Apr 9th 2016

Here’s the advantage that keeps Silicon Valley ahead of the world

A trait shared by the fastest growing and most disruptive companies in history — Google, Amazon, Uber, AirBnb, and eBay—is that they aren’t focused on selling products, they are building platforms. The ability to leverage the network effects of a platform is something that the technology industry learned long ago — and perfected. It is what gives Silicon Valley an unfair advantage over competitors in every industry; something that is becoming increasingly important as all information becomes digitized.

A platform isn’t a new concept, it is simply a way of building something that is open, inclusive, and has a strategic focus. Think of the difference between a roadside store and a shopping center. The mall has many advantages in size and scale and every store benefits from the marketing and promotion done by others. They share infrastructure and costs. The mall owner could have tried to have it all by building one big store, but it would have missed out on the opportunities to collect rent from everyone and benefit from the diverse crowds that the tenants attract.

Apple learned this the hard way in the 1980s when it created the first versions of the Macintosh. It built its own proprietary, closed, hardware, operating system, and applications. Bill Gates, on the other hand, realized that key to power and profit was the operating system and a thriving ecosystem. He designed Microsoft Windows as an open system in which other players could provide the hardware and software. The more programs that ran on Windows, the more users wanted it, and therefore more developers created applications. Windows became a near monopoly the 90s—while Apple came close to bankruptcy.

Fortunately for Apple, by 2007, Steve Jobs had figured out Microsoft’s advantage. He built the iPhone App Store and iTunes as open platforms on which other players could provide content. The top five mobile phone carriers—Nokia, Samsung, Motorola, Sony Ericsson, and LG—had owned 90 percent of the industry’s profits. Yet Apple was able to leap ahead and capture literally all of this.

The power of platforms is explained in a new book, Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You, by Geoffrey Parker, Marshall Van Alstyne, and Sangeet Choudary. The authors show how platform businesses bring together producers and consumers in high-value exchanges in which the chief assets are information and interactions. These interactions are the creators of value, the sources of competitive advantage.

Apple was able to connect app developers with app users in a market in which both sides gained value and paid it a tax. As the number of developers increased so did the number of users. This created the “network effect” — a process in which the value snowballs as more production attracts more consumption and more consumption leads to more production.

Just as malls have linked consumers and merchants, newspapers have long linked subscribers and advertisers. What has changed is that technology has reduced the need to own infrastructure and assets and made it significantly cheaper to build and scale digital platforms.

Traditional businesses, called “pipelines” by Parker, Van Alstyne, and Choudary, create value by controlling a linear series of processes. The inputs at one end of the value chain, materials provided by suppliers, undergo a series of transformations to make them worth more. Apple’s handset business was a classic pipeline, but when combined with the App Store, the marketplace that connects developers with users, it became a platform. As a platform it grew exponentially because of the network effects.

The authors say that the move from pipeline to platform involves three key shifts:

  1. From resource control to orchestration. In the pipeline world, the key assets are tangible — such as mines and real estate. With platforms, the value is in the intellectual property and community. The network generates the ideas and data — the most valuable of all assets in the digital economy.
  2. From internal optimization to external interaction. Pipeline businesses achieve efficiency by optimizing labor and processes. With platforms, the key is to facilitate greater interactions between producers and consumers. To improve effectiveness and efficiency, you must optimize the ecosystem itself.
  3. Value the ecosystem rather than the individual. Rather than focusing on the value of a single customer as traditional businesses do, in the platform world it is all about expanding the total value of an expanding ecosystem in a circular, iterative, and feedback-driven process. This means that the metrics for measuring success must themselves change.

Companies such as Walmart, Nike, John Deere, and GE are working towards building platforms in their industries. John Deere, for example wants to be a hub for agricultural products. But not every industry is ripe for platforms because the underlying technologies and regulations may not be there yet.

