many other functions. In other words, it is both a trading platform (a B2B marketplace) and an ecosystem of interconnected partners—buyers, suppliers, logistics companies and providers of other complementary products and services.
How FreeMarkets became an ecosystem while retaining its platform business model over its many incarnations has lessons for all businesses exploring the platform-versus-ecosystem approaches to business. That said, there is often a good deal of confusion regarding the meaning of platforms and ecosystems. For most businesses, it’s not a choice between starting a platform or an ecosystem. Rather, the question for most businesses is which network they should join: a platform or an ecosystem? Depending on what you do, your business can be part of both an existing platform and an existing ecosystem or just one of them. But first, you must understand the differences.
What is a platform?
Platforms are intermediaries that connect and facilitate interactions between two or more sets of users, such as sellers and buyers (as at amazon.com) or artists and listeners (as at spotify.com). Thousands of companies, including some of the world’s most valuable companies—think Apple, Microsoft, Alphabet, Facebook and Alibaba—run on the platform business model. They create value by enabling interactions between one set of users with another set of users and capture value by charging users fees for making the connections and for services provided to them.
Platform businesses do not own the inventory of the goods on the platform. Many platform businesses started out as product businesses that later transitioned to the platform model. Apple, for instance, started out making computers, software and games and became a platform only after it launched iTunes in 2001. On iTunes, one can purchase music, movies, apps, games and many other third-party products and services, and Apple gets a 15-30% cut. Platforms create and capture value through network effects, whereby a product or service becomes more valuable to platform participants the more users it has. They generate huge amounts of data about participants, their choices, prices charged, payments and more, which is also a source for capturing value.
Platforms have, in fact, almost always existed. For example, marketplaces such as bazaars have been around for thousands of years. It’s just that the term platform in its current usage refers to a digital intermediary—a digital marketplace. Physical marketplaces have many inbuilt inefficiencies due to scarce information about such things as the quality of the products being bought and sold, availability, shipping costs, prices charged, etc. Digital platforms help resolve such inefficiencies with digital technologies. For instance, information about goods and prices is instantly available to all market participants at Amazon; a customer can also get some idea of quality based on product reviews.
In the last decade, digital platforms have disrupted industry after industry because the platform is a disruptive business model. They enhance competition in industries by reducing barriers to entry. For example, different sellers on Amazon compete for customers’ business and must offer low prices in addition to selling products of acceptable quality.
What is an ecosystem?
An ecosystem is a group of companies, typically from different industries, offering bundles of products and services to meet specific customer needs. This is based on the idea that customers aren’t just looking for a specific product or service, but typically a solution to their needs.
Many of the fastest-growing companies (such as Apple, Amazon and Google) are ecosystems where they themselves act as a hub for networks of customers, suppliers and providers of complementary goods and services, in an integrated manner. Ecosystems aim to improve customer experience and retention.
How are they different?
Platforms and ecosystems have no inventories of their own; they create value through relationships and networks—linking one group of users with another group of users. There are several possible revenue streams, but generally, they make money through membership fees, advertising, commissions on transactions, providing services to users, revenue sharing with third parties and (with access to data on the entire platform or ecosystem) through data monetization.
For example, Amazon is a linear business (has its own products and services, such as Alexa and Kindle), a platform (a B2C marketplace, where third-party sellers sell their products) and an ecosystem (Prime video streaming, self-publishing, Amazon Web Services and much more). By contrast, eBay and Airbnb are global platforms (P2P marketplaces)—connecting one set of users with another set of users—but not ecosystems.
Google (Alphabet) started out as a search engine (a linear business), became a two-sided platform (serving searchers and advertisers) and then added many other products and services (such as Gmail, Google Maps, Google Calendar, advice for small businesses and so on) over time to become an ecosystem. In fact, Google is a hub for many ecosystems, including an innovation ecosystem, the Android ecosystem and a devices ecosystem.
The choice for businesses, starting a platform or an ecosystem, is a relatively easy one. A platform can be launched with an investment of a few hundred to a few thousand dollars, but that’s when problems arise. Since platforms typically serve two sides of a market, such as buyers and sellers, they must have a large number of buyers to attract enough sellers, and a large number of sellers to attract buyers for the platform model to work; it’s the age-old chicken-or-egg riddle. That’s where most platforms falter. As for the ecosystem choice, that’s a business model only for the big boys. Small and medium-sized businesses can do well and thrive by joining an existing platform or ecosystem, rather than starting one on their own.
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