Platforms or Two-sided markets
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(Stanford BUS-21)Martin Westhead
Mastering Marketing
Platforms – Two/multi-sided markets
How to make money by giving things away
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Overview
Theory of Two-sided markets (Platforms) Platform Examples Strategic Challenges Free Platforms
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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
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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)
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How Platforms are Different
Multi-Sided Platform (MSP)
Conventional business
MarketSide 1
MarketSide 2
$ $
Supplier Customer$ $
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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
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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
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Two-sided Market Interactions
MarketSide 1
MarketSide 2
Cross-SideNetwork Effect
Same-SideNetwork Effect
Multi-Sided Platform (MSP)
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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
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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
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PLATFORM EXAMPLES
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Platforms: HMO
Platform
HMO
DoctorsPatients
Care facilities
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Platforms credit cards
Platform
Credit card networks
Card holder Bank
Vendor
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Platforms Games Console
Platform
Games Consoles
PlayersGames writers
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Platforms: Shopping Mall
Platform
Mall
Shopper Store
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Shared platforms
Platform
Standards for car fueling
Cars Gas Station
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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
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PRICING IN TWO-SIDED MARKETS
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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
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Independently maximize each market
Pric
e
Quantity
Pric
e
Quantity
Neglects critical network effects
Side 1: Consumer Side 2: Business
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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
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STRATEGIC CHALLENGES IN TWO-SIDED MARKETS
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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FREE PLATFORMS
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Economics of Free Service
Adding a user- Increases value of Platform- Adds costs
When
Value > Costs
It makes sense to offer service for free
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Understanding the value of new users
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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
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Use Case: Glam Media
AudienceAdvertiser
Blogger
Content $
Content
Attention
$
Attributed syndication- Site owner- Content creator- Referrer- Network
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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
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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
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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
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PLATFORM BUSINESS MODELS
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Platform business models
Give women free admission, charge men
Bars, singles clubs
Give children free admission, charge adults
Museums
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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
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Platform business models
Give away content, make referral fees
Amazon associatesGive listings charge for premium search
Match.com
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Platform business models
Give away content, sell stuff
Slashdot/ThinkGeek
Give away content, charge advertisers to be featured in it
Product placement
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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
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Summary
Theory of Two-sided markets (Platforms) Platform Examples Strategic Challenges Free Platforms