CATALYST CODE: HOW TO IGNITE A PLATFORM BUSINESS AND … · Google Search Searchers Advertisers ......
Transcript of CATALYST CODE: HOW TO IGNITE A PLATFORM BUSINESS AND … · Google Search Searchers Advertisers ......
CATALYST CODE: HOW TO IGNITE A PLATFORM BUSINESS AND RULE A PLATFORM-CENTRIC ECOSYSTEM
20 April 2012 Catalyst Course 2012
David S. Evans Founder | Market Platform Dynamics Visiting Professor | University College London Lecturer | University of Chicago
© Market Platform Dynamics Do Not Distribute Without Permission
Platform Businesses Dominate the Economic Landscape
Catalyst Panorama 2
OpenTable: Intermediary between Two Different Kinds of Customers
3
© Market Platform Dynamics Do Not Distribute Without Permission
The OpenTable Business Model Restaurants Pay and Consumers Use it for Free
4
© Market Platform Dynamics Do Not Distribute Without Permission
$100 million revenue in 2010 | $1.35 billion markets cap
The Result: Positive Feedback Effects Fuel Open Table Growth
5
© Market Platform Dynamics Do Not Distribute Without Permission
Ø 27 million reservations in 2011Q4 a month up from 19 million in 2010Q4
Ø 25k restaurants in 2011Q4 up from 20k in 2010Q4
Ø More than 40% yoy growth in revenue
Many “Multi-Sided Platform” Businesses Operate Like This Positive Feedback Effects Fuel Business Growth
6
COMPANY CUSTOMER SIDE A CUSTOMER SIDE B
Windows Users Developers
Google Search Searchers Advertisers
Deutsche Bourse Liquidity providers Liquidity takers
eHarmony Men Women
Paris Match Readers Advertisers
Roppongi Hills Shops Shoppers
American Express Cardhodlers Merchants
© Market Platform Dynamics Do Not Distribute Without Permission
These Multi-Sided Platforms Include Many Massive Global Businesses
7
© Market Platform Dynamics Do Not Distribute Without Permission
Catalysts Create Real Value Providing a Platform Where Customers Can Meet and Transact
8
Platforms can create tremendous value by eliminating pain points in exchange
To ignite, platforms must solve extremely difficult coordination problem
But if do, they can generate tremendous profits through positive feedback effects
Sustaining those profits requires treacherous navigation in an n-dimensional universe of colliding platforms like Google Search (3-sided), Facebook’s Social
Network (4-sided) and Microsoft Windows (3-sided)
© Market Platform Dynamics Do Not Distribute Without Permission
Catalysts, Platforms and Two-Sided Markets Defining Terms
9
(Economic) Catalysts are intermediaries that create value by brining two or more types of agents (businesses or people) together.
(Multi-sided) Platforms are the virtual or physical places that catalysts create to enable multiple types of agents to find and transact with each other and thereby create and exchange value.
Economists sometimes call these platforms Two-sided Markets a term that was introduced in the pioneering work by French economists Jean-Charles Rochet and Jean Tirole.
A customer type is sometimes call a platform “side”.
© Market Platform Dynamics Do Not Distribute Without Permission
The Catalyst Curriculum
10
Catalyst Panorama
How Platform Businesses Dominate the Economics Landscape
Catalyst Defined
The New Economics of Two-Sided Markets
Catalyst Construction
How to Use the Catalyst Toolkit to Build a Profitable Platform Business
Catalyst Ignition
How to Start a Platform Business and Obtain Explosive Growth
Catalyst Competition
How to Compete When there are Colliding Platform Ecosystems
© Market Platform Dynamics Do Not Distribute Without Permission
CATALYST CODE: HOW TO IGNITE A PLATFORM BUSINESS AND RULE A PLATFORM-CENTRIC ECOSYSTEM
20 April 2012 Catalyst Course 2012
David S. Evans Founder | Market Platform Dynamics Visiting Professor | University College London Lecturer | University of Chicago
© Market Platform Dynamics Do Not Distribute Without Permission
Catalyst Defined: 12
The New Economics of Two-Sided Markets
© Market Platform Dynamics Do Not Distribute Without Permission
What Catalysts Do Add Value by Reducing Transaction Costs
13
Catalysts • enable two or more
types of customers,
who could engage in mutually valuable exchange, • to find each other
to transact, • and to thereby create
and exchange value.
