The Platform Paradox

How Digital Businesses Succeed in an Ever-Changing Global Marketplace

Mauro F. Guillén

• Publisher: Wharton School Press
• Year: 2021
• ISBN:
  9781613631157
• Topic: Business
• Subtopic: E-Commerce
• Index: Business

Digital platforms are changing the rules of competition in the global economy. Until recently, it took Fortune 500 companies an average of 20 years to reach billion-dollar market valuations. Successful platforms now reach that milestone in an average of four years. In The Platform Paradox: How Digital Businesses Succeed in an Ever-Changing Global Marketplace, Wharton professor Mauro F. Guillén highlights a key incongruity in this new world. Most platforms considered to be successful have triumphed in only some, rather than all, parts of the world. There are very few truly global digital platforms.In more than three decades of studying multinational firms, Guillén has found they often misunderstand key aspects of what it takes to succeed globally, from culture and institutions to local competitive dynamics and pursuing markets in a logical sequence. Seeing multibillion-dollar companies like Amazon flounder in certain markets has led Guillén to research what it takes to create a successful global strategy.In The Platform Paradox, Guillén details: How the COVID-19 pandemic has accelerated digitization and forced companies like Airbnb to pivot and adapt; How platforms like Tinder and Uber have used local advantages to grow rapidly in different countries; How traditional companies have transformed themselves into digital platforms, like Lego undertaking a digital revolution to emerge from bankruptcy and become the "Apple of toys"; and The possibilities and limits to global expansion, as illustrated by companies like Zoom and Skype. In The Platform Paradox, Guillén offers an integrated framework for these platforms to identify and implement a digital platform strategy on a truly global scale.

Chapter 1

The Rise of Digital Platforms

The recorded music industry has gone through a number of technological disruptions since the invention of the phonograph in 1877. Vinyl records and cassettes dominated the post–World War II period. By the 1980s and 1990s, compact discs had taken over. At the turn of the twenty-first century, music downloads and streaming started to grow, eventually capturing two-thirds of the market.³

Music streaming has revolutionized consumption because it is all about access, not ownership. It offers instant gratification and mobility. Most importantly, it is a platform supporting an entire ecosystem that generates value for an expansive number of participants, including listeners, artists, music labels, influencers, and concert organizers. In addition, telecommunications carriers and mobile-phone manufacturers also participate by preinstalling the app of a streaming service to make their offerings more attractive.

But the most consequential feature of music streaming is the wealth of individual and situational information gathered in the process, which can be used to fine-tune offerings, build playlists, and attract advertisers. Most music streaming platforms—Spotify (the global market leader); QQ Music, KuGou, and Kuwo (all owned by China’s Tencent); India’s Gaana; or South Korea’s MelOn—offer seamless connectivity through social media platforms like Facebook or WeChat, enabling users to share songs and their feelings about them, exchange information on upcoming concerts, and pursue their musical tastes. Producing, distributing, and enjoying music have become fully integrated into the platform economy.

Platforms have transformed the ways in which consumers and businesses interact. Today, a digitally connected consumer can listen to a news aggregator while taking a shower, consult the weather, hail a ride, secure a restaurant reservation, hold a remote work meeting, contribute to a philanthropic cause, find a date, exchange photos with family and friends, share the cost of a meal, and listen to music. In doing so, platform users leave a long trail of digital footprints about their daily behavior and whereabouts. The data are relational, in the sense that the user is establishing and acting on relationships with other users and with many different kinds of organizations.

The digital platforms that facilitate such contacts and transactions use a panoply of technologies including big data analytics, machine learning, cloud computing, and the blockchain, among others. All-digital interactions provide a seemingly endless stream of data to feed the nervous system of the platforms, propelling them to even higher levels of reach and accuracy. Their success, however, depends on correctly identifying the nature of those interconnections and on making strategic decisions consistent with them.

What Are Digital Platforms?

Digital platforms come in many shapes and sizes, but they all share three basic features. First, they offer users some kind of technology-enabled interaction for the purpose of obtaining or accomplishing something useful and valuable. This expanding universe includes social platforms like Facebook or WeChat, where people establish and grow relationships with other users; marketplaces like Amazon or Shopify, where sellers and buyers meet; streaming platforms like Netflix or Spotify, where users can enjoy audiovisual content; crowdsourcing platforms like Uber or Airbnb, which offer mutually convenient ways of exchanging value; telecommunications and telework platforms like Zoom or DocuSign; and so on. Some platforms enable individuals, companies, or organizations to build their own platforms within the platforms, as in the cases of social platforms and marketplaces.

