Platform mediated markets bring together groups of users in two-sided networks, which is not a new phenomenon. Malls link consumers and merchants; newspapers connect subscribers and advertisers. However, thanks to new technological developments, platforms have become more prevalent recently. The value these platforms have is depending on the amount of users in the network of the platform on either side. This is called the network effect. When platforms are successful they can start a virtuous cycle: higher demand from one side increases the demand from the other side. Because of network effects, successful platforms enjoy increasing returns to scale. This is contrary to traditional business where growth beyond some point leads to diminishing returns.

One of the industries that got disrupted by a platform is the mobile phone industry. In 2007 there were five major companies competing in this market:  Nokia, Samsung, Motorola, Sony Ericsson and LG. They collectively controlled 90% of the industry’s global profit. Then Apple came along and introduced their iPhone. Soon Apple became the dominant force and was responsible for 92% of the profits in the industry in 2015 (Bronnen?). Apple was able to do this, because of the App store. In the App store they connect developers with customers, exploiting the network effect.

Traditional mobile phone manufacturers created value by following a linear series of activities- purchasing inputs, transforming them and selling output- which is called the classic-value chain model (the pipeline model). The App Store has a triangular structure. Developers on the supply side offer apps to consumers on the demand side- this is the first set of bilateral exchanges. Developers must also contract with the platform’s provider, Apple, for permission to publish the apps, this is the second set of exchanges. Finally, customers must procure an app from the App Store: this is the third set of exchanges.

A strength of the App store is that there is no need for a physical shop to be owned and so lowering the costs tremendously. Apple, however, doesn’t own any of the intellectual property of the apps, which could hurt Apple in the long run. Through the App store Apple is able to enter unrelated markets by letting developers develop apps that cross these market boundaries. On the other hand letting everyone develop an app can also be a threat to the App store. If new apps are getting lower in quality, the quality of the App store will decrease as well. This might lead to users choosing a different platform.

In traditional businesses competitive advantage is gained by growing sales. However, with platforms, competitive advantage is measured as the number of interactions in networks. In order to gain strong network effects, it is advised that managers first ensure the value of interactions for platform users, before focusing on the volume of sales. Traditional financial metrics don’t include network effects when calculating a firm’s worth and potential. Platform managers must understand the financial value of their communities and their network effects.

Group 43

https://www.youtube.com/watch?v=FUafPJVGREw

References
Eisenmann, T., Parker, G., and Van Alstyne, M.W. 2006. Strategies for Two-Sided Markets. Harvard Business Review 84(10) 92-101.

Eisenmann, T., Parker, G., and Van Alstyne, M.W. 2009. Opening Platforms: How, When and Why? in Platforms, Markets and Innovation, Gawer, A. (ed.), Northampton, MA: Edward Elgar, pp. 131- 162

Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. 2016. Pipelines, platforms, and the new rules of strategy. Harvard Business Review, 94(4), 54-62.

Rysman, M. 2009. The Economics of Two-Sided Markets. Journal of Economic Perspectives 23(3) 125–43.