© Market Platform Dynamics Do Not Distribute Without Permission
eBay Reduced Transaction Costs People Who Wanted to Sell Pez Dispensers Find and Trade with People Who Wanted to Buy Pez Dispensers
14
© Market Platform Dynamics Do Not Distribute Without Permission
How Catalysts Do It
15
Catalysts provide a physical or virtual platform that enables different types of agents to find each other and transact
Platform
Transact Search Match
© Market Platform Dynamics Do Not Distribute Without Permission
eBay A Platform for Agents to Search, Match, and Transact
16
© Market Platform Dynamics Do Not Distribute Without Permission
Catalyst Value Creation
17
Catalysts create value by reducing
pain points or what economists call “transactions
costs”.
Catalysts reduce transactions costs
by making it easier for
different types of agents to get together and
exchange value.
As a result agents can engage in
mutually advantageous exchange that creates value.
That exchange and the resulting value creation
would have been more inefficient—or perhaps even
impossible—without the catalyst.
© Market Platform Dynamics Do Not Distribute Without Permission
An eBay Example The Miracle of Value Exchange and Wealth Creation
18
Seller values pez dispenser at -$.50 (cost of having junk around)
Buyer values pez dispenser at $2.00
They enter into a trade at $1.00
Buyer gets $1.00 of value (a pez dispenser worth $2.00 minus $1.00 purchase price
Seller gets $1.50 of value ($1.00 plus gets rid of junk which costs $.50)
Total Value of $2.50 created out of thin air!!!!
A 2003 study found that eBay created $7 billion of extra value just for buyers. © Market Platform Dynamics Do Not Distribute Without Permission
Common Features of Catalysts
19
Positive Network Effects
Type A customers value platform more if there are more Type B customers and vice versa.
Pez seller gets more value if more buyers; buyer gets better selection and deal if more sellers
Critical Mass
Need to be enough customers on both side to create value for either.
If few buyers and sellers of Pez dispensers little incentive to join platform.
Money/Subsidy Side
Platforms often give one side a “break” and make their profits for the other side.
Sellers pay commission plus merchant discount for PayPal. Buyers pay nothing.
© Market Platform Dynamics Do Not Distribute Without Permission
CATALYST CODE: HOW TO IGNITE A PLATFORM BUSINESS AND RULE A PLATFORM-CENTRIC ECOSYSTEM
20 April 2012 Catalyst Course 2012
David S. Evans Founder | Market Platform Dynamics Visiting Professor | University College London Lecturer | University of Chicago
© Market Platform Dynamics Do Not Distribute Without Permission
How to Use the Catalyst Tool Kit to Build a Successful Platform
Catalyst Construction: 21
© Market Platform Dynamics Do Not Distribute Without Permission
The Catalyst Tool Kit
22
Platform Concept
Platform Design
Transaction Engine
Prices
Search and Matching Engines
Product Offerings
Governance Rules
© Market Platform Dynamics Do Not Distribute Without Permission
Three Key Questions Platform Concept for Solving Pain Points
23
1. What’s the set of problems that need
to be solved for economic agents?
2. What’s the most efficient solution for
solving those problems?
3. Does the solution create enough
value for customers and platform?
© Market Platform Dynamics Do Not Distribute Without Permission
OpenTable Platform Design Solving Pain Points in Restaurant Reservations
24
© Market Platform Dynamics Do Not Distribute Without Permission
Pricing Is The Key Gets Customer Sides on Board and in Right Proportion
25
Need to get both sides on board Think selling advertising with no readers
Need to get right proportions Think nightclubs with few women
Relative pricing (“the price structure”) is key In practice many platforms have “subsidy” side
© Market Platform Dynamics Do Not Distribute Without Permission
Rules of Thumb for Pricing Structure
26
Higher price
(“Money side”)
Lower price
(“Subsidy side”)
Harder to get
Needed more by other side
More elastic demand
Bottleneck asset
Needed less by other side
Inelastic demand
Economic theory shows that optimal prices may be < than MC, 0, and possibly <0. Below-cost pricing common, in fact.
