Platforms benefit from positive network effects, scale economies, and information cascades.

Rose Prince

2019-07-25 16:42:00 Thu ET

Platforms benefit from positive network effects, scale economies, and information cascades. There are at least 2 major types of highly valuable platforms: innovation platforms empower third-party firms to add complementary products and services to some core technology (cf. Google Android, Apple iPhone operating system, and Amazon Web Services), and transaction platforms facilitate the positive exchange of information, goods, or services (cf. Amazon Marketplace, Airbnb, and Uber). In the empirical analysis of 20-year Forbes Global 2000 data, the top 43 core platform corporations generate about $4.5 billion annual sales with only half the number of employees at their non-platform counterparts. These public platform corporations also yield twice operating profits, market values, and bottom-line growth rates.

There are some generic lessons for modern platform corporations. First, founders and managers need to learn fast from failures for better lean startup optimization. Despite huge upside platform opportunities, the mere pursuit of a platform strategy may not improve the odds of success as a long-term sustainable business. Second, most platforms need to boost exponential user demand with network effects and scale economies, so platform corporations should set prices near their relatively low marginal costs with appropriate buyer-or-seller subsidies. Google, Facebook, Twitter, Amazon, Apple, Alibaba, and Tencent etc start their lean enterprises by subsidizing at least one side of the market before they maintain profitable platforms. In comparison, Netflix, Uber, Lyft, Slack, and Zoom still struggle to fine-tune their business models toward maximum sustainable platforms.

Third, it is important for platform firms to explain why they strive to accomplish a great deal for better customer trust and loyalty. Many platforms cultivate customer rapport to inspire users via positive information cascades. For instance, Alibaba Taobao and Tmall leverage Alipay as the sleek third-party payment mechanism to ease the transactional frictions of e-commerce in China (whereas, eBay fails to attract customer trust and rapport there due to the mere absence of a credible and verifiable third-party payment system).

Fourth, most platforms enjoy and maintain first-mover competitive advantages with formidable barriers to entry. A good example is Microsoft: the software tech titan remains competitive with its Windows operating system, Office software suite, and Edge Internet browser; however, Microsoft gradually loses unique business niches to Apple iOS, Google Android, Chrome, Firefox, Safari, and Opera.

On balance, platform corporations need to deploy these key strategies for better network effects, scale economies, and information cascades.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

Mark Granovetter follows the key principles of modern economic sociology to analyze social relations and economic phenomena.

Charlene Vos

2023-02-21 08:27:00 Tuesday ET

Mark Granovetter follows the key principles of modern economic sociology to analyze social relations and economic phenomena.

Mark Granovetter follows the key principles of modern economic sociology to analyze social relations and economic phenomena. Mark Granovetter (2017) &

+See More

The great reversal of antitrust merger review in America

Monica McNeil

2023-10-07 10:24:00 Saturday ET

The great reversal of antitrust merger review in America

Thomas Philippon draws attention to greater antitrust scrutiny in light of the rise of market power and its economic ripple effects. Thomas Philippon (20

+See More

Innovative investment theory and practice

Olivia London

2022-05-15 10:29:00 Sunday ET

Innovative investment theory and practice

Innovative investment theory and practice Corporate investment can be in the form of real tangible investment or intangible investment. The former conce

+See More

Empirical tests of multi-factor models for asset return prediction

Apple Boston

2022-02-25 00:00:00 Friday ET

Empirical tests of multi-factor models for asset return prediction

Empirical tests of multi-factor models for asset return prediction  The capital asset pricing model (CAPM) of Sharpe (1964), Lintner (1965), and Bla

+See More

President Trump imposes punitive tariffs on $60 billion Chinese imports in a brand-new trade war.

Laura Hermes

2018-03-25 08:39:00 Sunday ET

President Trump imposes punitive tariffs on $60 billion Chinese imports in a brand-new trade war.

President Trump imposes punitive tariffs on $60 billion Chinese imports in a brand-new trade war as China hits back with retaliatory tariffs on $3 billion U

+See More

Artificial intelligence continues to push boundaries for tech titans to sustain their disruptive innovations and competitive advantages.

Chanel Holden

2020-11-01 11:21:00 Sunday ET

Artificial intelligence continues to push boundaries for tech titans to sustain their disruptive innovations and competitive advantages.

Artificial intelligence continues to push boundaries for several tech titans to sustain their central disruptive innovations, competitive moats, and first-m

+See More