In a paper in Harvard Business Review, Kellogg School of Management professor Robert Wolcott illustrates the problems that Netflix founder Reed Hastings had in 1997 in building a platform. Hastings had always wanted to provide on-demand video, but the technology infrastructure just wasn’t there when he needed it. So he started by building a DVDs-by-mail business — while he plotted a long-term strategy for today’s platform. According to Wolcott, Uber has a strategic intent of providing self-driving cars, but while the technology evolves it is managing with human drivers. It has built a platform that enables rapid evolution as technologies, consumer behaviors, and regulations change.

Building platforms requires a vision, but does not require predicting the future. What you need is to understand the opportunity to build the mall instead of the store and be flexible in how you get there.

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Vivek Wadhwa is a Fellow at Arthur & Toni Rembe Rock Center for Corporate Governance, Stanford University; Director of Research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering,  Duke University; and Distinguished Fellow at Singularity University. He is author of  “The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent”—which was named by The Economist as a Book of the Year of 2012, and ” Innovating Women: The Changing Face of Technology”—which documents the struggles and triumphs of women.  In 2012, the U.S. Government awarded Wadhwa distinguished recognition as an  “Outstanding American by Choice”— for his “commitment to this country and to the common civic values that unite us as Americans”. He was also named by Foreign Policy Magazine as Top 100 Global Thinker in 2012. In 2013, TIME Magazine listed him as one of The 40 Most Influential Minds in Tech.

Wadhwa oversees research at Singularity University, which educates a select group of leaders about the exponentially advancing technologies that are soon going to change our world.  These advances—in fields such as robotics, A.I., computing, synthetic biology, 3D printing, medicine, and nanomaterials—are making it possible for small teams to do what was once possible only for governments and large corporations to do: solve the grand challenges in education, water, food, shelter, health, and security.

In his roles at Stanford and  Duke, Wadhwa lectures in class on subjects such as entrepreneurship and public policy, helps prepare students for the real world, and leads groundbreaking research projects.  He is an advisor to several governments; mentors entrepreneurs; and is a regular columnist for The Washington Post, Wall Street Journal Accelerators, LinkedIn Influencers blog, Forbes, and the American Society of Engineering Education’s Prism magazine.  Prior to joining academia in 2005, Wadhwa founded two software companies.




  

