Why Some Platforms Thrive and Others Don't

Feng  Zhu; Marco   Iansiti

Article | Harvard Business Review | January–February 2019

Why Some Platforms Thrive and Others Don't

Abstract

In the digital economy, scale is no guarantee of continued success. After all, the same factors that help an online platform expand quickly—such as the low cost of adding new customers—work for challengers too. What, then, allows platforms to fight off rivals and grow profits? Their ability to manage five aspects of the networks they’re embedded in:

• network effects, in which users attract more users
• clustering, or fragmentation into many local markets
• the risk of disintermediation, wherein users bypass a hub and connect directly
• vulnerability to multi-homing, which happens when users form ties with two or more competing platforms
• network bridging, which allows platforms to leverage users and data from one network in another network

When entrepreneurs are evaluating a digital platform business, they should look at these dynamics—and the feasibility of improving them—to get a more realistic picture of its long-term prospects.

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Citation:

Zhu, Feng, and Marco Iansiti. "Why Some Platforms Thrive and Others Don't." Harvard Business Review 97, no. 1 (January–February 2019): 118–125.

As platform owners continue to expand their ecosystems, many of them have started to provide consumers with their own complementary applications. These moves position the platform owners as direct competitors to their complementors. This paper surveys empirical studies that examine the direct entry of platform owners into complementors’ product spaces. It finds that both the motivation and impact of such entries on complementors are multifaceted. The motivation behind platform owners’ direct entry goes beyond value capture, and the impact of platform entry on complementors varies across empirical settings. It identifies several future research directions that can help advance our understanding of the relationships between platform owners and complementors.

While some platform markets exhibit strongly interconnected network structures in which a buyer is interested in purchasing services from most providers, many platform markets consist of local clusters in which a buyer is primarily interested in purchasing services from providers within the same cluster. We examine how network structures affect interactions between an incumbent platform serving multiple markets and an entrant platform seeking to enter one of these markets. We find that having more mobile buyers, which increases interconnectivity among markets, reduces the incumbent’s incentive to fight and increases the entrant’s incentive to expand. Incumbent profits increase with interconnectivity. When advertising is inexpensive and mobile buyers consume in both local markets and the markets they visit, greater interconnectivity increases the entrant’s profit, thus encouraging entry.

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Why Some Platforms Thrive and Others Don't

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