Network vs. Platform

So, how do we define these terms? What is the core difference? Why does it matter – what is the implication on business models? And finally, which firms today embody these models?

First, the basics. Digital business models are inherently exponential in terms of value generation. Data drives powerful flywheel effect, and these business models often ‘tips over’ the markets and industries they operate in. I wrote about this at length in my previous blog (Digital – what is different about it?)

There are, however, three kinds of ‘exponential growth models’ correlating to different digital business models. It is important firms get that distinction right, as they pursue their digital strategy. And I think this is particularly important for established Fortune 500 firms, as they have large existing consumer base, established set of service/product offerings, and established digital channels. For them, its not just a product strategy – it’s a product, vendor, supply-chain and channel strategy all rolled into one!

A digital firm can therefore opt for one of the 3 basic models – Network, Marketplace and Platform. The basic difference between them is the nature of interactions between the firm and its consumers, and between its consumers.

Network is the simplest model, with value determined by the broadcast value. Telecommunication network, Skype, Social networks like Facebook are the simplest form of network, and are typically homogeneous, operate in a NXN mesh, are bidirectional. The value of these networks are determined by Sarnoff’s law: V = f(N).

Marketplace is the next evolution of this model. This digital models are heterogeneous, operate in a one-to-many mode, are bidirectional, and provide a foundation for multiple businesses to come together and operate. The value generation of this model is a scale higher than simple network model (Metclaf’s law): V = f(N^2).

Microsoft (or rather, WinTel) was the original founder of this model (hence them ‘tipping over’ the personal computing market in their favor, cornering 95% of the industry profit). ebay, Craigslist, etc. then proceeded to create these marketplaces on the web. Facebook extended its original network model to Marketplace model with Facebook Marketplace, and so has Google Shopping. The most famous example of this strategy is, of course, iTunes – which Apple successfully leveraged to tip the smartphone market in its favor (and walk away with 95% of the industry profit).

Platform is, however, the highest form of evolution of digital business models. Its build on platform model – but create marketplace on marketplace: sub-groups of users coming together, homogeneously and/or heterogeneously, to create their own marketplaces. It requires an Open Platform, so that user community can extend the original platform to new functionalities and add new capabilities. The economic value generation is exponential (Reed’s law): V = f(2^N).

The early adopters of this model are WhatsApp, Facebook Messenger, WeChat in China. Google, a firm I would normally expect to lead this race, is absent. Apple is trying its hand at this, but early results are desultory as this will require Apple to open its platform, something it does not do well.

Where does this leave the established consumer facing Fortune 500 firms? Frankly, except for a very few – nowhere. Even the early pioneers like Chase, Capital One are really struggling to define the true nature of the digital platform they are attempting to develop and roll out, and I suspect are reticent regarding the scale of operational change they have to make in the way they roll our product, way they manage channels, way they interact with partners and client. But some are trying.

The change will come, make no mistake about it. It has already come in retail (Amazon), telecommunication (Apple), digital advertising (google), digital media (facebook) – in each of these verticals, the market tipped over and got reshaped by one dominant firm. It has not yet played out fully in these verticals, yet, as each of these firms have not yet transitioned from Marketplace to Platform model. Perhaps they will make that transition and retain leadership status, perhaps a new start up will move faster and displace them. Current size/market dominance, however imposing, is no defense against new digital models – just ask Nokia.

But the most wrenching change will come to the other consumer verticals – banking, various retail categories, hospitality, travel, etc. Most of these firms are not yet digital, or operating in the most rudimentary digital business model. Banks, in particular, believe they are ‘protected’ by regulations – and yet…

We are in for a very interesting ride ahead!