In the platform economy, quality control beats large numbers

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The platform economy has come to dominate business, with Amazon, Facebook, Google, Apple, Airbnb, Uber and many other leading companies playing an important part of this trend. Many new companies are also trying to go the platform route by creating their own platforms. Often the main objective has been to maximize the number of users and offerings on the platform. A new doctoral thesis challenges this simple model.

In his thesis Strategic interaction in platform-based markets: An agent-based simulation approach [PDF], researcher Pontus Huotari has studied and simulated platform economy models. In his research, he has looked at markets such as game consoles, mobile and computers. In those markets we can see how products and their related platforms like Apple, Sony PlayStation and Windows have been big winners, while other platforms like Windows mobile, Atari and Xbox didn’t do so well. He has also simulated markets for these kinds of platforms.

I recommend everyone read the thesis to get detailed conclusions. Here, I will simplify some conclusions based on the material and discussions with Huotari.

In essence, it appears the platform economy doesn’t function like a rational, pure, perfect market. In that sense, we can argue it is like many markets in the world. In practice, this means it often makes sense for the platform to control and guide the market. As an example, we can think of how Apple controls its App Store offering, and how PlayStation has controlled the quality and offering of games.

When Apple launched the iPhone, it didn’t open its App Store immediately. Apple wanted to offer the first iPhone applications itself. In this way, it was able to control the quality of the apps and the user experience in the first phase. Android is much more of an open platform, but at the same time, it is important to remember that Android is not a similar platform business for Google as the App Store is for Apple. Relatively speaking, the iOS app business is much larger than the Android app business.

We have many other examples about control of platforms. For example, Amazon in principle offers a platform for all kinds of sellers, and therefore a larger range of products to its users. But in practice, Amazon also controls its offering and the quality of third parties. We can also see how Airbnb uses different levels of verifications as quality control. Meanwhile, Uber has had some very public issues with the quality of its drivers, which highlights the importance of quality.

Many successful platform companies also have their own offerings on the platform – they are not totally dependent on independent third-party suppliers. For example, Apple and Google offer their own apps; Microsoft sells Windows PC software; Amazon has its own vertical stores; and even Uber has in some cases worked to guarantee a car fleet, and works with its own self-driving car offering. At the same time, it is clear that in-house apps and offerings by themselves is typically not enough – third parties are needed to expand offerings and thus offer a wider variety of them for different kinds of customers.

I have seen the same phenomenon in alternative finance and FinTech services and platforms. If we look at crowdfunding and p2p lending platforms, for instance, the pure open-market approach hasn’t worked very well. Typically, it helps if the platform has quality control of investment opportunities and loan applications. It also makes platforms more attractive if they can guarantee a certain investor base, such as lending platforms that have started to work with institutional investors. The same model seems to also work for FinTech platforms. For example, a finance back-office platform must offer certain high-quality core services, have quality control for all available services, and then start to expand third-party services to better serve the various needs of different kind of customers.

As such, the conclusions of the study are not very surprising – they are in line with many other empirical market and business experiences. We probably often hold quite idealistic, perfect-market illusions of the platform economy, where only the invisible hand of the market is needed, as Adam Smith described the pure free market.

The platform economy is becoming a fundamental part of all industries and businesses. It is excellent to see more research and studies being conducted to better understand how it works, what are the critical success factors, and how to simulate different scenarios. This doctoral thesis raises many relevant points about control of the market, the value-add of the platform model, the importance of quality and how it is not a winner-takes-it-all model. I hope to see many more studies and books about this important topic.

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