Value of platform economy increases by $1 trillion in first half of year

By Hamidreza Hosseini and Dr. Holger Schmidt


American and Chinese platforms continue to pull ahead of European providers

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The growth of the platform economy continues unabated. In the first half of 2018, the world's 60 most valuable platforms gained about $1 trillion in value and are now worth a combined $7 trillion. All platform companies together now reach a total value of about $8.2 trillion.

Topping the list of winners in the first half of the year are Amazon, Microsoft and Netflix in the U.S., while in China Alibaba, Ant Financial, Meituan, Didi Chuxing and Toutiao have made the biggest absolute gains. In Europe, Spotify, Wirecard, and Adyen performed well, but still rank far behind their peers in the Americas and Asia in the overall rankings.

The platforms, which have predominantly reached the modern third generation, were able to further increase their lead over the traditional companies with linear business models. Over the past six years, the values of the top 10 platforms from Asia have grown by an average of 26 percent a year - with a noticeable pace of growth in the past two years. The top 10 platforms from the U.S. are up about 19 percent a year, while the top 10 companies from Germany's Dax stock index are up only about 10 percent a year. The gap is therefore widening, which is due to the superiority of the platform model over the classic linear business models.

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The result is significant shifts in wealth and capital due to the relocation of trading centers, especially to the countries of the platform operators such as the USA or China. This is because with every transaction, every book purchase with Amazon, every cab ride with Uber or every apartment rental with Airbnb, a portion of the transaction sum flows directly into the coffers of the platform operators. According to estimates by the German Institute for Economic Research, around 25 billion dollars (net) a year flow from Germany to Silicon Valley in this way, because virtually nothing comes back on the way. 

No single European share in the platform index

The result is a major imbalance in the regional distribution of platforms between the USA, Asia and Europe. Although the three regions still have roughly evenly distributed shares of world GDP in the analog world, the U.S. and soon China clearly dominate in the platform world, while Europe accounts for just 3 percent. The result is a major imbalance in the regional distribution of platforms between the U.S., Asia and Europe.

The U.S. continues to clearly dominate the platform world with a 67 percent share. However, Asia has also already reached a 30 percent share of the value of the 60 most valuable platforms. This is where most new platform models are emerging at the moment, especially in B2B markets, driven by Alibaba and also Tencent, which has just invested in the B2B platform Huixiaden, for example. In contrast, Europe's platform companies account for just 3 percent of the value. In the platform index of the 15 best platform stocks, Europe is no longer represented at all.

Advantages of platform companies

Simple economic platforms already existed in the analog world. Buyers and sellers have met in various marketplaces for many centuries; newspapers, for example, bring readers and advertising companies together. Many demanders, i.e., buyers and readers in these examples, attract many suppliers (sellers or advertisers). What is new about digital platforms is the focus on interactions between the two sides of the market, the revenues from the interactions (network effects), their global dimension and low transaction costs through the use of digital technology.

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Platforms in all industries

Searching for providers or workers, comparing prices, negotiating a contract and making payment are many times easier for companies and consumers on digital platforms today than in the days when there was no Internet, and also much faster compared to the early phase of the Internet when there were no platforms. On AirBnB, we now book a room in a foreign city in just a few minutes. In the past, it would have taken hours to find out the providers, compare their prices and room qualities, conclude the rental agreement, and finally pay the rent.

The modern platform economy follows an economic understanding of platforms that enable and foster interactions in an ecosystem. It is no longer the ownership and efficient management of as many production factors as possible that are the decisive criteria for success, but the intelligent management of the interactions of external suppliers and demanders.

The company turns, as it were, from the inside (with a focus on efficient resource allocation) to the outside, where efficient platform management determines success. But if value creation is no longer linked to the accumulation of production factors, the need to build large companies with the highest possible economies of scale on the supply side is also eliminated. On the contrary, old-style industrial companies are now even at a competitive disadvantage compared with platforms because the latter can scale more quickly.

The spectrum of platforms ranges from classic product marketplaces like Ebay or freelancer platforms like CATALANT or Upwork to complex B2B2C constructs like Alibaba. In the meantime, platforms are being set up in virtually every industry on an almost monthly basis and primarily in Southeast Asia and China, including in industries that are so important for Germany such as mechanical engineering, automotive, logistics, electrical engineering and chemicals.

Platforms change markets and market mechanisms 

In a study by the Center for Global Enterprise from 2015 to 2016, a total of around 6 percent of the world's gross domestic product already took place in the platform market metastructure. This share will continue to grow rapidly in the coming years as platforms gain importance in more and more markets, shift markets, change market mechanisms, and create a low-threshold entry point for the supply and demand side through their low transaction costs. This market shift and rapid development is based on the growth and shrinkage effects of the different market layers.

Platform models thus change markets and market mechanisms by establishing alliances in dynamic ecosystems. Often, it is precisely these alliances that give platforms the decisive competitive advantages over traditional providers, as they not only make life considerably easier for customers, but also generate new value streams and new network effects between providers. As a result, all partners in the ecosystem do more business than before and can push the classic providers out of the market. Once established, platforms are able to model new markets and change existing mechanisms by leveraging dynamic ecosystems and alliances, which usually leads to a shift in trading venues and thus capital.

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Here, platform economists consider three different market layers: the platform market layer, the transaction and trading market layer, and finally the market layer of pure product and service business models. The platform market layer grows, among other things, due to network effects between supply and demand. The more partners are added who bring their customers, the faster a platform grows. The resulting shift in trading and transaction venues shifts further market share from the traditional world to the platform market layer.

