platforms or two-sided markets
DESCRIPTION
This lecture describes the Platform model or Two-sided Markets. Platforms serve multiple customer groups and benefit from network effects that take place with and between those groups. Businesses based on Platforms are able to adopt innovative pricing structures in which one side subsidizes another. When the marginal costs are near zero it can be practical to drop the subsidized price all the way to zero.TRANSCRIPT
(Stanford BUS-21)Martin Westhead
Mastering Marketing
Platforms – Two/multi-sided markets
How to make money by giving things away
Overview
Theory of Two-sided markets (Platforms) Platform Examples Strategic Challenges Free Platforms
THEORY OF TWO SIDED MARKETSStrategies for Two-Sided Markets by Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstynehttp://en.wikipedia.org/wiki/Two-sided_market
Two-sided market
Platforms with two (or more) user groups Provide each other with
- beneficial network effects
MarketSide 1
MarketSide 2
Multi-Sided Platform (MSP)
How Platforms are Different
Multi-Sided Platform (MSP)
Conventional business
MarketSide 1
MarketSide 2
$ $
Supplier Customer$ $
Externalities
Negative- Air pollution- Competing vendors
Positive- Number of users of
An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit - Wikipedia
Network Effect A kind of externality where value of the
product changes with number of users Examples
- Telephone- Facebook- Twitter
Can be negative- e.g. Traffic congestion
Scale network effect business- Cost fall with scale (nothing special)- Also value increases
Leads to dominant vendors
Two-sided Market Interactions
MarketSide 1
MarketSide 2
Cross-SideNetwork Effect
Same-SideNetwork Effect
Multi-Sided Platform (MSP)
Network Effects for MSPs
Same side- Positive – more players => more online interaction- Negative – more sellers => more competition
Cross side- Positive – more games available to players- Negative – more adverts in programs
Must capture cross-side network effects- Avoid: subsidize a side that uses someone else’s paid- E.g. Netscape browser NOT tied to servers
Multi-Sided Platform (MSP)
Platform that facilitates interactions- Architecture – product design and infrastructure- Rules – terms of engagement and pricing
Platforms can be shared e.g. cars and gas stations- Usually no subsidies in shared platforms- Internet makes it easier to own both sides
MSP is not a reseller- Must facilitate direct interaction between markets
Typically, each side has very different requirements- E.g. Credit card customers vs. merchants- Providers may specialize in serving a single side
Key feature: novel pricing and business models- Often one market side subsidizes the other- E.g. Adobe PDF needed to drop reader price to $0 to succeed Hagiu A., Wright J. "Multi-Sided Platforms" Harvard Working Paper 12-024
PLATFORM EXAMPLES
Platforms: HMO
Platform
HMO
DoctorsPatients
Care facilities
Platforms credit cards
Platform
Credit card networks
Card holder Bank
Vendor
Platforms Games Console
Platform
Games Consoles
PlayersGames writers
Platforms: Shopping Mall
Platform
Mall
Shopper Store
Shared platforms
Platform
Standards for car fueling
Cars Gas Station
Why is CNG not more popular?
Compared to gasoline- Cheaper- Safer- Much cleaner- White carpool sticker
Too few fueling stations- Reduced cross-side
network effect
PRICING IN TWO-SIDED MARKETS
Pricing in Two-Sided Markets
In TSM one side can subsidize the other
Traditionally price is bounded- Min: Marginal cost per unit- Max: Customer’s willingness to
pay Look for the biggest rectangle
under the demand curvePr
ice
Quantity
Independently maximize each market
Pric
e
Quantity
Pric
e
Quantity
Neglects critical network effects
Side 1: Consumer Side 2: Business
Collectively maximize both markets
Pric
e
Quantity
Pric
e
Quantity
Side 1: Consumer Side 2: Business
Leverage network effects
Network Effects
Total of red boxes must exceed blue
STRATEGIC CHALLENGES IN TWO-SIDED MARKETS
Strategic Challenges
1. Which side to subsidize?- Who pays and how much?
2. Winner-takes-all or shared?- How to manage winner-takes-all dynamic
3. Threat of envelopment- Competitors can come at you sideways
Challenge 1Which side to subsidize?
