Modern Monopolies by Alex Moazed and Nicholas Johnson

Summary
  1. Platform companies generate value by using technology to facilitate exchanges between groups which benefits all sides and helps create new markets and expand old ones. Moazed and Johnson walk through how to build, spot and optimize platform companies in this new exciting technological era
Key Takeaways
  1. Platforms are a business model – a holistic description of the way a company creates, delivers, and captures value rather than simply a piece of technology. Platform business models often use modular modification and this leads to incorrectly use of “platform” – computing platform, product platforms, industry platforms and platform as a services are all examples
    1. They don’t own the means of production but rather create the means of connection
    2. Reduce transaction costs – search and information, bargaining, enforcement costs
    3. Encourage both sides to innovate into complementary services and consumers can also be producers
      1. Exchange vs. Maker platforms – eBay vs YouTube
    4. The complexity of the core transaction should be extremely low
    5. Commoditized industries have consistent and transparent pricing and a focus on increasing transactions
    6. Platforms do not equal technology; they have been around for thousands of years (bazaars)
    7. Platforms don’t even try to guess what customers want, they simply facilitate interactions
    8. Platforms allow groups to exchange value amongst themselves and therefore what a company owns is less important than the resources it can connect to. They create communities and markets that allow users to interact and transact. These characteristics allow platforms to expand at a pace unprecedented in human history, able to grow exponentially rather than linearly
    9. Platforms are partly so powerful because they bring hidden demand and supply into the market, therefore expanding the overall pie. Many more people use Uber than ever used taxis because it has become cheaper, more convenient and faster
    10. Most important aspect to get right is the core transaction – the set of actions producers and consumers must complete in order to exchange value. Facilitating the core transaction is the way that platforms create value
      1. At a high level, the core transaction has the same basic set of four actions
        1. Create – a producer creates value or makes it available to be consumed through the platform
        2. Connect – in every transaction, one user takes an action that sparks the exchange by connecting with the other party
        3. Consume – once consumers find the right match, they can consume the value created by the producer
        4. Compensate – consumers create value for the producer in exchange for what they consumed
          1. There is more than money to compensate – likes, reviews, ratings, shares, comments, follows, etc.
    11. 4 Core Functions – like the core transaction, the four functions evolve as a platform expands
      1. Audience building – build a liquid marketplace by attracting a critical mass of consumers and producers
      2. Matchmaking – connect the right consumers with the right producers in order to facilitate transactions and interactions. As the network grows, the task becomes exponentially more complex
      3. Providing core tools and services – build tools and services that support the core transaction by lowering transaction costs, removing barriers to entry and making the platform more valuable over time through data
      4. Creating rules and standards – set guidelines that govern which behaviors are allowed and encouraged and which are forbidden or discourage
  2. Risks
    1. It is incredibly hard to overcome the chicken and the egg network problem to reach critical mass. Until critical mass is reached, it is very hard to convince consumers to join and therefore producers in a negative cycle.
    2. Platforms don’t control the inventory
    3. Platforms don’t own their most valuable asset – their users
  3. Network Effect – present when the behavior of one user has a direct impact on the value that other users will get out of the same service. Networks are much harder to duplicate than features and many believe are the strongest economic moat of all
  4. Linear business – value flows linearly through the supply chain to the customer
  5. Battle of devices has become a war of ecosystems – generally winner take all
  6. When information processing and storage costs decline, the size of firms can increase as they can now manage much more information and make better decisions and further reduce transaction costs
  7. Connected Revolution – Four key changes flipped the world of business strategy in the late 2000s – the democratization of processing power, the declining cost of communication, the rise of ubiquitous connectivity and sensors and growing returns to scale on data analysis
  8. Loosely organized individuals can substitute entire organizations (i.e., Wikipedia)
  9. Today, often the most important resources are external to the organization, the ecosystem. Value has moved from creating products and services to facilitating connections between external producers and consumers, becoming the center of exchange. Key value add is the curation and management of the network. The firm no longer invests in production but rather in building the infrastructure and tools to support and grow a networked marketplace or community
  10. In essence, platforms are correcting market failures by more efficiently allocating resources
    1. Local knowledge is local no more and this leads to the improved possibility and efficiency of central planning
  11. Software alone is a commodity but the moat comes from a network of users, transactions or data
  12. Platforms tend to be more richly valued as they have faster growth, higher margins and higher returns on capital
  13. Platforms remove high fixed costs and bring zero marginal cost to the supply side. They become exponentially more efficient the larger they become as expenses don’t grow as fast as revenue does