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More Essays

Jan 16th 2020
EXTRACT: "Between 1940 and 1942 Charlotte Salomon, a young German-Jewish artist, created a sequence of 784 paintings while hiding from the Nazi authorities. She gave the sequence a single title: Leben? oder Theater? (Life? or Theatre?). Viewed in the 21st century, Salomon’s artwork could be considered a precursor to the contemporary graphic novel, creating a complex web of narratives through words and images."
Jan 9th 2020
EXTRACT: "It’s simply not possible to do justice to the value of Iran’s cultural heritage – it’s a rich and noble history that has had a fundamental impact on the world through art, architecture, poetry, in science and technology, medicine, philosophy and engineering. The Iranian people are intensely aware – and rightly proud of – their Persian heritage. The archaeological legacy left by the civilisations of ancient and medieval Iran extend from the Mediterranean Sea to India and ranges across four millennia from the Bronze age (3rd millennium BC) to the glorious age of classical Islam and the magnificent medieval cities of Isfahan and Shiraz that thrived in the 9th-12th centuries AD, and beyond."
Jan 9th 2020
EXTRACT: "Lautrec had a genius for representing people. He would rarely paint any other subject. When he looked at a person who caught his interest, not only their appearance, but seemingly also their personality would magically flow from his hand, fixing a moment of their life, and his, on a piece of cardboard or canvas."
Jan 7th 2020
EXTRACT: "In 2010, Great Britain generated 75% of its electricity from coal and natural gas. But by the end of the decade*, these fossil fuels accounted for just 40%, with coal generation collapsing from the decade’s peak of 41% in 2012 to under 2% in 2019. The near disappearance of coal power – the second most prevalent source in 2010 – underpinned a remarkable transformation of Britain’s electricity generation over the last decade, meaning Britain now has the cleanest electrical supply it has ever had. Second place now belongs to wind power, which supplied almost 21% of the country’s electrical demand in 2019, up from 3% in 2010. As at the start of the decade, natural gas provided the largest share of Britain’s electricity in 2019 at 38%, compared with 47% in 2010."
Jan 5th 2020
EXTRACT: "Owing to these positive developments, many were lulled into thinking that modern advanced economies can run on autopilot. And yet economists knew that market capitalism does not automatically self-correct for adverse distributional trends (both secular and transitional), especially extreme ones. Public policies and government services and investments have a critical role to play. But in many places, these have been either non-existent or insufficient. The result has been a durable pattern of unequal opportunity that is contributing to the polarization of many societies. This deepening divide has a negative spillover effect on politics, governance, and policymaking, and now appears to be hampering our ability to address major issues, including the sustainability challenge."
Jan 2nd 2020
In September 2018, Ian Buruma was forced out as editor of The New York Review of Books, following an outcry over the magazine’s publication of a controversial essay about #MeToo. A year later, in a conversation with Svenska Dagbladet US correspondent Malin Ekman, he reflects on lost assignments, literature, cancel culture, threats to freedom of speech, and the state of liberal democracy.
Dec 31st 2019
EXTRACT: "I have long been troubled by the way so many believing Christians in the West have either been ignorant of or turned their backs on the plight of Palestinians, both Christian and Muslim. Right​-wing Evangelicals, under the sway of heretical theology, are so blinded by their obsession with Israel that they can't see Israel's victims. Other Western Christians simply just don't know or about the people of Palestine. I find this state of affairs to always distressing, but especially so at Christmas time, since the Christmas story we celebrate not only took place in that land, it continues to define the lives of the Palestinians who live in places like Bethlehem and Nazareth. "
Dec 19th 2019
EXTRACT: "Although there have long been farmers and merchants who specialised in growing and selling seeds, it wasn’t until the 20th century that people started talking about seed production as an industrial process. Thanks to changes in farming, science and government regulations, most of the “elite” seed that is bought and sold around the world today is mass produced and mass marketed — by just four transnational corporations."
Dec 14th 2019
EXTRACT: "Dehydration is associated with a higher risk of ill health in older people, from having an infection, a fall or being admitted to hospital. But an appetite for food and drink can diminish as people age, so older people should drink regularly, even when they’re not thirsty. Older women who don’t have to restrict their fluid intake for medical reasons, such as heart or kidney problems, are advised to drink eight glasses a day. For older men, it’s ten glasses."
Dec 12th 2019
EXTRACT: "A decade ago, I wrote The Life You Can Save: Acting Now to End World Poverty. This month, a fully revised Tenth Anniversary edition was published, and is available, free, as an eBook and audiobook. The chapters of the audiobook are read by celebrities, including Paul Simon, Kristen Bell, Stephen Fry, Natalia Vodianova, Shabana Azmi, and Nicholas D’Agosto. Revising the book has led me to reflect on the impact it has had, while the research involved in updating it has made me focus on what has changed over the past ten years"
Nov 27th 2019