The second key characteristic of digital platforms is that the value the platform offers to each user grows with the number of people and/ or companies that use it. This is the famous network effect, which carries three implications:

• In principle, platforms can scale up indefinitely without any signs of performance decline.

• First movers can reap enormous economies of scale and thus create barriers to entry.

• A large user base of loyal and/or captive users creates phenomenal opportunities for revenue diversification.

The third prominent feature of digital platforms is that they can accommodate different kinds of revenue models. On Spotify, for instance, users can enjoy streamed music for free if they are willing to listen to an occasional advertisement. Or they can pay a monthly subscription fee to listen ad-free. One can also use a social platform for free and be able to interact with other users, but pay for premium services. If the platform has two or more different types of users, it is possible to subsidize one of them.

Given the three basic characteristics of digital platforms, most people are surprised to learn that there are very few truly global platforms—platforms with a presence and a user base across the entire world. If it weren’t for government regulation, Google would be an example of a global platform, with a worldwide market share in searches hovering around 90%. Facebook, with a 60% world market share, is also a platform that is nearly global in geographical scope.

Now consider other platforms that, in spite of their multibillion-dollar valuations, are very far from being global. Uber is a behemoth in the United States, disrupting one industry after another—how we get around, how we get our food, and even how cities provide more mobility to their residents. For all its might and potential, Uber has failed to reach critical mass in most African markets, in India, and in China, where it sold its incipient operations to Didi, a huge local competitor.

This is a familiar story for many different kinds of platforms. Spotify, a Swedish company, is the global market leader in music streaming. It has a strong footprint in Europe, the United States, and Latin America but only a token presence in the emerging markets of Asia, the Middle East, and Africa.

The fact that, in spite of their awesome power, most digital platforms find it hard to succeed in every market around the world raises several important questions. Is it due to the uneven and asynchronous worldwide development of the internet? Is it the result of government regulation or barriers to free trade and free investment? Or is it because of the intrinsic characteristics of the platform businesses themselves? The answer to this puzzle is that all three factors play a role in preventing platforms from succeeding across the board, in every national market, and across market segments.

Digital platforms collect, store, and analyze information with the purpose of monetizing it. Data monetization can take place in a variety of ways, but always by bringing users together so that they can interact with one another. Platforms add value in different ways:

• Facilitating relationships among people and organizations (Google, Facebook, Twitter, LinkedIn, WeChat)

• Enabling buyers and sellers to conclude transactions in exchange for a fee (Amazon, Alibaba, Shopify)

• Inviting people to share each other’s assets (Uber, Didi, Airbnb)

• Connecting people for other social, learning, or work purposes (Tinder, Zoom, TaskRabbit)

• Producing and selling content in the form of information, text, audio, and/or video (BuzzFeed, Coursera, Netflix, Spotify)

• Intermediating and disintermediating money and finance (Alipay, PayPal, Venmo)

• Renting cloud services (Amazon, Microsoft)⁴

Digital platforms are not the exclusive province of start-ups. Most large, established companies, and quite a few smaller ones, have created platforms. Many manufacturing firms have created marketplaces for their suppliers and crowdsourcing platforms for solving complex engineering problems, for instance. Within the service sector, all manner of companies have established platforms to interact with customers, suppliers, and society in general, especially in areas like banking, insurance, travel, media, and entertainment. Oftentimes, established firms launch platforms in response to the disruption and competitive threats from start-ups.

The nonprofit sector has also moved swiftly to embrace digital platforms, with the aim of improving the state of the world. Examples include exchange, donation, crowdsourcing, education, service, and sharing platforms. Perhaps the most famous example is Wikipedia, which has transformed the way people access and share knowledge on a truly encyclopedic scale.

Governments have also created digital platforms, though mostly for the purpose of facilitating the relationship between citizens, residents, or taxpayers and various agencies and departments, and only rarely to encourage user-to-user interaction, as in public spheres for political deliberation, policy consultation, and voter engagement. Governments have also created platforms to encourage citizens to engage in appropriate behaviors during emergencies. Needless to say, political candidates use platforms to their advantage. Finally, multilateral organizations such as the World Bank have launched crowd-funding and knowledge-dissemination platforms.

If the Digital Economy Is Not Flat, the Platform Economy Isn’t Either

The COVID-19 pandemic has made readily apparent the longstanding fact that the digital economy is not of one piece. For instance, not everyone can work remotely from home through some kind of digital platform. In the United States, the work-from-home option applies to fewer than 40% of workers.⁵

There is considerable cross-national heterogeneity in terms of the usage of the fixed and mobile internet by socioeconomic group, age, gender, race, and ethnicity. In addition, governments regulate data privacy and intellectual property in different ways, resulting in a situation in which platforms need to adapt to local peculiarities. Moreover, network effects range in terms of geographical scope, from local to global.