  14. Finding the right market is even more important for platforms than for linear businesses because they need large markets to dominate
  15. Mostly winner-take-all but if users can switch easily the network effects weaken and the market can therefore support more than one platform
  16. Monopolistic because of usage and participation, not ownership like in the past. Platforms are natural monopolies as many platforms would lead to higher costs (of some sort) to users
  17. Regulation – it is important for government regulation to not limit the market power of these platform businesses – a move that would likely diminish overall consumer welfare – but rather to address the behavior of these businesses in specific areas of concern
  18. Biggest mistake for new platforms is trying to build multiple core transactions at once
  19. The importance of user-led innovation for platform businesses means that the traditional software company approach of building a complex, fully featured product before going to market doesn’t make much sense. Platforms should start with the simplest possible system and build from there
  20. Dynamic pricing can help create balanced, manageable growth
  21. Focus more on producers as they are more limited than consumers in a large market
  22. Find established networks to tap into
  23. Twitter is not a social platform like Facebook but a content platform
    1. Will have to solve for spam and harassment with better rules and policies in order to thrive
    2. All platforms must solve for the tendency for diminished quality as the network grows through ratings, rules, policies
  24. Important to replace individual trust with trust in the platform
  25. Tools and Services
    1. The distinction between tools and services has to do with what a platform chooses to centralize. Tools are self-service and decentralized. Anyone can use them and they don’t require ongoing involvement or assistance from the platform. Tools typically include much of the technology and software products that will help users create value connect with each other
    2. Services are centralized, and require continued involvement from the platform. Customer support is the most common example and it’s a service most platforms have to offer
    3. Tools or services that don’t line up with one of the four steps in the core transaction are often unnecessary and platform entrepreneurs often make the common mistake of trying from the start to add every tool that they think users might want
  26. Designing a platform is mostly about sociological insight and continuous behavior design
  27. Adding secondary transactions is a key way platforms scale
  28. Law of Chatroulette – when left unchecked, a network of sufficient size will naturally deteriorate in its quality of users and usage
  29. Facebook surround strategy – if a competitor had established a foothold in a certain school, Facebook would open not only at that school but on as many nearby campuses as possible
  30. A big mistake is to think that any new user is as good as any other but this is not true and means that not all growth is equally valuable and at times each new user can have a negative effect on other users. Not every potential connection in a network is relevant and some users are more valuable than you think. In other words, most network effects are local, not global
  31. A large network isn’t a moat if it is polluted with bad actors and largely removes first-mover advantages. While important, growth is not an end in itself and while incumbents have advantages over newer, smaller entrants, it only matters if it is sustainable
  32. Platforms are path dependent, the types of users your network will attract in the future depends on the composition and behavior of your network’s existing users. This path-dependent nature of networks makes platform design especially crucial early on. Who uses a platform at the start can have a big effect on its growth trajectory. You have the most leverage to shape your community and its culture when your network is still forming. A common way for new platforms to accomplish this is to limit participation to a high-value subset of users at the start. Quality begets quality
  33. Network effects ladder – the five steps on the ladder dictate the quality of a platform’s network: connection, communication, collaboration, curation and community
  34. Coordination problem – it is impossible to get everyone on each side of the network to all agree to join the network at the same time to benefit everyone. This problem is solved by incentivizing users to join via monetary subsidies, product feature subsidies and/or user sequencing (prioritizing the acquisition of certain user groups that others will want to interact with)
  35. 7 ways to solve the chicken and the egg problem
    1. Monetary Subsidies
      1. Provide security through a large, up-front investment
      2. Cooperate with industry incumbents
    2. Product Features
      1. Act as a producer – early on, platform produces own content
      2. Tap into an existing network – digital or otherwise (sororities, clubs, etc.)
    3. Monetary Subsidies and Product Features
      1. Attract high-value or celebrity users
      2. Target a user group to fill both sides
      3. Provide single-user utility – attractive enough for one side to join even if other side never does
  36. Trying to emulate the success of these types of businesses today without understanding the competitive landscape is a recipe for failure
  37. How to spot platform opportunities
    1. Look for technology that reduces transaction costs and removes gatekeepers
    2. Look for implicit or underserved networks – build on top of existing networks and behaviors; untapped sources of supply
    3. Look for large, fragmented sources of supply
  38. Potential industries where platforms will move next – healthcare (wearables especially), finance, Internet of Things
What I got out of it
  1. Great overview of what the platform business model is, how to solve the inherent chicken and egg problem and why platforms are so powerful and world-changing