A Study of More Than 250 Platforms Reveals Why Most Fail

David B. Yoffie, Annabelle Gawer, and Michael A. Cusumano, A Study of More Than 250 Platforms Reveals Why Most Fail, HBR, May 29, 2019.

Platforms have become one of the most important business models of the 21st century. In our newly-published book, we divide all platforms into two types:  Innovation platforms enable third-party firms to add complementary products and services to a core product or technology. Prominent examples include Google Android and Apple iPhone operating systems as well as Amazon Web Services. The other type, transaction platforms, enable the exchange of information, goods, or services. Examples include Amazon Marketplace, Airbnb, or Uber.

Five of the six most valuable firms in the world are built around these types of platforms.  In our analysis of data going back 20 years, we also identified 43 publicly-listed platform companies in the Forbes Global 2000. These platforms generated the same level of annual revenues (about $4.5 billion) as their non-platform counterparts, but used half the number of employees. They also had twice the operating profits and much higher market values and growth rates.... 

We grouped the most common mistakes into four categories: (1) mispricing on one side of the market, (2) failure to develop trust with users and partners, (3) prematurely dismissing the competition, and (4) entering too late....

Here are the key takeaways from our research into why platforms fail:

First, since many things can go wrong in a platform market, managers and entrepreneurs need to make concerted efforts to learn from failures.  Despite the huge upside opportunities that platforms offered, pursuing a platform strategy does not necessarily improve the odds of success as a business.

Second, since platforms are ultimately driven by network effects, getting the prices right and identifying which sides to subsidize remain the biggest challenges. Uber’s great insight (and Sidecar’s great failure) was recognizing the power of network effects to drive volume by dramatically lowering prices and costs on both sides of the market. While Uber is still struggling to make the economics work (and it may yet fail as a business), Google, Facebook, eBay, Amazon, Alibaba, Tencent, and many other platforms started by aggressively subsidizing at least one side of the market and made the transition to high profits.

Third, it is important to put trust front and center. Asking customers or suppliers to take a leap of faith, without history and without prior connections to the other side of a market, is usually asking too much of any platform business. eBay’s failure to establish mechanisms for building trust in China, like Alibaba did with Taobao, is an error that platform managers can and should avoid.

Fourth, although it may sound obvious, timing is crucial. Being early is preferable, but no guarantee of success: remember Sidecar. Being late can be deadly. Microsoft’s catastrophic delay in building a competitor to iOS and Android is a case in point.

Finally, hubris can lead to disaster. Dismissing the competition, even when you have a formidable lead, is inexcusable. If you cannot stay competitive, no market position is safe. Microsoft’s terrible execution with Internet Explorer is an obvious example.