This in turn leads to shrinkage effects in the trading and transaction market layer due to the loss of revenue/market share or customers, among other things. In the product and service market layer, the shrinkage effects are felt, among other things, through loss of market share or brand or product positioning. Platforms are thus able to assign their role in the market layer of platforms to the traditional companies in the market layers of commerce and transactions as well as in the product and service business models.

The evolution of platform business models 

Crucial are the differences compared to the classic linear business models. In a linear model, a provider sells a product or service directly to a customer. These models have no direct or dynamic ecosystem influence and suffer from strong competition. To position oneself against the competition, high investments in product, market research, customer needs analysis and the definition of the unique selling point are required. In the slipstream of these linear business models, which continue to account for the lion's share of the entire global economy, three platform generations have developed since the late 1990s, absorbing ever larger parts of the value creation.

In the process, platforms draw their strength from interaction data and derive new approaches to two-sided/ or multi-sided markets (including network effects). Only those who can anticipate how one side of the market (for example, demand) will react can adjust what happens on the other side of the market (providers). Cab apps like Uber or MyTaxi should know how much a discount will boost consumer demand in order to ensure enough supply from cab drivers in time. This effect from one side of the market to the other is called the indirect network effect. While decision-makers in linear pipeline companies can only focus on one side of the market (their customers), the demands on platform managers are higher: they have to manage both sides and, above all, have a handle on the indirect network effects.

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Since 2014, the third generation of the platform economy has been establishing itself. The characteristics - in addition to those of the first generation (marketplaces with supply and demand without intelligent interactions and based on the principle of critical mass) and the second generation (share economy: focus on intelligent interactions between supply and demand or sharing of resources, capacities and skills) - are primarily the complete monetization of information along information economy criteria, the analysis of dynamic ecosystems and the derivation of new approaches for the design of ecosystems and network effects based on complementary alliances.

By leveraging information economics, dynamic ecosystems and alliances, monothematic constraints do not exist, and thus horizontal, vertical and lateral diversifications are far easier to establish and pivot. Third-generation platforms are thus able to model new markets, change existing mechanisms, and most importantly have a strong focus on generating network effects through more partners as well as their customers, or through partners and portfolio expansion. For some platforms, this strategy is accelerated based on an inversion of the business or services, for example, in the form of a consistent API strategy as part of the business strategy.

In addition to the providers mentioned above, Chinese platforms such as Alibaba or Tencent in particular have established the advantages of information-economic use, evaluation and derivation of fields of action in their business models from the very beginning. Alibaba leverages all interaction points between market participants in both its B2B and B2C platforms. The platforms established by Alibaba over time, such as Taobao (auction platform), Alipay (payment), Youku (movie streaming), and Xiami (music streaming), operate on the same principle: they exchange and complement each other's data and information. In addition, Alibaba is one of the world's leading companies in the research and use of artificial intelligence. In comparison, Tencent collects data not only from the social media platforms, but also in online games, advertising and especially with their payment offers.

Blueprint and platform business models 

In principle, different platform-economy scenarios and business models can be established in the industry, which, depending on their characteristics, also have a non-destructive potential, but show collaborative, practically cooperative traits. The following scenarios are examples of approaches that can be combined depending on the strategy.

1) Platforms focused on sharing resources, capacities and capabilities.

Here, complementary partners from the previously analyzed ecosystem form an alliance to bundle and share complementary capacities or resources. In general, human resources, production resources, capacities and capabilities can be pooled and shared. The advantage is that the platform participants can participate from the shared resources and make their capital expenditures lower and more flexible.

2) Platforms focused on product and service alliance. 

Alliance platforms provide complementary products and services to ecosystem partners. The platform operator enables ecosystem partners to combine their products and services with multiple diversification approaches (horizontal or vertical) in a targeted manner via the platform and offer them to their customers. On the one hand, these alliances strengthen the joint value creation and, on the other hand, the portfolio and assortment design of the partners. More portfolio offering leads to better market and demand coverage of customers, which in turn leads to more interactions and lastly increasing revenues through more network effects.

3) Platforms focused on changing market mechanisms and ecosystems.

These platforms primarily aim at shifting the interaction and trading mechanisms: The platform operator brings together ecosystem partners that have market power and high customer access. Bringing together such alliance partners further expands market access and the number of indirect customers, i.e., the ecosystem partner's customers. The result is in turn more interactions among the partners' customers, which also leads to more revenue through the network effects - market power increases, value creation is sucked out of classic business models, classic players are pushed out of the market.

4) Platforms focused on data, technology, software solutions, Internet of Things (IoT) and artificial intelligence. 

Here, the platform operator brings together different ecosystem partners with a technology focus, who (taking into account the applicable data protection guidelines) share and analyze their complementary technologies or data, such as anonymized benchmark data, generate insights from this across partners, and in turn use these in their day-to-day business to develop data-driven products and services, for example. Another example is connecting diverse IoT or smart devices or factories via one platform. This creates massive digital networks (smart business models) that share massive amounts of data and communicate with each other automatically and efficiently (smart platforms).

Strategies for the implementation of platforms - Hope is not a Strategy! 

Once the platform business model has been worked out, the next step is implementation. The following applies: Hope is not a strategy! 

In principle, the following models are conceivable:

1. Establish your own platform business model: Recommended for companies that want to establish platform models as platform initiators and pioneers in the market.

2. Build a platform with additional partners: This model is suitable for platform initiators who combine complementary elements upfront and pursue a common strategy.

3. Use existing platforms as a sales channel: In principle, it is recommended that every company uses existing platforms as another sales channel as part of its sales channel strategy.

Platforms therefore also offer opportunities to complement classic business models and to collaborate within an industry for the benefit of all. Those who start earlier have a better chance of actively countering the changes in the markets.