IS4940 week 3

Innovation & Technology Entrepreneurship

Learning Objectives

• Platform introduction
• Network effects
• Platform ecosystem & Innovation
Platform Introduction
 Platform definition from techopedia

• A platform is a group of technologies that are used as a base upon which other
applications, processes or technologies are developed.

https://www.techopedia.com/definition/3411/platform
Most Platforms are Two-Sided
• Groupon Consumers
• Uber Riders
• Xbox Gamers
• Amex Cardholders
m
Production •
•
Aga Khan Patients
YouTube Viewers
• Airbnb Renters
• Groupon Merchants • Tesla Car Drivers
• Uber Drivers • Mechanical Turk Jobs
• Xbox Developers • LinkedIn Employees
• Amex Merchants • Upwork Freelancers
• Aga Khan Doctors • Android Users
• YouTube Videographers
• Airbnb Rooms
•
•
Tesla Charge Stations
Mechanical Turk Laborers
n Consumption
• LinkedIn Employers
• Upwork Projects
• Android Developers
 Two-sided platforms

Direct interactions
“Side” A “Side” B

“affiliation” “affiliation”
Platform

Enabling direct interactions between affiliated “customer” groups

Value = reduce search and/or transaction costs

 Examples of Platforms

Buyers Sellers

Buyers Sellers
 Examples of Platforms

Game
Users
developers

Game
Users
developers
 Examples of Platforms

Users Local professionals

Travelers Hosts
 Examples of Platforms

Consumers Merchants

Consumers Merchants
 Examples of Platforms

Corporate 3rd-party
customers developers

Corporate 3rd party

customers developers
Examples of Multi-sided Platforms

Users Advertisers

3rd-party sites
(AdSense)
 Examples of Multi-sided Platforms

App
Users
developers

Advertisers 3rd-party sites

(FB Connect)
Why are platforms important?
They are the most valuable companies in the world.
World’s most valuable public companies
2020 (4Q) 2010 (4Q)
Company Market Cap Company Market Cap
($Billion) ($Billion)
Apple 2,254 Exxon Mobil 369
Microsoft 1,682 Petrochina 303
Amazon 1,634 Apple 296
Alphabet 1,185 BHP Hilton 244
Facebook 777 Microsoft 239
Tencent 683 Industrial & Commercial 233
Bank of China
Tesla 668 Petrobras 229
Alibaba 629 China Construction Bank 222
TSMC 565 Royal Dutch Shell 209
Berkshire Hathaway 545 Nestle 203
World’s most valuable public companies
2020 (4Q) 2010 (4Q)
Company Market Cap Company Market Cap
($Billion) ($Billion)
Apple 2,254 Exxon Mobil 369
Microsoft 1,682 Petrochina 303
Amazon 1,634 Apple 296
Alphabet 1,185 BHP Hilton 244
Facebook 777 Microsoft 239
Tencent 683 Industrial & Commercial 233
Bank of China
Tesla 668 Petrobras 229
Alibaba 629 China Construction Bank 222
TSMC 565 Royal Dutch Shell 209
Berkshire Hathaway 545 Nestle 203
 $1B+ Platforms by Region

North America Europe

Asia Africa & Latin
America

Public
Private

North America has more platform firms, as measured by market cap, than anywhere else in the world. China,
with a large homogeneous market, is growing fast. Europe, with a more fragmented market, has less than ¼
the value of North America and is not far ahead of developing regions

Source: P. Evans, CGE; CB Insights, Capital IQ, CrunchBase, 2015

Everyone has to “play with” platforms.
Everyone has to “play with” platforms
 Why are platforms the most valuable companies?

• Network effects & low cost structures:

• Growth (exponential)

• Profit margins (e.g. 70% for eBay, 60% for Etsy)

Craigslist – Low-cost structure
 Craigslist – Low-cost structure

https://www.cnbc.com/2019/01/24/craigslist-posts-annual-revenue-of-1-billion-study.html

Craigslist 2019: ~$1 billion revenues (99% US), 50 employees, >90% margin
Network effects
 Same-side network effects
Metcalfe‘s law
• Network Value = 𝑛!