© Market Platform Dynamics Do Not Distribute Without Permission
Software Platforms a Good Example of Pricing Illustrates Variety of Pricing Structures
27
PLATFORM USERS DEVELOPER COMMENT
Windows Pays Subsidized App developers get API access for free and cheap or free tools
Sony PlayStation Subsidized Pays Users get consoles for no more than cost and game developers pay commissions
iPhone OS Pays Free for free apps Paid for paid apps
Users pay for phones and developers pay commissions on sales through App Store (but not from other revenue sources)
© Market Platform Dynamics Do Not Distribute Without Permission
Platform Offerings
28
Offerings to Create Value for Each Side
More offerings create more value and work like price (iPhone features)
More distinct offerings bring in more customers (sections in newspapers)
Offerings to Promote Interactions and Transactions
Search and matching (eHarmony)
Information (depth of book data for exchanges)
Transactions (Google AdWords)
© Market Platform Dynamics Do Not Distribute Without Permission
Design for Positive Network Externalities Platform Design/Rules Promote Positive Externalities
29
Sorting Devices to Get Right Customers
“Exclusionary vibe” (JDate discourages Gentiles)
“Exclusionary amenity” (Upscale anchor stores discourage low-end shoppers)
Search Diversion
Design rules encourage one type of agent to meet another type of agent who really values them but may not seek out by themselves
Shopping malls with anchor stores at either end
© Market Platform Dynamics Do Not Distribute Without Permission
Design to Mitigate Negative Externalities Reducing Bad Behavior that Reduces Platform Value
30
Rules Prohibitions on actions that could harm other agents (usually those on other side of match/transaction)
eBay has detailed rules for buyer and seller behavior No misleading ads (sellers) and no multiple auctions for same good (buyers)
Detection and Monitoring
Systems to determine if rules are being broken
Facebook has hundreds of employees looking for bad pictures and bad language
Enforcement Platforms have and use “Bouncers Rights” to exclude violators
Google manually reduces ranks of websites that violate rules for 90 days and sometimes delists
© Market Platform Dynamics Do Not Distribute Without Permission
CATALYST CODE: HOW TO IGNITE A PLATFORM BUSINESS AND RULE A PLATFORM-CENTRIC ECOSYSTEM
20 April 2012 Catalyst Course 2012
David S. Evans Founder | Market Platform Dynamics Visiting Professor | University College London Lecturer | University of Chicago
© Market Platform Dynamics Do Not Distribute Without Permission
How to Ignite a Platform Business and Obtain Explosive Growth
Catalyst Ignition: 32
© Market Platform Dynamics Do Not Distribute Without Permission
YouTube Ignited in Late 2005
33
0.000
10,000.000
20,000.000
30,000.000
40,000.000
50,000.000
60,000.000
70,000.000
may 05
jun 05
jul 05
aug 05
sep 05
oct 05
nov 05
dec 05
jan 06
feb 06
mar 06
apr 06
may 06
jun 06
jul 06
aug 06
sep 06
oct 06
nov 06
dec 06
jan 07
feb 07
mar 07
apr 07
may 07
jun 07
jul 07
aug 07
sep 07
oct 07
nov 07
dec 07
jan 08
feb 08
TABLE 1 -- YOUTUBE UNIQUE VISITORS ('000)
YOUTUBE
Get both sides on board
YouTube needed content creators and content viewers
Block and tackle
YouTube tried multiple strategies to increase uploading and viewing of videos
Ignite
Slow growth from February to December 2005 when YouTube shows an inflection point
© Market Platform Dynamics Do Not Distribute Without Permission
Platforms Need Critical Mass to Ignite
34
Critical mass
Critical mass refers to the minimal set of customers on each side that is large enough to attract more customers and result in sustainable positive feedback
Critical mass depends on scale and balance
Probability of customers from two sets getting together and exchanging value increases with the number of customers on each side
Platforms implode if they can’t reach critical mass
If there aren’t enough customers on the other side the probability of advantageous exchange falls and customers don’t join and the early adopters who have eventually leave
© Market Platform Dynamics Do Not Distribute Without Permission
Successful Platform Launch Depends on Critical Mass
35
0
200
400
600
800
1000
1200
0 200 400 600 800 1000
Each point reflects a combination of scale (how many customers) and balance (proportion of customer types)
Critical mass corresponds to a combination of scale and balance that is minimally sufficient to ignite the platform
© Market Platform Dynamics Do Not Distribute Without Permission
Platform Ignition Requirements Reaching One of Possibly Many Combinations of Scale and Balance Based Critical Mass Points
36
Catalytic Ignition and Critical Mass
Side B
D*- Long-run equilibrium
C`
C``
C*
Ignition
Points of critical mass
Movements at starting to achieve critical mass
O
In this example the critical mass points are between C’ and C”. C* is the point that would lead to optimal platform launch. Points to the NW of the vector 0-C’ and to the SW of vector 0-C” would result result in platform implosion.
