Platform Capitalism

The growing emergence of digital platforms has seen the rise of companies such as Alphabet (Google), Uber and Deliveroo grow to global dominance. These companies are becoming ever prominent in society, highlighted by how ordinary terms have been replaced by brand equivalents such as to search the web is now ‘to Google it’ and ordering takeaway is now ‘I’ll get a Deliveroo’.

These companies are disrupting the global economic market through technology-driven innovation, in which investment opportunities are rife.

In this blog I look at the founding concepts of these companies through Srnicek’s work on platform capitalism and how this has presented investment opportunities within the different types of platforms. 

PLATFORMS

All companies mentioned are built on digital platforms, which monopolise and utilise data. For example, Google uses vast data amassed from Internet users and analyses it to produce highly segmented audiences that are more valuable to advertisers. As such, Google derives its value from the ability to harness this data.

Essentially these companies act as intermediaries, such as between customers and advertisers in the case of Google, on platforms that Srnicek refers to as ‘digital infrastructure that enables two or more groups to interact.’

Consequently, these platforms are dependent upon the data that its users produce. Without this, the company can no longer derive a source of value. Therefore, the more users a platform can attract, the more data it will produce which is monopolised and results in an increase in value. This reliance on users is referred to as network effects.

Such platforms must therefore provide value to customers, which will attract them to be a member of the site. For example, Google offers free services such as Gmail and Uber provides a cheaper alternative to taxis with the ease of ordering them via your smart phone. 

PLATFORMS TYPES 

Platforms can be distinguished into five different types of platforms that include advertising, industrial, cloud and lean platforms.

I have already mentioned how advertising platforms use data to create value. On these platforms, data is harnessed to produce high quality audiences that can be sold to advertisers. Good examples are Google as already touched on, along with companies such as Amazon who have large data resources based on customer information via search history and transaction data.

As such, adverting platforms like Amazon can provide advertisers with specific details about customers and improve advertising engagement by providing highly sophisticated target segments.

Another interesting platform type is that of lean platforms, which are populated by companies such as Uber, Lyft and Airbnb. All these companies are essentially asset-less companies or as the name suggests ‘lean on assets’. For example, Airbnb owns no properties and Uber owns no cars. The virtual platforms that these companies control, and the software and data analytics that they produce, are the source of value for the company.

Here data creates value by producing effective returns. For example, Uber can use data to plan the most efficient trips to reduce journey times and hence increase the capacity of trips a driver can take. Additionally, it connects drivers and customers together, producing a market place for the transaction of services or goods to take place. 

FUTURE

The aim for all platforms is to increase its users due to the value add from network effects. This means that for these companies to continue to grow, and hence provide a return on investment, they must continue to provide value to users in order to capture new customers and hence more data. A good example is the recent innovation of the Internet of Things (IoT), Amazon Echo, which has now presented a new source of data extraction via smart speakers.

Furthermore, once customers have been drawn to the platform, there must be sufficient value for them to remain. For example, once you start using Uber it has to remain cheaper than the alternative and produce a large enough supply of drivers in order to meet demand. This again links back to network effects in which the more users you have, both drivers and customers, the more influence the platform will have.

Network effects is therefore vital for these firms to continue to provide value, and hence achieve sustained growth. If platforms lose the power of network effects, the company will be negatively impacted and could ultimately cause the business to close. For example, if none of your friends were on Facebook then there would be no reason to use the platform. In other words, there would be no value-add to you using the site and hence you would stop using the platform.

In conclusion, such platforms can provide returns for the future as long as they continue to innovate and provide sustained value to its customers. Otherwise, it’s a steep slide down for companies that are already trading on a premium.