Platforms or Two-sided markets

(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

Facebook

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

Linkedin

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