Table of Contents
Defining Platformization
Platformization is a term used to describe the increased need for apps, and the new opportunities they open up. Platformization is what happens when technologies and cultures become so inter-connected that one changes dramatically due to the other. For example, the traditional role of a digital storefront has been usurped by platforms such as Amazon, which have transformed the way products are sold and purchased. As consumers, we also are affected by platformization. Examples include smart-phones replacing computers, social networking sites substituting for traditional media like newspapers and television networks; and e-books becoming the dominant format for reading. The term platformization is used to describe these changes in culture at large, but it is especially useful when talking about contemporary technology industries such as software and digital content (e.g., games, movies, music, and books).
In a keynote address at the 21st Australasian Conference on Information Systems (ACIS), I described two patterns that are helping us to understand platformization: The first is the overall trend toward a more interconnected world; and the second is that of platforms. The interconnected world trend is what helps us understand platformization. Platforms are just the result of this connectivity, but from our perspective they are all part of it. These two patterns are also connected. Platforms are how we deal with the rising levels of connectivity, and connectivity is what makes platforms possible.
The Platform Economy
The platform economy is a term used to describe the current state of digital commerce, in which software platforms have become more important than the content they enclose. It is the world in which digital content, or apps, are not simply products companies develop but rather are components of huge networks of connected products, users, and services that can transcend traditional distinctions between hardware and software (e.g., we no longer refer to cars as “apps for roads”). Thus, platform economies are not just new markets or new channels: they are a transformation in the very nature of commercial activity. A growing crowd of companies and entrepreneurs are finding new ways to profit by becoming part of these networks, while a growing number of companies are struggling to survive outside their walls.[/ARTICLE START]
These platforms have certain common characteristics: a network-based business model, a large and ever growing addressable market, and an ecosystem that is more important than the individual products or services they offer.
The Platform Model
Platformization has already occurred in the software space, where a bunch of startups and established players are creating new business models by publishing software as “software as a service.” This is also known as SaaS and it is an effective tool for creating business models because companies like Facebook can monetize their user base without even building servers (see point 4). The same model is being used in digital content, and recently some have referred to this as the “digital content economy,” or “terminator economy” (ref. http:www.measuredup.com/video-terminator-economy/) because of the “boom or bust” nature of companies in this sector (e.g., YouTube). For example, on December 23, 2009, Amazon.com launched its Kindle e-book platform. Within three months, it had sold more than 425,000 Kindle devices and more than 1 million digital books.
This model is also emerging as a dominant platform service business model for creating value in the physical goods sector. Think about it: why doesn’t Netflix allow users to rent DVDs? By limiting its service to DVD rentals, Netflix leaves money on the table because it could not only capture more bookings, but it could improve its optimization of the supply chain by substituting a digital offering (i.e., unlimited streaming) with a physical offering (i.e., unlimited DVD). In other words, Netflix is building a “platform” to capture more bookings from rentals. And, it is also building a “platform” in the physical goods sector by being the only game in town in that sector. It’s like having a monopoly on automobiles: consumers can’t shop around for another car provider and consumers cannot rent DVDs from an online service they don’t know (Amazon).
Characteristics of a Platform
A platform is simply an environment in which new things can happen. For example, the Internet allows the development of new ideas and applications, whereas a social network allows the spread of ideas and information. A platform must have four characteristics: (1) It must be decentralized: there cannot be one central control point for all activity, so there are no hierarchical relationships between assets (e.g., communities). Each platform consists of many nodes that interact on the network and exchange information based on a set of rules. (2) It must have a strong technical infrastructure: the user’s experience must feel seamless, which is a function of how easy it is for people to find content, connect with others, and alter their knowledge. (3) It must be open: anyone can participate without the need to pay money or complete any formalities. (4) It must have network effects: the value of a platform increases with the number of people using it. A platform is a self-reinforcing phenomenon that attracts more users, which in turn attracts more content providers, developers, and advertisers. This creates an ever-increasing value for all interested parties who wish to participate on the platform.
“Platformization” is a term appearing in the work of the Austrian-American economist Joseph Schumpeter, who used the metaphor of “creative destruction” to describe how innovative ideas and inventions are produced. In this context, “platformization” means an increasingly concentrated market share of control over new products or services, as well as a greater number of users and producers connected to one another within and across organizations. “Platformization” is a function that is increasing monopoly power, which means that a few large companies are controlling the platforms of their time. The more concentrated control over a given technology, the greater the risks and costs of failure.
Benefits and Risks of Platformization
On the other hand, platforms carry risks related to the fact that they open up new opportunities for competitors. Amazon is not alone in this respect: many traditional retailers have struggled to compete with the convenience of online shopping. Nations have also been far less aggressive in protecting their intellectual property due to their dependence on platforms (e.g., Hollywood and the music industry).
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