Thursday, October 5, 2017

Networks, platforms, and business value

From the book Modern Monopolies:
Networks are the new aggregator of business value....when the world becomes more connected, what a company owns matters less than the resources it can connect to. Today's most valuable businesses are those that can build and orchestrate large networks, not those that can aggregate and centralize large amounts of resources under one roof. In the old model, scale was a result of investing in and growing a business's internal resources. But in a networked world, scale comes from cultivating an external network built on top of your business
And a related, and complimentary, excerpt from the work of Ben Thompson at Stratechery:
Because aggregators deal with digital goods, there is an abundance of supply; that means users reap value through discovery and curation, and most aggregators get started by delivering superior discovery. 
Then, once an aggregator has gained some number of end users, suppliers will come onto the aggregator’s platform on the aggregator’s terms, effectively commoditizing and modularizing themselves. Those additional suppliers then make the aggregator more attractive to more users, which in turn draws more suppliers, in a virtuous cycle. 
This means that for aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers. This further means that aggregators enjoy winner-take-all effects: since the value of an aggregator to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones. 
This is in contrast to non-platform companies that face increasing customer acquisition costs as their user base grows. That is because initial customers are often a perfect product-market fit; however, as that fit decreases, the surplus value from the product decreases as well and quickly turns negative. Generally speaking, any business that creates its customer value in-house is not an aggregator because eventually its customer acquisition costs will limit its growth potential.