The use of different modes of access to the world of information offered by the internet varies widely. While nearly everyone in developed markets has access to a mobile network, in the less developed parts of the world—sub-Saharan Africa, parts of the Middle East, and parts of South Asia—about three in four people have a mobile phone, but only one in three has a mobile broadband connection. The quality of the connection is also unevenly distributed, with 20% of people in emerging markets and 60% in the least developed countries lacking access to an LTE (Long-Term Evolution) or WiMAX (Worldwide Interoperability for Microwave Access) network or better, compared with only 7% in developed countries.⁶

While mobile phones can be used to access most digital platforms, some are easier to use with a computer, especially those that facilitate working or learning remotely. The problem is that access to a fixed broadband connection is much less prevalent, with only a third of people in developed markets having one, 10% in emerging markets, and barely 2% in the less developed parts of the world. Moreover, the proportion of households with a computer hovers around 85% in most developed countries but is as low as 18% in Africa. Another important concern is the cost of broadband access, which can be 10 or even 20 times higher in developing countries than in developed markets, adjusted for the level of income.

These differences have two implications for digital businesses. The world is not flat, at least in the sense that markets cannot be approached in exactly the same way. Not only are some markets limited in their potential, but businesses also need to tailor offerings given the prevalence of different devices, download speeds, and locations where people access online services. The second implication is that local competitors may know how to navigate those constraints better than global companies, which need to resort to alliances or acquisitions to overcome the disadvantage.

There are also persistent differences in access to the digital world by income, gender, and age. In the developed countries, the bottom quarter of households by income tend not to have fixed broadband or computers. Men are 2 or 3 percentage points ahead of women, a difference that can be as high as 15 percentage points in some parts of the Middle East and Africa. This gap limits the labor market opportunities of women, as well as constrains their ability to become entrepreneurs. Given that men and women behave differently as consumers, the gender digital divide is yet another factor for firms to consider in their strategizing. Like gender, age is another important factor behind patterns of digital consumption. The born-digital generations are far more likely to use platforms than are senior citizens, with baby boomers falling somewhere in between.

In addition to differences by country, income, age, and gender, the global development of digital platforms occurs in a landscape in which national borders matter because of regulation. Governments differ massively in terms of their regulatory approaches to web neutrality, data privacy, freedom of expression, freedom of the media, and intellectual property protections. In most cases, large differences by country do not imply a slower growth of platform businesses. However, such variations spell trouble for global platforms while helping local platforms prosper.

Thus, successful strategies in one market may not easily transfer to another in which government regulations are different. Moreover, a business model that works wonders in a market characterized by lax regulations about data privacy and constraints on freedom of expression may not “travel” well in another market with the opposite features. As in any other part of the economy, regulatory fragmentation favors local competitors and multilocal firms that, while operating in different markets, tailor their approaches to each market based on local characteristics.

The Impact of COVID-19

The COVID-19 pandemic has added urgency to the study of digital platforms given how ubiquitous they have become in the age of lockdowns and social distancing. Remote work—which before the crisis was the norm for only about 3% of American workers—became a new reality for tens of millions of individuals. With some companies switching almost completely to remote work, and about one in three Americans performing their duties from home, platforms such as Zoom or DocuSign saw demand for their services explode. In addition, remote learning by tens of millions of students provided an additional impetus to the growth of digital platforms.

The lockdown also introduced new opportunities in ecommerce, completely unanticipated by giants like Amazon or Alibaba. For instance, the Canadian digital marketplace Shopify has attracted many small businesses that sell to consumers within a distance of 15 miles. This kind of short-distance ecommerce has blossomed. Moving nimbly to nurture this new source of business, Shopify offers small businesses a complete suite of services not limited to a mere storefront. It also helps vendors monitor costs, pay bills, plan for deliveries, and optimize overall cash flows.

The shortening of supply chains to make them more resilient to unforeseen events like a natural disaster or pandemic has multiplied the possibilities of using blockchain platforms to manage complex interactions between companies and their suppliers. Given the renewed emphasis on product provenance, the blockchain offers a secure platform to ensure the efficiency of the supply chain and that customers are satisfied with their purchases.

Other types of platforms have also seen enormous growth in the wake of COVID-19, including streaming services like Spotify and Netflix...