Platform Business - How Do They Create Value?

So what exactly is a platform anyway? In the most basic sense, a platform is a digital space that connects two or more users and facilitates some interaction between them that creates value. For most platforms, this interaction involves an exchange of something between a producer and a consumer. Depending on the platform, that something could be a product, a service, or digital content. Unlike most businesses, platforms are not directly producing these goods or services themselves. Instead, they serve as facilitators, bringing together previously disconnected users and giving them tools to interact between themselves. In 2022, 5 of the 10 most valuable companies in the world had platforms at the core of their business. So why are simple facilitators such valuable businesses? The magic ingredient is the network effect. Since the platform exists to facilitate interactions between users, each additional user exponentially increases the number of potential interactions. This is easiest to see with social media platforms, because all users are both producers and consumers of content. One user by themselves on Facebook is not that valuable, as no one can see their posts. But each additional user can potentially interact with every previous user. And each additional interaction is even more value created by the platform. But what about networks where there is a clear distinction between producers and consumers? These two-sided networks still have strong network effects. Take Uber. When more riders, the consumers, join the platform, more drivers, the producers, want to join, as they'll make more money. As more drivers join, this decreases the wait times and fares for the riders, which makes the platform even more appealing to new riders. This positive feedback loop creates a virtuous cycle, which has been the key driver of the rapid growth of platform businesses. However, it's not the only one. Platforms have few physical constraints. No need to build production plants or local branches to acquire customers. Most of the work of the core interaction is outsourced to users themselves, allowing platforms to operate with leaner, more efficient teams. Lastly, given their digital nature, there are very low marginal costs for each additional user. Together, these factors can lead to astronomical growth of platform networks in a very short time. For comparison, it took over 20 years after the introduction of televisions for there to be 50 million users. Facebook got there in three years. And more recently, WeChat did it in one. And once these networks are established, they can be very difficult to break apart, creating strong competitive moats. But it's not just the platform businesses themselves that are benefiting. Platforms create massive value for the users themselves. Compared to traditional linear value chain businesses, digital platform businesses tend to offer consumers more choice, lower cost, and more convenient experiences. This is in addition to the value offered to the producers, who frequently were not producing anything before the platform, and now have access to a massive customer base.