Michael L Katz (AER,1985) (JPE,1986)

• Telecommunications network
• WeChat and Facebook
• Winner-take-all.

§ Same side: value to side A users increases with number of side A users
 Cross-side network effects
Data Learning

+ +
“Side” A “Side” B

+
Platform

§ Cross-side: value to side A users increases with number of side B users, and vice versa
 Network effects can create “winner-take-most”

• Network effects => Users create value for users.

• Examples:
• Android (74.6%), iOS (24.8%) vs. Blackberry, Windows Mobile, etc.
• Windows (78%), Mac OS (17%) vs. Linux, Chrome OS, etc.

https://gs.statcounter.com/social-media-stats
https://gs.statcounter.com/os-market-share/mobile/worldwide
 Network effects vs. Supply side of economies of scale

• Supply side economies of scale: unit costs are falling as output increases
• Demand side economies of scale: network effects -- outcome affected by
the user size
Network effects & expectations
• 1 buyer and 1 seller
• Buyer derives net value $5 from interacting with the seller on the platform
• Seller derives net value $5 from interacting with the buyer on the platform
• Buyer and seller each incur a cost of $1 to join the platform
• Buyer and seller must make adoption decisions simultaneously; no
coordination/communication possible. Equilibrium outcome?

Buyer/seller net payoffs Seller doesn’t join Seller joins

Buyer doesn’t join (0, 0) (0, -1)

Buyer joins (-1, 0) (4, 4)

Network effects & expectations
• 1 buyer and 1 seller
• Buyer derives net value $5 from interacting with the seller on the platform
• Seller derives net value $5 from interacting with the buyer on the platform
• Buyer and seller each incur a cost of $1 to join the platform
• Buyer and seller must make adoption decisions simultaneously; no
coordination/communication possible. Equilibrium outcome?

Buyer/seller net payoffs Seller doesn’t join Seller joins

Buyer doesn’t join (0, 0) (0, -1)

Buyer joins (-1, 0) (4, 4)

Outcome determined by expectations: “favorable” vs. “unfavorable”.

Network effects can create but don’t guarantee “winner-take-all”.
Marginal value of network effects

WeChat

A Increasing

B Constant

C Decreasing

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Network effects can create value but don’t guarantee “a huge value”.
A debate on Uber valuation in 2014

Bill Gurley (VC Partner)

• Uber's valuation is $450 billion to $1.3 trillion.
• Uber will dominate the market and make huge profits.

Aswath Damodaran (NYU Professor)

• https://www.youtube.com/watch?v=K0wky8yyjuM

Slides restricted to Questrom IS474 students 2019 34

 Uber Lyft
Net Loss in 2019: $8.5 billion Net Loss in 2019: $2.6 billion
Net Loss in 2018: $1.85 billion Net Loss in 2018: $0.91 billion
Net Loss in 2017: $4.1 billion Net Loss in 2017: $0.69 billion
Net Loss in 2016: $2.8 billion Net Loss in 2016: $0.68 billion

Slides restricted to Questrom IS474 students 2019 35

 Data: Second Measure
Slides restricted to Questrom IS474 students 2019 36
http://therideshareguy.com/rsg-2017-survey-results-driver-earnings-satisfaction-and-demographics
Why can’t Uber & Lyft make any money?
 Why can’t Uber & Lyft make any money?

