I thought the best way to open a series of posts about platforms is to actually talk about what is a platform. Software platforms have been around for a long time and many of the same principles and dynamics apply across the changing times and technologies.
I want to start off by recommending some homework. I found a book early in my time at Twitter, called Invisible Engines, that helped me greatly in understanding the dynamics and economics of platforms. A lot of how I think about platforms was shaped by that book and you’ll see many of the concepts repeated here. While it looks long, you can focus on a few key chapters to make it an easy read. You can download it as a free eBook from the MIT Press.
Now, let’s go back to June of 2007 — the iPhone has just launched. The only applications allowed on the phone were the ones that Apple built and pre-installed. No Facebook, Pandora, Twitter, Evernote, Uber, Angry Birds, Netflix, Square, and so on. Each one of those applications went on to thrust the iPhone into huge new markets. Square suddenly turned your phone into a money making device for small business owners. Angry Birds made the iPhone an indispensable gaming device. Netflix let you stream movies and TV shows right to your device. Facebook and Twitter turned every phone into something that let you share the world around you — from your child’s birth to a plane landing on the Hudson. The iPhone would not be the monumental success it is today if Steve’s original vision of Apple building every app had played out. Each of those apps, and countless others, have created immense value for Apple that they never would have realized on their own. By becoming a platform, they enabled developers to build applications that would make their device more valuable to users, thus selling more devices. As more devices were sold it created more revenue potential for app developers, thus drawing more developers to iOS. This created a very powerful network effect that drove growth of both sides of the business (developers and users) where growth of one side directly benefited the other.
“Most successful software platforms have exploited network effects between applications and users: more applications attract more users, and more users attract more applications.” — Invisible Engines
Platforms, as we’ll reference here, are software-driven, multisided businesses or marketplaces. A lot of the same dynamics can be applied to more general marketplaces like eBay or TaskRabbit, but for the purposes of these posts we’ll focus on software platforms. iOS, Android, Microsoft, Facebook, and Twitter serve at least two sides of the business and sometimes more (partners, advertisers). While all platforms theoretically have network effects, some have stronger network effects than others. This is something that changes over time depending on what services the platform provides and what policies are in place to govern behaviors.
An example of a platform with strong network effects is iOS. Apple provides great discovery of applications to their users through the App Store. I think they do the best job in the industry of merchandizing valuable applications to users and providing a fairly frictionless process for paying for and downloading an application onto a user’s phone. This in turn delivers great distribution and revenue opportunities for their developers, making users happy as they get more value out of the iOS device through new applications and the application developers become more successful through the distribution and revenue opportunities.
An example of a platform with weak network effects was the Twitter Platform in it’s early days. At that time, the ecosystem was made up of some great applications, but the platform didn’t directly provide distribution or revenue opportunities. For the most part developers had to do their own marketing to get users and had to provide their own means of capturing revenue. For example, CoTweet, one of the earliest applications on the platform, built their entire business around Twitter data, yet had to do their own marketing to find customers and had to setup their own billing in order to capture revenue. This creates a lot of friction for app developers and thus loses some of the value of those network effects. As Twitter has brought the platform into the core product (Twitter Cards) they have been able to deliver better distribution opportunities for developers while also increasing utility to the user experience.
The lower the friction to connecting the various sides of the business, the greater the network effects and the greater the value to the platform provider.
An API does not a Platform Make
One final note that I think is worth throwing out there for debate is what isn’t a “platform”. A lot of people talk about Amazon Web Services, Urban Airship, Twilio and other similar services as platforms. However, I think of them more as software as a service (SaaS) instead of a platform, since they aren’t multisided businesses and only provide services to developers. These can still be incredibly valuable businesses, but they don’t get the benefit of the network effects that come when you connect multiple sides of the business together. On the flip side of that, just because your business is a platform, doesn’t mean it is provided with some magic dust to make it successful. In fact, trying to build up two sides of a business can be much more difficult than just signing up developers to use and pay for your service.