© Market Platform Dynamics Do Not Distribute Without Permission
B2Bs Died Because They Didn’t Get to Critical Mass No Model to Get the Right Scale and Proportion of Suppliers
37
0
50
100
150
200
250
0 200 400 600 800 1000 1200
Points Show Supplier (X) and Buyer (Y) Combinations for B2B Exchanges (Illustrative Example)
Most B2Bs ended up with Too few suppliers and imploded
Critical mass points that could lead to ignition
© Market Platform Dynamics Do Not Distribute Without Permission
Platform Ignition Has a Stopwatch
38
Limited Time for Reaching Critical Mass
Early adopters have limited patience
Diffusion must be rapid enough for momentum
Competitors, new technology, and market changes can dose ignition
Critical Time Period Depends on Type of Platform
More time if sides can be sequenced (e.g. build up advertisers then gets readers)
Less time if sides much show up simultaneously (dating clubs, exchanges, payments systems)
Evans’s Law of Ignition Timing
Platforms that can’t be sequenced have two years or they’re toast
Completely unscientific law but can’t think of many that were successful with longer fuse and lots died who didn’t ignite in that time
© Market Platform Dynamics Do Not Distribute Without Permission
Platform Failures: Video Sharing Sites That Imploded (13 Largest as of February 2008)
39
Video Sharing Company Feb 04 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08
YOUTUBE.COM 900 4,230 12,669 19,089 25,471 34,413 41,035 44,894 53,521 63,921
MSN Video 5,830 5,003 8,211 9,760 10,921 9,971 14,762 11,738 12,453 16,350 15,414 13,250 15,769 14,488 14,987 13,606 13,543
Internet Broadcasting, Internet Broadcasting Systems 11,620 9,257 9,573 9,393 10,329 12,302 10,709 12,658 12,742 10,898
CSTV: College Sports TV 3,747 5,277 7,383 5,504 4,724 5,797 7,373 5,433 4,370 5,943 8,318 4,804
Yahoo! Video 21,141 22,059 19,802 20,855 23,571 6,467 3,982
EBAUMSWORLD.COM 3,654 3,086 2,947 3,166 3,926 4,365 4,394 5,047 4,453 5,316 5,069 4,280 3,363 3,408 4,894 5,224 3,489
HEAVY.COM 490 759 1,927 2,087 2,970 5,589 5,480 6,208 7,518 6,840 3,391 5,241 5,758 4,349 5,092
DAILYMOTION.COM 436 691 1,298 1,952 3,196 2,751 3,729 3,747
VEOH.COM 207 667 293 784 1,857 3,537 3,457 3,196
ATOMFILMS.COM 732 329 1,359 1,845 1,132 1,371 1,154 1,178 1,257 3,065 1,213 2,057 1,534 2,233 2,576 1,847 2,374
NICK.COM TurboNick 1,870 2,101 1,815 2,106
IFILM.COM 2,522 2,757 2,731 2,873 2,241 2,467 2,876 2,846 3,594 3,275 2,979 3,443 3,484 2,124 2,272 1,753 1,115
BRIGHTCOVE.COM 181 334 2,016 1,418 1,578 1,641 2,736
No separate data available on Google Video which also imploded.
© Market Platform Dynamics Do Not Distribute Without Permission
Foundations of an Ignition Strategy Determining Relative Prices and Value Propositions
40
Who’s Needed Most and Why?
What value is being provided to
each side?