Riders Drivers

Riders Drivers

No
No switching/multi-homing
switching/multi-homing costs
costs =>
=> low
low barriers-to-entry
barriers-to-entry =>
=> no
no tipping
tipping

If you were Uber, what would you do to help tipping in your favor?
Uber enters the food delivery market

Uber
Competition

Lyft

Uber
Eats
 Uber Uber Eats & Postmates

Food
Passenger Food

Uber
Uber Uber Eats
Postmates
Uber merged Postmates.
Driver Customer
Driver

41
 Market value of Groupon and Meituan

1 billion 300 billion

https://www.allstripes.com/
§ Different strategies lead to totally different results.
 The Growth
of Groupon

Zhou Zhou zhouzhou@bu.edu 43

44
Data learning and platform competitive advantage
 Network effects & tipping

Riders Drivers

Travelers Hosts

Which one has stronger network effects & better chance of tipping its market?
Question 1

Why can Airbnb dominate the market but Uber

cannot?

Data Learning: Reviews & Ratings, Travel stories, etc.

 Economies of scale + network effects

Users Advertisers

3rd-party sites
(AdSense)

§ Economies of scale: fixed technology investment of Google is huge, but the marginal cost of
serving an additional user is zero.
Question 2

Besides of its leading technology, why can

Google dominate the market?
The “chicken-and-egg problem”
Network effects are a double-edged sword

MORE USERS MORE VALUE

Network effects are a double-edged sword

NO USERS NO VALUE

NO PRODUCER PRODUCER CONSUMERS NO CONSUMERS

Question 3

How to solve the “chicken-and-egg problem”?

Examples?
Pricing Strategy
 Network effects & first-mover advantage

China's Online C2C Market Share

100%
90%
Others
80%
70% eBay China
60%
50%
40%
30% Taobao
20%
10%
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011

How can this happen despite network effects and early dominant position?
Platform Ecosystems
A firm in charge of a business platform is a
firm in charge of a microeconomy.

https://www.youtube.com/watch?v=J0kdOlqgF6E
API Economy
Openness & APIs Enable 3rd Party (external) Value Creation

Which one scales more easily?

3rd parties add value for each other out of altruism or self-interest.
Walmart vs Amazon growth over 10 years: 12% vs 1516%

Logistics & supply chain squeezing have limits.

External value add is much less limited.
 Does Openness Work? Facebook vs MySpace

‘‘We tried to create every feature in the world and said,

‘O.K., we can do it, why should we let a third party do
it?’ ‘’ says (MySpace cofounder) DeWolfe.

‘’We should have picked 5 to 10 key features that we

totally focused on and let other people innovate on
everything else.’’ says FB.

The Rise & Ignominius Fall of MySpace – Business Week 2011

Does Openness Work? Facebook vs MySpace

Open to developers −

− Open to .com”
2023 Apple Worldwide Developers Conference
Case Discussion
Meituan Dianping: China’s Super Service App
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Discussion Questions

1. How does the Groupon business model create value? How does it differ from the
traditional price promotion model (in terms of scalability, data utilization, and joint
promotion across multiple products)?

2. How did Meituan win the "Thousand Groupon War"?

3. Why did Meituan thrive in China's group buying industry, while the creator of the
business model, Groupon, was much less successful in the US?

4. What is the driving force behind the merger between Meituan and Diamping? What
are the complementarities between their businesses?

5. Discuss MD's strategies in the food delivery business in terms of commission rate,
exclusive listing of restaurants, and competition with Ele.me.
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Discussion Questions

6. Discuss the use of big data in the food delivery business in terms of recommendation
system, optimized delivery routes, and the great power of joint pricing and promotion of
multiple products.

7. Discuss how NMD may leverage its strength in the food delivery network into the
business of delivering other goods, and how it may face competition in its core business
of food delivery from other delivery and logistics companies.

8. NMD's aspiration is to become the largest local service platform in China. Discuss the
potential of this business (ie., how service digitalization creates value), NMD's
competitive advantage, and its prospects for success.

9. How does NMD compete with Alibaba for dominance in service super apps?

10. How did NMD successfully enter the travel business and compete with the industry
leader, Ctrip?
Thanks!