EXTRACT: "Jay Willis at GQ reports that Secretary of Energy Rick Perry said on Fox and Friends that Trump is God’s Chosen One. He said he told Trump, “If you’re a believing Christian, you understand God’s plan for the people who rule and judge over us on this planet and our government.” Perry also said that he had written a memo for Trump about how God uses imperfect people, comparing Trump to biblical figures such as Solomon, Saul and David, who were also flawed. This evangelical discourse that a providential God controls political power goes back to old West Semitic Religion"
Nov 7th 2019
Extract: "The PSA test is done using a small amount of blood to detect raised levels of prostate specific antigen (PSA). Yet, despite its relatively low cost and ease of administering, it is not offered for routine screening in many countries, including the UK. This is because a significant proportion of those testing positive have no disease (a false-positive result), slow-growing cancer that doesn’t need treatment, or positive results caused by a relatively benign condition, such as a urinary tract infection. Detecting prostate cancer early is important and saves lives. But many of those identified by the PSA test as having elevated levels of the antigen could potentially undergo painful treatment with significant life-altering side effects, which were unnecessary. Also, up to 15% of men with prostate cancer have normal PSA levels (a false-negative result), meaning that many men would receive unwarranted reassurance from this test. Guidelines in most countries, therefore, note that the possible benefits of testing are outweighed by the potential harms of over-diagnosis and over-treatment, making it unsuitable for screening everyone."
Nov 5th 2019
Extract: "Ken Loach’s film, Sorry We Missed You, tells the harrowing tale of Ricky, Abby and their family’s attempts to get by in a precarious world of low paid jobs and the so-called “gig economy”. But how realistic is it? Can Loach’s film be accused of undue pessimism?"
Nov 3rd 2019
Extract: "Travel to Prague, Kyiv, or Bucharest today and you will find glittering shopping malls filled with imported consumer goods: perfumes from France, fashion from Italy, and wristwatches from Switzerland. At the local Cineplex, urbane young citizens queue for the latest Marvel blockbuster movie. They stare at sleek iPhones, perhaps planning their next holiday to Paris, Goa, or Buenos Aires. The city center hums with cafés and bars catering to foreigners and local elites who buy gourmet groceries at massive hypermarkets. Compared to the scarcity and insularity of the communist past, Central and Eastern Europe today is brimming with new opportunities.......In these same cities, however, pensioners and the poor struggle to afford the most basic amenities. Older citizens choose between heat, medicine, and food. In rural areas, some families have returned to subsistence agriculture."
Nov 3rd 2019
EXTRACTS: "Genetic clustering has existed in all past societies. People have typically been relatively genetically similar to others nearby. But most of this was because of limited mobility."........."But in the 19th and 20th centuries, people started to move about more. Societies opened up geographically, and socially. This new mobility has created a new kind of clustering – what the American author Thomas Friedman called a “great sorting out”.".........".....this is now visible at the genetic level too."
Oct 9th 2019
EXTRACT: "The idea that we are living in an entrepreneurial age, experiencing rapid disruptive technological innovation on a scale amounting to a new “industrial revolution” is a pervasive modern myth. Scholars have written academic papers extolling the coming of the “entrepreneurial economy”. Policymakers and investors have pumped massive amounts of funding into start-up ecosystems and innovation. Business schools, universities and schools have moved entrepreneurship into their core curricula. The only problem is that the West’s golden entrepreneurial and innovation age is behind it. Since the 1980s entrepreneurship, innovation and, more generally, business dynamics, have been steadily declining – particularly so in the US. "
Aug 28th 2019
EXTRACT: ". But today, the impulse to gain attention on social media has produced a discourse of extreme defamation and scorched-earth tactics aimed at destroying one’s opponents. We desperately need a broad-based movement to stand up against this type of political discourse. American history is replete with examples of people who worked together to solve – or at least defuse – serious problems, often against great odds and at significant personal risk. But the gradual demise of fact-based history in schools seems to have deprived many Americans of the common ground and optimism needed to work through challenges in the same way they once did."
Aug 8th 2019
Consider the following facts as you wend your way to the Guggenheim Museum and its uppermost gallery, where you will presently find The Death of Michael Stewart (1983), Basquiat’s gut-punching tribute to a slain artist, and the centerpiece for an exhibition that could hardly be more timely.
Jul 22nd 2019
It’s worth remembering, then, that we are not designed to be consistently happy. Instead, we are designed to survive and reproduce. These are difficult tasks, so we are meant to struggle and strive, seek gratification and safety, fight off threats and avoid pain. The model of competing emotions offered by coexisting pleasure and pain fits our reality much better than the unachievable bliss that the happiness industry is trying to sell us. In fact, pretending that any degree of pain is abnormal or pathological will only foster feelings of inadequacy and frustration. Postulating that there is no such thing as happiness may appear to be a purely negative message, but the silver lining, the consolation, is the knowledge that dissatisfaction is not a personal failure. If you are unhappy at times, this is not a shortcoming that demands urgent repair, as the happiness gurus would have it. Far from it. This fluctuation is, in fact, what makes you human.