Uber offers chastening lesson for platform businesses of the future

IT has become accepted wisdom in the tech world that the easiest path to a fortune is to set up a digital platform. Bringing together different sets of customers with matching needs in a multi-sided, online market can be a be a low-capital, high-margin proposition.

No wonder so many tech start-ups try to insert themselves as marketwide intermediaries. "Platformania" is the word coined for it in a new book on the subject, called The Business of Platforms.

Written by three veterans observers of the tech industry - US academics Michael Cusumano and David Yoffie, along with Annabelle Gawer at the University of Surrey - it highlights the characteristics and strategies the successful companies have in common, while also warning that many of today's platforms "are not sustainable businesses".

Platformania is understandable, though there are certainly extra risks to this type of business. The authors are able to count only 43 platforms among the top 2,000 global companies. By definition, most platform wannabes fall by the wayside. Also, the people who rush in first fail: in almost all cases, the companies that come behind them end up the winners.

But the returns make up for it. By almost any measure, platform businesses have "performed extraordinarily well", say the academics, even when you control for the outsized impact of the tech giants. Platform companies generally employ half the number of people, grow at twice the rate and have much fatter profit margins.

But not all platforms are created equal. Plenty of pitfalls exist in trying to harness the network effects and other characteristics of multi-sided digital markets. Also, as the authors warn, the golden age of untrammeled growth for the most successful online intermediaries is receding.

The academics identify two types of platform. The first, known as innovation platforms, act as the technologPrakash Sakpal, economist at ING Asia, pointed out that Singapore is among the front-line Asian economies to face the brunt of the recent escalation of trade tensions between the world's two largest economies.

y foundations on which other applications are built - like Microsoft's Windows, Google's Android and Amazon Web Services. The second - called transaction platforms - are marketplaces that bring together buyers and sellers, or advertisers and audiences.

Combining both types in the same company has boosted the market power of the big tech companies, the authors say - while also increasing their strategic complexity and posing difficult questions for regulators.

Uber's bumpy IPO has been a pointed reminder of both the power and the limits of digital platforms. The car-booking company has benefited from clear network effects - but it also exhibits one of the most common mistakes made by would-be platform operators, the authors say: a failure to price effectively.

Getting a multi-sided platform to take off often involves subsidising one side of the market to attract the other. But in Uber's case, the subsidies have come on both sides, and there is no end in sight to the oceans of red ink.

Besides strategic mis-steps, the biggest challenges to digital platforms now come from courts and regulators.

Take the US Supreme Court ruling against Apple this week in a case involving its App Store. Marketplaces like this claim merely to bring buyers and sellers together, rather than to transact directly. But a majority on the court held otherwise, ruling that buyers had a right to sue Apple for antitrust violations over the 30 per cent cut it takes on app sales.

Besides the obvious implications for other mobile app stores and all the media and software businesses that depend on them, the ruling also raises a broader question for other dominant digital platforms: Will they also come to be seen as more than just a neutral marketplace?

Regulators around the world have also started to tackle the market power and social impacts of some of the most powerful platforms. Recent rules in India that prevent e-commerce companies from acting as both marketplace operator and merchant at the same time, for instance, carry an echo of the EU's first antitrust case against Google, over whether its search engine was fair to rival comparison shopping sites that depended on it.

As the academics say: "The age of unfettered, open platforms is largely over." That does not mean that market dynamics will not still work in favour of digital businesses like this, or that successful platforms will not remain at the top of the list of attractive tech investments.

But it does mean that the business plans of the next wave of digital innovators will have to address much wider issues than simply how to attract complementary sets of users, take a cut from their interactions - and then stand back. FT