Ecosystem, Platform, Value Chain: What's the Difference?

Ecosystem is one of those buzzwords used without explanation, all the time. Some appear to use the term “ecosystem” to describe the range of partners a firm may have. 

Others appear to use the word to describe third-party applications that interwork with, or are available to use, on a device or a network. 

Finally, the classic, pre-digital and pre-internet “ecosystem” was a vertically-integrated end-to-end solution. 

The term might be confused with platform. The issue there is that there are several different ways the term is used. In the computing business, a platform is a set of hardware or software upon which other third-party apps can run. So Windows has always been seen as a platform, as have the Intel line of processors. 

In that sense, the internet is a platform for both communications and applications. But there is a new sense of the term that refers strictly to business model, not computing or communications infrastructure. 

In the internet era a new meaning has emerged. A platform is a business model based on an entity that acts as an exchange, connecting buyers and sellers. 

source: Simon Torrence 

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. 

Amazon is a platform. Etsy is a platform. Uber and Lyft are platforms. Airbnb is a platform. All connect buyers with sellers; sellers with sellers or buyers with buyers. None of those platforms “owns” the assets traded on the exchange. 

It all boils down to “who makes the money” and “how” the money is made. Even when understood as a business-to-business marketplace, a bandwidth exchange, for example, a key principle is that buyer and seller transactions volume is how the platform makes money. 

A true platform in the digital commerce sense does not own the actual products purchased using the platform, and makes money by a commission or fee for using the platform to complete a transaction. A ridesharing platform does not own the vehicles used by drivers. A short-term lodging platform does not own the rooms and properties available for rental. An e-commerce site does not own the products bought and sold using the platform. 

“Ecosystem” sometimes also seems to be used in the sense of value chain, a business model that describes the full range of activities needed to create a product or service. 

source: Analysys Mason 

Also, firms have for decades been moving towards products that combine physical goods with software; content with appliances; implements and experiences. Among the classic examples in the mobile device business is Apple bundling devices with content; device with app store; device with payment mechanisms; sales with support. 

Almost by definition, ecosystems are loosely coupled. There might not be a direct business relationship between any two firms in an ecosystem. Ecosystem participants might come from distinct industries, geographies or roles. So digital ecosystems are quite complicated. 

“A digital ecosystem is a complex network of stakeholders that connect online and interact digitally in ways that create value for all,” says Tata Consulting Services. 

 

It is hard to organize an ecosystem. It is difficult to create a platform business model. It can be tough to develop a value chain. For most businesses, creating a simple role within a value chain is task enough. 

Acting as a retailer of products to end user customers, for example, can be complex enough. Creating ecosystems or platforms is quite something else.

Ecosystem, Platform, Pipe: What's the Difference?

Ecosystem might be the term that is replacing platform as a broad description of business strategy for would-be market leaders. And it is likely to be even harder to achieve, for most firms, in most industries. 

One study found that attempted platform failure rates were about 80 percent, about the same failure rate we see in information technology projects, firm startups and most change initiatives. 

The difference goes beyond nomenclature, even if many use the terms essentially interchangeably. 

Ecosystems can be thought of as “networks of networks.” Think of the internet. Does it have a single active organizer? Is it under any single entity’s control? Closer to home, think of the global telecom network, which is a network of networks. 

Travel is an industry that might be thought of as an ecosystem, but it is not centrally managed. A platform, on the other hand, always has an organizer or orchestrator. 

Platforms, on the other hand, can be created by a single entity, though not without the participation of many other full-ecosystem participants. Uber and Lyft can create platforms for ridesharing, but not lodging, which can be organized by firms such as Airbnb. 

Some might argue that the platform is the tool or foundation other products, supplied by third parties, build upon. In that taxonomy, the ecosystem would refer to the totality of products and relationships built on the platform. 

That makes less sense to me than than a taxonomy based on whether there is an active orchestrator or aggregator. A biological ecosystem has no human or mechanical organizer. It develops, but is not “planned” or “managed.” A platform always is managed, with admission and operating protocols. 

Network effects are key, in either case. A network effect essentially means that value grows as the number of users grows. It is different from mere scaling. More scale leads to lower unit costs, but no increase in value. 

source: Linkedstarsblog 

A network effect increases value as the number of users increases. 

One might generalize and argue that ecosystems are about increased end user value, while platforms are more directly about firm value and revenue. The total value of the Apple iPhone ecosystem for end users exceeds the value reaped by any single supplier participant. 

That noted, even when most of the ecosystem revenue is earned by third party participants, the orchestrator of the platform still gains value, if not always huge amounts of direct revenue, as when the orchestrator profits by transaction fees, commissions, licenses, support services, advertising, referrals or some other revenue model. 

An ecosystem is unitary; a platform can exist as one of many. Amazon or Alibaba can create platforms for some retail products, but arguably not all, while existing within the broad “retail” ecosystem. 

An ecosystem is a community of interacting entities, some say. The members of the ecosystem can be organizations, businesses and individuals, all creating value for one another in some way; mostly by producing or consuming goods and services.

A platform is the way a particular community or ecosystem is organized to interact with one another and to create value. A platform typically is focused on bringing part of the “ecosystem” together and reducing friction for interactions to take place. 

source: Kilian Veer 

Uber, Lyft, Airbnb, Google, Apple, Amazon and Facebook might be considered platforms that organize some of the value created by the internet. But the internet ecosystem is too big to be anything but a collection of value created by various platforms. 

What is more certain is that a business model based on building an ecosystem or platform is not the same as building a traditional pipe business model where a firm creates and sells a product or products that have a specific role in a value chain. 

By “pipe” is meant not just “communications services” but any product created and sold to customers. Most products and most firms historically use a “pipe” business model, in that sense. 

Indeed, there is a key difference between selling in an ecosystem and organizing the ecosystem. Amazon and Alibaba create and organize their platforms and ecosystems, if you believe both are ecosystems. We can say with certainty that both are platforms.

It might be debatable in some quarters whether those firms--or others such as eBay--actually have created ecosystems. 

Every other firm buying or selling on the or to the platform is part of the ecosystem. 

Every successful platform or ecosystem produces value in excess of what is contributed by any single firm. That is generally not true for a pipeline product, where value is fixed: it works, or does not; the specific problem is fixed; a specific capability is gained. 

The value of the entire internet exceeds the specific value contributed by each point solution. 

The role of any business or entity within a value chain is determined when it asks who are our customers? A chip foundry has chip suppliers as customers; chip suppliers have device manufacturers as customers; device suppliers have consumer or business users as customers; applications have users (subscription models) or advertisers as customers. 

Platforms can take aggregator or orchestration roles within an ecosystem. Platforms can create the marketplace or transaction venue (aggregating suppliers and buyers) or orchestrate the creation and operation of platforms. 

Platform business models and ecosystems, broadly speaking, seem destined to play a greater role in digitally-enabled industries. But most firms will never become platforms.