What alternatives does each side
have and what is demand elasticity?
How much is each side valued by the
other side?
© Market Platform Dynamics Do Not Distribute Without Permission
MPD’s Strategic Framework for IgnitionTM
Business Model Getting to Ignition Whose Done It
Sequential entry Get one side on board first, then use it to get the other side on board. OpenTable
SImultaneous entry The platform is opened up right away with both sides on board, usually done when there is an obvious problem to be solved and it is simply making both sides aware
of the business proposition that gets both sides to show up at the same time.
Static precommittment strategy
Make credible commitment to each side that the other side will show up Diners Club
Dynamic precommittment
strategy
Have both sides in play by approaching one side and getting them to agree to show up if there is evidence that the other side is on board. Then, go to the other
side and promise that the side they are most interested in is on board.
Xbox
Basic zigzag Incremental growth. Engage in a variety of strategies to get one side and then the other to join the platform over a space of time
YouTube
Marquee strategy Secure a small number of really influential players on one side or both. Mall of America
Zig zag with self supply
Launch platform by initially providing one side yourself. Palm Pilot
Partner with another platform
Partner with a platform that has the most critical side of your platform already on board.
Android
Developer strategy
Create APIs and give a let developers access the platform to create value for the platform’s customers
PayPalX
These are methods that platforms have used successfully in solving coordination
problems and reaching critical
mass.
The appropriate method depends on
the economic situation of the
particular platform.
© Market Platform Dynamics Do Not Distribute Without Permission
Catalyst Competition: 42
How to Survive, Compete and Disrupt in a Multi-Dimensional Ecosystem
© Market Platform Dynamics Do Not Distribute Without Permission
The Winner-Take-All Myth in Platform Markets Most platforms operate in competitive ecosystems
43
Long-lived platform monopolies are rare
• Many successful platforms face direct competition
Positive feedback effects don’t insure a
single winner
• They limit the number of successful firms but multiple platforms survive by appealing to different types of customers on both sides
Positive feedback effects work in
reverse
• They drive rapid growth but competition can lead to a death spiral when they work in reverse
Only the Smart Worrywarts Survive
The MySpace “Monopoly” Leaders often seem entrenched until they aren’t
44
The long-lived Windows dominance on PCs is the exception to the rule that platform markets usually aren’t winner take all.
Facebook Friendster MySpace 2011 Social Network Analysis Report, http://www.ignitesocialmedia.com
“MySpace is far and away the de facto standard for social
networking and is highly entrenched in the youth culture of
today.”
IMEDIACONNECTION, 2006
MASHABLE, 2006
“We see MySpace as the new
MTV, with one crucial difference: the users are the stars.”
Symmetric vs. Asymmetric Competition Multi-dimensional nature of platforms results in new concepts of competition
45
Symmetric Competition
• Competitors have same number of sides and types of users
• Competitors have similar pricing structures including decisions on money vs. subsidy side
Asymmetric Competition
• Rival has extra side(s); both have same side but one has a different one
• Rival has one side in common but one side different
• Rival has radically different pricing structure
Examples of Asymmetric Competition
46
Enveloping Platform Rival has extra side
• Microsoft has 2-sided user/developer software platform
• Google had 2-sided search/advertising platform plus 2-sided user/developer software platform
• Google could provide free software, Microsoft couldn’t because that was rev source.
Intersecting Platforms Rival has different side
• Tencent provides IM for users, sells advertising
• Qihoo provides anti-virus software for users, sells advertising
• They compete for users by providing different products to attract users but both looking to sell advertising
Different Pricing
• Google provides free software to users, Microsoft doesn’t
• nytimes.com charges viewers, cnn.com doesn’t
• Developers don’t pay to develop PC games, but do to develop console games
Overtaking the Leader When Competing on the Same Sides Entrants have several strategies for displacing or at least competing with the leader
47
Differentiate by serving subsets of users on each side
better
Feature competition that increases value platform
participants can exchange—better search, matching, and
exchange
Identify better pricing structures that create stronger positive
feedback effects
• Square entered by identifying tiny merchants and cash users
• New financial exchanges succeeded through more efficient computerized trading mechanisms
• Munsey Magazine in late 19th century dropped prices dramatically to users thereby dramatically increasing demand for advertising.
