Platform Revolution | Danny Zuckerman

Need a product first, platform second. That’s how you build a side of the market
Underappreciated benefit of platform model (besides scale and unit economics and variety) is you get to run massive amount of small experiments with real world data on what customers want
Redraws the lines of the business - influence outside matters more than control inside
Moved from supply economy of scale to demand economies of scale
Two sided network effects -
Ways to attract
- Price - can disappear
- Brand - fickle
- Network - virtuous cycle
Viral is attracting new, network is making it more valuable for existing
Need to curate to avoid negative network effects from undesirables crowding out others
4 types of network effects
- Cross side and same side effects, on both consumers and producers
- Can be positive or negative on both
4 types of companies, broadly: asset builders, service providers, technology creators, network orchestrators
- Network orchestrators are by far the most efficient value creators (2x or 4x better ratio)
- Far easier to scale network effects outside a firm, so focus of organizational attention inverts
- Management of externally is
- Functional integration and network orchestration
Platforms are complex and getting started is hard - focus first on the fundamentals. What are you trying to facilitate
3 things that are exchanged
- Information
- Goods/services (value unit)
- Currency (incl attention and reputation)
Design one interaction at a time
- As easy as possible to exchange - the core
- Well designed filters are critical - give users the value units that are valuable to them. Eg a good search fn
Pull, facilitate and match
Pull - attracting consumers is very different than pipeline biz. Chicken and egg.
- Once they are there, make sure they can find value
  - Feedback loop is critical
  - Single user feedback loop - targeted value unit to that consumer
  - News feed is great feedback loop with likes/etc for producers
  - Lower barriers to entry
Platform must be simple and clean to let users and producers rely on it, no bloatware
- Low variety and stable base
Integral architecture can be easier, but is much harder for external parties to build on. Network effects are much harder
Software is eating the world
- V1 was improved digital pipelines
- V2 is platform model
3 ways to unlock value and create platform
- Delink asset from value (let it be used by anyone who can find a use)
- Reintermediation - more efficient pairing of value units to consumers..also can leverage social feedback and reputation
- Market aggregation - centralized markets to serve dispersed markets
Designing for viral growrh
- Pull not push strategies
- Push doesn’t work bc it doesn’t activate and create feedback loops
- Strategies that bake marketing and appeal into the platform, feedback loops that reinforce the right usage and add value
Incumbents vs upstarts - not about huge initial user base, but about designing the right interaction model
What works for one platform does not typically work for others
YouTube’s early focus was entirely on content creators
- Created network of producers which is more sticky than viewers are
- Know your value proposition and those of your competitors
Solving chicken and egg problem
- Start with an existing pipeline business then open to external
- Staging value creation - attract initial users who then create new value units
- Focus on one side then use that to attract the others
- Simultaneous onboarding in a burst
Example variations
- Piggyback off another customer base or provider base (scraping Craigslist, ebay PayPal)
Seed the initial value by being the first provider
Incentives to key users
Exclusive access
Induce producers to bring their customers
Big bang strategy for simultaneous onboarding
- Can do this in small networks too, not just globally
Micro market - bring people who are already likely matches (fb at Harvard)
Viral growrh requires 4 components
- Sender
- Value unit
- External network - medium where something spreads
- Recipient
Viral growth incentivizes every user to become a marketer and spread value externally
How to monetize the business
- Cannot charge either side - would discourage entry, data etc
  - Unless you need to add friction to curate
- Charge at deal completion - once value is proven
- Or charge for something tangential
What value is created on the platform? 4 types
- To consumers - access to value created on the platform (apps, vids)
- To producers - access to a market
- For both - access to tools and services that facilitate interactions
- For both - access to curation mechanisms
Plenty of times that monetization may not be possible - need to produce enough excess value through the platform that can be captured by the platform
More users is not always better
- Meetup succeeded by charging organizers, making for better interactions
Find a way to monetize in a way that does not destroy network effexts
- Charge for enhanced curation
- Enhanced access to users (broader reach, sponsored content)
- Subscription
- Charge for completed transactions
- Charge for advertising that is beneficial to both sides (eg LinkedIn recruiting)
- Charge for enhanced tools that aid the interaction beyond the match
Who to charge
- All members - when you want to curate the full network
- Charge the side that values the interaction more
- Subsidize ‘stars’
- Charge the less price elastic group
- Never take first money - only once both other sides have gotten value
Platform is basically an infrastructure to facilitate exchanges that are valuable
- Start with the basic then later on over time
How to decide how open to be?
