Business of platforms Introduction last version 06072020 Prof
Business of platforms: Introduction (last version 06072020) Prof. Nicholas Economides Stern School of Business, New York University http: //www. stern. nyu. edu/networks/ NET Institute http: //www. NETinst. org/ mailto: economides@stern. nyu. edu Copyright ©
Nicholas Economides n Background: n n n Undergraduate in mathematical economics London School of Economics Ph. D in Economics, UC Berkeley Has also taught at Columbia, Stanford, Berkeley Over 20 years at Stern NYU Research: n n n Industrial organization, economics of high technology industries, antitrust, public policy, economic growth, EU issues (Greek crisis, Brexit, …), financial markets microstructure Solving real-world questions Most recent research: n n See research at www. stern. nyu. edu/networks/ Consulting n n n Mobile Money in Tanzania at Marketing Science Google Android EU antitrust problems Antitrust; cartels; tying; design of pricing schedules; financial and securities' markets Created a new market for binary options and sold it to Goldman Sachs I appear often on TV and printed press. See my “news” page at http: //www. stern. nyu. edu/networks/? page_id=5 2
Top 5 capitalization companies over time: in 2016, all tech 3
Top 5 also have another feature: all are platforms n n n Platforms are matchmakers A platform provides a way for two parties to enter into mutually beneficial exchange or transaction Example: Platform American Express n n n Side 1: Merchants Side 2: Cardholders Service: Payment facilitation (Amex market share 26%) Merchants pay 3%; Cardholder’s rewards 1% Profit to Amex, about 1. 5% of transaction (costs 0. 5%) 4
Examples of platforms Platform Uber Airbnb MSFT OS Apple i. OS Google M-Pesa Sony PS 3 Internet You. Tube Facebook Side 1 Driver Apartment MS-Word Phone apps Advertiser Money sender Game Google Search Netflix Kindle books Video creators User Side 2 Rider User money receiver User Video user Kindle app Video users User Service(s) Transport Accommodation Writing Various Ads/Search Cell phone Game playing Search Video e. Book Video Discussion, live audio, video 5
Stylized model of a platform: Xbox charging both sides Platform Xbox is paid by users R > 0, and collects royalties from game developers s>0 Game s Platform Xbox p R Users 6
Platform Google charges one side, other side free The Google platform collects from advertisers s > 0, while it allows free search, R = 0 Advertisers Advertised product s Platform: Google search p R Users 7
Platform Amex collects from merchants but subsidizes cardholders Amex charges merchants s = 3% > 0, and subsidizes cardholders through “rewards, ” R = -1% < 0 Merchants s Platform Amex p R Cardholders 8
Platforms are taking over … 9
Why do platforms have high profits? Reason 1: network effects n n Platforms leverage network effects Network effect: a user will pay more to connect to a larger network 10
The more Uber cabs on the road, the more riders they will attract and vice versa n Uber can increase scale and reap network effects, making much higher profits 11
Winner-takes-most world n n n Network effects often create big sales and profits inequality Successes: Windows, i. Phone, Facebook, Adobe, Linked. In, Visa, Master. Card, Amex, Alibaba Failures: Betamax, IBM OS/2, Blackberry, Discover Card 12
Reason 2: Platforms usually have fewer employees and much less fixed investment than traditional companies 13
Platforms tend to have high profits because of low fixed investment n n Uber, the largest taxi company, owns no taxis Airbnb, the largest accommodation provider, has no real estate Alibaba, the most valuable retailer, has no inventory Facebook, the most popular media company, creates no content 14
Traditionally, the focus of the company was internal n n Tweaking the value chain to make perfect products In platforms, the focus is external n n n Platform tries to bring together as many as possible from both (or all) sides, match them and create transactions Need to minimize the conflicts among participants The notions of a buyer and a seller are blurred 15
Platforms disrupt traditional business n n Amazon displaced bookstores and is displacing retailers Netflix displaces subscription cable TV Google displaced the “yellow pages” Wikipedia displaced Britannica 16
Not easy to do it right n n Especially because you need to bring in both market sides Microsoft almost killed Apple/Mac in the 80 s (and killed IBM’s OS/2) by attracting more developers to write applications for Windows Apple has killed Microsoft’s cellphone OS Android (Google) is taking over from Apple as dominant smartphone platform 17
Privacy and antitrust issues (1) n n n Digital platforms have been downloading your personal info. for free Should there be regulation? Regulation can be on privacy grounds given the “right” to privacy But there antitrust issues too Need a working market for selling and buying personal information 18
Privacy and antitrust issues (2) n n A platform like Google or Facebook forces users to provide for free his/her personal info to the company (default “opt-in”) Some users would prefer to pay for Google or Facebook service rather than provide personal information Additionally, EU and California have laws that restrict use of personal information, based on the rights of users Federal law on privacy is needed 19
We will cover n n n What strategies make a platform successful Fruits of success: large scale and profits Intense competition among platforms Analyses of big successes and bad platform failures Economic sectors ripe for platforms now 20
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