Enveloping the Leader by Adding a New Side Adding another side encircles the incumbent platform and boxes the leader in
48
Major disruptive innovation involves bringing another side to a platform
Provides another source of value to existing sides
Enables n+1 sided platform to lower prices/increase value to the n-sides of the incumbent
Android enveloped iPhone initially because it had the prospect of search-ad revenue and therefore could enter at a low price
Envelopment Strategy Adding a side can surround a rival platform
49
Users
Dev
elop
ers
Users
Deve
lope
rs
Staying in the Lead when Competing on the Same Sides Incumbents can keep the competitors far away—or at least try
50
Feature competition
• Keep adding and improving features that increase the value platform participants can share in
Focus on strategies that make it hard for new firms
to attract customers
• Make one or more sides very sticky via platform-specific investments
• Create a side that requires platform-specific investments
• Example: applications are sticky and are hard for entrants to duplicate quickly
Lock up liquidity
• Make if difficult for competitors to attract critical mass by
• Locking up customers on one or both sides with long-term contracts or
• Making customers very sticky
Most of all keep growing on both sides as this increases value of platform compared to all followers
Staying Ahead When Rivals Go Asymmetric Asymmetric competition is highly treacherous for incumbents
51
Differentiation Create value prop so strong that lower price of rival doesn’t matter
(WSJ creates unique value so it can charge subscribers)
Price discrimination—lower price to customers most at risk
Expand Platform to Achieve Symmetry
Integrate into additional side to compete directly
(e.g. Apple into ads, Google into hardware)
Expand Platform to Achieve Another Revenue Stream
Integrate into a new side that rival lacks but than can provide similar offsetting revenue
© Market Platform Dynamics Do Not Distribute Without Permission
Only the (Smart) Worrywarts Survive Successful platforms are tough but not impossible to beat
52
Constantly worry about the
competition; no matter how successful you are it is possible for you to lose your
lead
A rival has even faster
positive feedback
loops
You have a reverse positive
feedback
loop
Not so clear the paranoid survive
Be smart about what you worry about and
how you react
The Microsoft Syndrome: paranoia
over every possible platform
competitor resulted in
missing major disruption
Lots of rivals have no
chance of success and you shouldn’t waste effort
Realistic assessment of
who could overtake you
Focus a lot on competition
from the n+1 dimensions
CATALYST CODE: HOW TO IGNITE A PLATFORM BUSINESS AND RULE A PLATFORM-CENTRIC ECOSYSTEM
20 April 2012 Catalyst Course 2012
David S. Evans Founder | Market Platform Dynamics Visiting Professor | University College London Lecturer | University of Chicago
© Market Platform Dynamics Do Not Distribute Without Permission
Catalyst Conclusion 54
© Market Platform Dynamics Do Not Distribute Without Permission
© Market Platform Dynamics & Evans & Schmalensee, The Catalyst Code (HBS Press, 2007)
The Catalyst FrameworkTM
© Market Platform Dynamics Do Not Distribute Without Permission
Concluding Thoughts
56
• All about solving pain points between agents • Can have explosive growth through positive feedback • Hard to design because solving many masters • Hard to ignite because coordination makes it difficult to achieve critical
mass
Catalysts can create tremendous value for themselves and their customers
© Market Platform Dynamics Do Not Distribute Without Permission
For More Detail and Background Catalyst Reading List
57
Evans and Schmalensee, Catalyst Code: The Strategies Behind the World's Most Dynamic Companies Harvard Business School Press.
Evans, Platform Economics, CPI Press.
Evans, “How Catalysts Ignite: The Economics of Platform-Based Startups,” in Gawer, Platforms, Markets, and Innovation, Elgar Publishing, 2009.
Evans, Launching New Payments Businesses: The Role of Critical Mass and Ignition Strategies, PYMNTS.com, 2010.
www.catalystcode.com
© Market Platform Dynamics Do Not Distribute Without Permission
Thank You!
58
DAVID S. EVANS
Market Platform Dynamics | Founder
Mobile: +1 617 320 8933
Skype: david.s.evans
© Market Platform Dynamics Do Not Distribute Without Permission