Users that are price sensitive
Users that are quality sensitive- Charge users responsible
for quality – eliminates low quality users
Marginal costs- If marginal costs of subsidy
side are low (~$0) pricing becomes easier
- Counter example: FreePC
Other Factors
Same side network effect- Consider excluding users to avoid negative network
effects- Examples
- Covisint – failed due to seller competition- Autobytel – succeed by offering only 1 dealership in a
region
User Brand Value- Marquee users can be key- Celebrities for Twitter/Ning
Price is all about perception
Tom Sawyer- Persuaded his friends to pay
him to paint There are wealthy gentlemen in England who drive 4-horse passenger-coaches 20-30 miles on a daily line in summer because the privilege costs them considerable money but if they were offered a wage for the service that would turn it into work and they would resign – Mark Twain
Reversible business models
From Derek Sivers, founder of CD Baby Night clubs in LA
- Pay to play- Bands crave exposure more than money
Doctors in China - Paid by the healthy- Payment stops when you get sick
Gym in Denmark- Don’t pay if you go every week- Pay when you miss a week
Challenge 2Winner-takes-all or shared platform?
Critical strategic decision either:- Try to dominate the whole
market or- Share the platform
Examples- Windows at the turn of the
century- Xbox and PS- Betamax vs. VHS standards
battle- DVDs
Winner-takes-all market characteristics
Multi-homing costs are high- For at least one side
Network effects are positive and strong- At least for the side with high multi-homing costs
Neither side’s users require special features- Differentiation is difficult or irrelevant
DVDs look like winner takes all
Multi-homing costs are high- Both for consumers and producers
Network effects are strong and positive- More content is attractive to consumers- More consumers is attractive to content producers
Opportunity to differentiate limited- By TV standards
So why did the industry collaborate on a standard?- To avoid replay of VHS vs. Betamax war- Consumers held off purchase until winner declared- Marketing cost to participate in war very high
To win the battle
Require differentiation or cost advantage Plus three other factors:
1. Preexisting relationships with market side(s)2. Reputation for winning3. Deep pockets
First-movers can have an advantage So can late-movers
- Learn from mistakes of others Move fast, but not too fast
- Don’t grow user base faster than you can scale- Manage cash carefully
Challenge 3Threat of Envelopment
Rival platform with same users offers your functionality- Bundled as part of a bigger
offer- Blurs market boundaries
=> convergence Examples
- Netscape vs Internet Explorer
- Real Player vs Windows Media Player
Defenses against envelopment
Change business model- Real changed subsidy market - Charged consumers and provided content “Rhapsody”
Find a “bigger brother”- Real partnered with broadband TV, cellphone co.
Sue- Anti-trust law still open in this area- Real sued Microsoft for $760M- Time-Warner (Netscape) similar awards
FREE PLATFORMS
Economics of Free Service
Adding a user- Increases value of Platform- Adds costs
When
Value > Costs
It makes sense to offer service for free
Understanding the value of new users
Use Case: Adobe PDF
Leveraged existing user base for PostScript Initially charged for both reader and writer Moved reader to Free
- Over 500 million users- Very attractive to content creators
- Everyone has reader
Use Case: Glam Media
AudienceAdvertiser
Blogger
Content $
Content
Attention
$
Attributed syndication- Site owner- Content creator- Referrer- Network
SampleLab: The Store Where Everything is Free
SampleLab (p60)- Store where everything
is Free- Can take up to 5 items per
visit
- $13 membership- $2000 shelf rental for 2
weeks (90 items)- Focus groups – sell
survey data
Series1
Practice FusionFree medical records software
Freemium + Advertizing- $100 for ad free version- 10% adoption
Sell access to data- Longitudinal health records- $50-$250 per patient per
study- 250 patents per doctor
Kill Bill
Free Billing Software Open Source Software
- Available for free- Build a community
Network effects- User base creates credibility- Support network
Make money by- Selling SaaS service- Commercial plugins (App
store)- Verification program
Kill Bill
PLATFORM BUSINESS MODELS
Platform business models
Give women free admission, charge men
Bars, singles clubs
Give children free admission, charge adults
Museums
Platform business models
Give away travel services, get a cut of rental car and hotel reservations
Travelocity
Charge sellers to be stocked in a store, let people shop for free
“slotting fees” in supermarkets
Platform business models
Give away content, make referral fees
Amazon associatesGive listings charge for premium search
Match.com
Platform business models
Give away content, sell stuff
Slashdot/ThinkGeek
Give away content, charge advertisers to be featured in it
Product placement
Platform business models
Give away resume listings, charge for power search
Give away limited “Green” house plans, charge builders and contractors to be listed as green resources
Free Green
Summary
Theory of Two-sided markets (Platforms) Platform Examples Strategic Challenges Free Platforms