- Three kinds - manager and sponsor particiaption, developer participation, user participation
- Manager - different than sponsor. Apple, Android, linux all different
- Devs - core, extension, data aggregators
  - Core - app store
  - Extension - apps; opened through apis, which can be closed . Salesforce gets 50 percent of revenue through APIs
  - Data -
  - If an extension app can become a platform itself, seek to own it
  - If a function is often reinvented by extensions, own it and make it a free api( (camera, record)
- Users - compete openness usually doesn’t work, need to filter for quality
- The unique value of a platform lies in it’s ability to make connections between users outside the platform itself
Governance
- Don’t take more than your fair share
- Don’t change rules in your favor
- Always create value for your customers
4 ways to build healthy markets
- Increase safety - transparency, wualitu, insurance
- Thickness - discoery
- Minimze congestion
- Minimize repugnant activity
4 tools to control behavior
- Laws - forbid smoking
- Norms - mkae it uncool
- Architecting - filters that reduce the impact
- Market - taxes
Use all 4
Vibrant community is one of the most important things a platform can have
- Promote the best members
- Have a natural role progression to more authority
- Trigger - action - reward - investment
  - Unexpected rewards are most habit forming
- Let users have a hand in designing the system
- Use social credit system to get community involved
- Tell community what you are building and help them financially to avoid unnecessary competition
- Insurance exacmple - transaction benefit and freedom outweighs fraud
Metrics
- Successful interactions and value for all users
- Early -creation, sharing of value.
- Later - retention and conversion
  - What portion is happening on vs off the platform
- Which groups to incrnticiz, to bring onto the platform, to charge..
- At maturity, innovate to enhance the value proposition against competitors — track producers and consumers participation closely
- In phases
  - Startup -
    1. Liquidity - percentage of successful interactions is high. There is stuff to do! Percent of listings that lead to interactions within a time period.
    2. Matching quality - successful curation ; daily interaction percentage
    3. Trust - comfort with engaging in interactions on the platform
  - Growth
    - Producer to active consumer ratio
    - Producer - frequency, offerings, rate of failed interactions, fraud; can calculate LTV of producer
    - Consumer -
    - Interaction conversion rate
    - Consumer conversion to producer (issue attestation)
    - Odd one - distance to consumers. How integrated into lives?
  - Maturity
    - Measuring incremental changes to the product
    - Drive innovation - identify what developers are doing that’s valuable to absorb,
    - Signal from noise - don’t over measure/underprioritized
      - The more you measire, the less prioritized you’ll be. No vanity metrics
      - Actionable, simple, auditable
    - Resource allocation -
Strategy
- In Porter’s 5 forces - build a moat to avoid competition, and push all others to compete; horizontal and vertical integration
- Resource based view - control of a key resource
- Sustainable advantage disappearing today with such rapid iteration and competition
- Purpose of business is to create a customer
- Can remake markets through network effects
- Platforms turn businesses inside out, moving resources outside the walls
- How platforms compete
  - Limit access to control more value
  - Foster innovation and capture it’s value. Eg sap dev community. Don’t seek to own all value, but do own the most important resources
  - Leverage data -
  - M&a - get to observe activity on the platform first
  - Platform envelopment - scan the horizons for adjacent platforms
  - Enhanced platform design
- When advantage is sustainable
  - Supply economy of scale
  - Strong network effects
  - High switching costs
  - Catering to niche tastes/specialization