Thursday, December 31, 2020

Pipe or Platform?

For all the talk of the value of “platforms” in the internet ecosystem, platforms are much harder to create than the typical “pipes” business. So the “good advice” to “become a platform” might apply to only a smallish percentage of all connectivity provider businesses. 


A platform business model essentially involves becoming an exchange or marketplace. A pipe model requires a firm to be a direct supplier of some essential input in the value chain.


A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. 


Platform creation is not especially easy for a connectivity services provider. If you think about every business as either a “pipe” or a “platform,” then most businesses are “pipes.” They create a specific set of products and sell them to customers. That is a classic “one-sided market.”


It arguably is easier to build and sustain a business using a “pipe” model than a “platform” model for a number of reasons, but primary among those reasons is that a pipe model only requires knowing what problems the potential buyer faces, and then coming up with a workable and affordable solution. 


Creating a platform model requires understanding the problems that at least two sets of participants may have, and then devising a way to solve each participant’s problem. At a crude level, that means a platform’s business value challenge is twice as hard as that facing a pipe provider. 


Of course, for all the attractiveness of a platform model, it can be argued that creating a platform is much more capital and scale intensive than operating an alternative pipe model. In fact, small firms have almost no choice but to operate using a pipes model. 


Also, some businesses we think of as “platforms” might actually operate as pipes. Amazon’s e-commerce operations are a classic platform. But Amazon Web Services arguably operates as a pipe: it sells customers computing or storage services that actually are “pipe” products.


In other words, AWS is an example of one supplier (AWS) selling a specific product directly to one customer. One might say the same for a single retail brand selling online. That is a pipe model, not a platform, as it features one seller, making transactions with a single buyer. 


Another way of stating this is that a pipe model has customers interacting with a seller; a platform has users interacting with each other. 


Also, the value for different sets of participants might be asymmetrical, which is why platform providers sometimes have to create incentives for one side of the platform to participate. Uber pays its drivers, for example, to ensure adequate availability for riders. AirBNB compensates rental partners for their participation. Expedia pays booking commissions to its travel providers. 


Yet another way of illustrating the difference is that a platform orchestrates interactions and value. In fact, a platform’s value may derive in large part from the actions and features provided by a host of ecosystem participants. Facebook’s content is created by user members. Amazon’s customer reviews are a source of value for e-tailing buyers. 


Consumers and producers can swap roles on a platform. Users can ride with Uber today and drive for it tomorrow; travelers can stay with AirBNB one night and serve as hosts for other customers the next. Customers of pipe businesses--an airline, router or phone suppliers, grocery stores-- cannot do so


You might be aware that firms in an ecosystem often move into adjacent roles within the ecosystem, or challenge incumbents in other ecosystems. Though that can be done by either a pipe or a platform, it might be easier for a platform. 


Network effects and communities both have business value, and platforms might be able to more easily transfer scale advantages to new lines of business. Pipe-oriented firms can do this as well. The difference might be the ease of scaling platform assets, which by definition require wide participation by lots of different firms and industry segments.


A pipe-oriented business will have advantages in its current customer base, ex-customers and suppliers. A platform might already have relationships with supply chain, payment, logistics, marketing or user relationships that are far broader. 


In a pipe business, the seller “creates value” represented by the product sold. In a platform business, value can be created in different ways, such as recommendations. In that case, neither the platform itself or the sellers of products are creating the value, but the customers or users. 


The other issue is that any business using the internet is itself participating on a platform, though perhaps indirectly. And as is true for most products sold or exchanged over the internet, there is a tendency for excess profit to be removed, which means any product available on the internet--by pipe or platform--tends to move towards zero margin


Also, many businesses may operate partly as a pipe and partly as a platform. Perhaps the Apple iPhone provides a good example of that. 


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