How Data Informs Business

Digital Platform Dynamics

Platform dynamics have business and policy implications. The dominance of a platform, arising from network effects (winner-takes-all), raises competition concerns, although some argue that dominance can benefit consumers through greater convenience. Often, the achievement of critical mass drives platform dynamics.

Some authors propose a system dynamics simulation model of platform competition, highlighting three cases. In the "chicken-and-egg" scenario, no platform achieves critical mass. In the "winner-takes-all" scenario, a vendor locks the participants into one dominant platform. The final scenario ­– "winner takes some" ­– is characterized by the "collaboration and competition scenario in which several platforms coexist in balanced competition".

Various models have focused on the conditions for multiple platforms to grow first, and then to coexist in a competitive market. Both considerations matter in developing countries, and have policy and regulatory implications. Network effects, "critical mass" factors, and reversibility of participation create entry barriers and are likely to be more pronounced in developing countries.

Competition among multisided platforms depends on several factors, including network effects, and "single-homing" versus "multi-homing" scenarios. If an agent uses only one platform, the agent is said to be single-homing; if the agent uses multiple multisided platforms, the agent is multi-homing. Network effects may lead to situations in which a proprietary platform may be socially desirable, as it partially internalizes two-sided indirect network effects and direct competitive effects on the producer side. Ruutu, Casey, and Kotivirta indicate that "if platform adopters are able to react quickly, achieving a critical mass may be difficult because the platform firms cannot accumulate enough resources for sufficient platform development".

Competitive dynamics can be altered by "platform envelopment," a strategy through which an entrant platform can rapidly gain market share by entering another platform market and harnessing its network effects by offering a multiplatform bundle. An example would be Google's offer of various services around its core search platform, including Google Translate (translation software), Google Checkout (online payment), Chrome (browsing), and Google Docs (productivity software). The services are often offered free of charge to the user (that is, paid by advertising), whereas other competitive service offerings may require payment.

The initial growth phase can be accelerated through open interfaces (that reinforce cross-side network effects), as well as by the ability to transfer user data among competing platforms. These tactics may lead to the envelopment of local service offerings in developing countries. They thus raise competition policy concerns as local companies in these countries often lack economies of scale to respond in kind. This may explain, in part, why the largest internet companies are so clustered in the United States and Asia (see figure 5.3).

Different dynamics can emerge and mutate over time. In the U.S. market for online platforms for books, for example, eBay acquired half.com, eliminating its most direct competitor. However, it did not prevent other platforms, notably Amazon .com (new and second-hand books, and a wide range of other products and services), from dominating the same market segment, deploying a different business model.

Will competition among platforms in emerging markets follow a similar dynamic? The choices may be more limited.

Network effects and critical mass considerations may skew competition toward foreign platforms. The huge size of the domestic Chinese e-commerce market was a factor leading to the emergence of Alibaba and Alipay as global leaders, while the ability to cater to domestic demand allowed Yandex to retain two-thirds of the addressable market in Russia. But few developing countries have such economies of scale, and there are many cases in which local platforms do not emerge as winners. As noted, the fear of a winner-takes-all scenario dominated by foreign platforms seems to be a major concern in many markets.

Partnership is another business strategy undertaken by digital platforms, especially in emerging markets. Incentives for global platforms to localize their businesses by partnering with a local business partner can also be an option. In China, Uber decided a better strategy was to sell out to its local partner, Didi Chuxing, and in Southeast Asia it is selling to Grab in exchange for a stake in the combined company. The common shareholding in all three companies of Japan's Softbank, now the Visions Fund, seems to have played a part here.

Access to user data is of vital value for online platforms to keep advertisers onboard and is a crucial tool for competing. Owning the end customer's data is akin to owning the market. This is one reason traditional freight forwarders are being squeezed by vertically integrated e-commerce companies. Online platforms have an interest in locking out rivals that may threaten their market dominance. This makes data portability ­– the ability to transfer a user's data from one platform to another ­– a critical policy issue. Data portability benefits users and secondary players in the market, but will most likely be opposed by the dominant players.

Digital platforms in developing countries

A study of digital platforms in emerging markets provides significant insights into business leaders and policy makers. Broadband and smartphone access will have a direct impact on network effects and platform diffusion; the maturity of the advertising market can exclude or boost advertising-based platform models; conversely, the maturity of digital payments, such as mobile money, in emerging markets may allow firms to determine the development of transaction-based models. The interplay of rapidly changing enabling conditions in emerging markets and rapidly changing business models (figure 5.4) will affect the three main drivers of platform dynamics: network effects, localization, and envelopment. To some extent, it will also determine whether winner-takes-some or winner-takes-all trends dominate.

Figure 5.4 A methodological approach to assessing digital platforms in emerging markets