Why does every business now want to be a platform?

THE ILlusion PLATFORM Who wins and who loses in the age of tech titans By Jonathan Genou Over the past two decades, the world’s hyper-a...


THE ILlusion PLATFORM
Who wins and who loses in the age of tech titans
By Jonathan Genou

Over the past two decades, the world’s hyper-ambitious entrepreneurs – is there another kind now? – have largely pursued two objectives in tandem. First: Become a platform. Second: conquer the world. The first is supposed to lead to the second, as it apparently did for the five conglomerates under the intimidating acronym FAANG. Facebook, Apple, Amazon, Netflix, and Google have taken such a bite (get it?) From the global economy that in the past five years alone, their value has more than tripled – at a rate three times faster than the growth of the entire S&P 500 – and are now worth more than $ 7 trillion. The appeal of building a platform is clear.

But what, exactly, is a platform? In the analog world, a platform is where you take a train or launch a rocket or give a speech – somewhere where you go to do something else. In a digital context, platforms facilitate transactions. Facebook and Google don’t sell much themselves; they make money by connecting advertisers to your eyes. Apple profits from the sale of phones, but a significant portion of its revenue comes from the reduction every time you buy something from someone else in their App Store. The promise of the platform’s business model is its magical self-reinforcement: once the platform is in place, money is supposed to flow through the system without much additional effort.

The platform’s siren song has proven to be irresistible to countless start-ups, with many finding a way to get the word out in their investor pitch decks – WeWork used it 170 times in its ill-fated attempt to go public – as an easy signal of ambition if not always the reality of their business. Peloton, which sells indoor exercise bikes, calls itself an “interactive fitness platform.” Casper, which sells mattresses, is a “platform designed for better sleep”. Beyond Meat, which sells faux burgers that taste like beef, pork and poultry, insists that they are actually “three platforms of plant-based products.” The world’s most established companies are not immune to this trend. In an episode of a podcast produced by Boardroom (a “sports content platform for businesses” co-owned by basketball superstar Kevin Durant), Goldman Sachs chief executive David Solomon said Goldman did not is not a bank but a company with “three main platform activities.

The word “platform” has been used so many times in so many ways that it has lost almost all of its meaning, a fact that Jonathan Knee, who teaches at Columbia University’s business school, tries to make clear in his paper. new book, “The Platform Delusion. Knee is not in favor of big platforms, which he describes as ‘succubus companies’ that ‘suck all the value, returns and growth from the companies that actually do things’. But he doesn’t argue neither for their dissolution. ”He simply offers a warning that being a platform is not all it is meant to be.

Knee’s book is filled with business school case studies that might be a bit of the weeds for general readers. (One of the successes he identifies is a company that makes software for a very specific financial accounting function.) But for aspiring entrepreneurs, these stories offer a glimpse into the illusion that Knee identified and show how avoid the two main errors in judgment that cause it. . The first is the belief that platforms have emerged with the advent of the Internet. In fact, they have been around for decades. Shopping centers are platforms. Cinemas are platforms. Credit cards are platforms. (Not to surprise you, but the money itself could be the original platform.) Additionally, Knee argues that these analog companies were often better than the digital companies that replaced them. A suburban mall operator will never achieve global scale, but the business has built-in competitive advantages: Stores are locked into long-term leases, and buyers traditionally have no choice but to browse. many kilometers. In e-commerce, where 90% of businesses are said to fail in their first four months, these barriers do not exist. My dog’s favorite food is available for the same price on Amazon or Chewy or many other sites that I can access with a few taps. While much has been said about the mall’s decline, Knee writes that the top performers still have 70% operating margins. Amazon only manages about 7%.

Not that you have to feel bad for the FAANGs, who prey on each other as much as everything else. (Apple makes billions every year from a deal to include Google as the iPhone’s default search engine – a platform that runs on top of another platform.) Something is clearly different. about our digital platform giants; Otherwise, your local mall mogul could also fund his own space program. The internet has allowed these businesses to reach unprecedented size and scale, so the top-performing competitors – of whom Knee cites a lot – are those who choose to nibble a little slice of a particular business rather than compete directly. with the giants.

But the crux of Knee’s argument is that “beyond their size and success” – which is no small feat – there is little in common between the major platforms. This brings us to the second symptom of delusion, which involves blind faith in the supernatural powers that digital platforms are said to possess: “network effects”, “big data” and other buzzwords that have had their heads nodding. audience at TED conferences for years.

Facebook’s growth, for example, has been largely attributed to the power of network effects – the more people use your platform, the better it is for everyone – which, Knee acknowledges, is perhaps the key differentiator. of the company. But Knee points out that Facebook has yet to dig a wedge around it in much the same way that Warren Buffett would advise any business to do. When competitors come up with a competing product, Facebook spends a lot of time and money copying or buying it, lest users easily switch to another social network.

Knee admits that the scale and reach of giant tech platforms is “awesome,” but he thinks our collective fear of them is exaggerated. (Other than a few nods to their impact on the news industry and the state of our informed democracy, Knee doesn’t consider their societal implications.) Platforms have weaknesses like any business, he argues, and the succubi themselves push the myth of their own invincibility in order to deter any potential competition.

But what the myth has mostly done is get young entrepreneurs to try and match them. Knee teaches an investing course at Columbia, where graduates have largely left Wall Street to work in start-ups, often of their own creation. The personal and societal virtues of starting a business are many, in theory, but no business school graduate seeks to create a mom and pop outfit that will piece together the social fabric torn apart by our digital Goliaths. Almost all of them want to start a small business that will grow into a big business, and the venture capital world encourages such bets. A start-up founder I spoke to recently had met a prominent venture capitalist who said, “I’m interested in finding a company that can own the ocean.

Knee believes investors, and many of his students, are deluding themselves into thinking that building a global platform is a viable goal. Platforms are successful not because they are platforms, but because they harness the same kinds of advantages that successful businesses have enjoyed for decades. It’s a boring achievement, but one that Knee hopes will save his students from not only chasing bad ideas, but ruining their lives. The platform sirens song, he writes, “fatally hinders the ability of many to clearly consider what they might actually enjoy.” Not everyone has to start a business to be happy. And not all businesses need to take over the world.

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