Airbnb, Uber and the rest: the rise of the platform business

By Trevor Didcock, former easyJet CIO and Tuomas Syrjänen, CEO of Futurice

Convention has it that owning and leveraging tangible assets makes companies more valuable.

This has typically led to companies with business models based on accumulating and exploiting assets such as fossil fuels, minerals, property and vehicles, rising to the top of global stock indices.

By contrast, the last ten years has seen platform businesses such as Airbnb and Uber, whose business model is to create platforms which match suppliers with buyers, start to replace these global giants as the world’s biggest companies, despite having relatively few tangible assets. 

Take Walmart: the US retailer falls firmly into the asset exploitation category and has a market capitalisation of $239.3bn on revenues of $490.01bn while e-commerce giant Alibaba has a market cap of $431.21bn on revenues of $25.78 bn. For its part, Facebook, a platform with even fewer physical assets than the retailers,  has a market cap of $503bn on revenues of just $33.17bn.

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Alibaba, Airbnb, Facebook and Uber are by no means isolated examples: a study by the Wharton School’s SEI Centre into 1,500 companies found that organisations with digital platforms and virtual networks receive valuations on average two to four times higher than companies with more traditional business models. Of course valuations are forward-looking expectations of future earnings, and lessons from IPOs such as Groupon and Snapchat suggest at least some of these valuations might be overinflated. Interestingly however, the Wharton study revealed that  platform/network businesses outperformed traditional businesses across a range of key metrics including profit margins and revenue growth. 

From our experience in advising big corporates on digital transformation - including how to embrace the platform business model - we have identified four unusual characteristics that platform businesses share which are likely to make them more attractive to investors.

1. Platform businesses think outside sector siloes

Digital disruption is trashing traditional sector boundaries: Facebook and Snapchat have moved into payments yet they are not financial services companies; Uber is expanding into online meal ordering and delivery with Uber Eats. “Think the unthinkable” is the battle cry of the progressive platform businesses which will swoop into new areas with no warning - as Google looks set to do with space exploration or Alibaba with its $1.2bn bid for MoneyGram. The mindset behind this approach is a willingness to constantly challenge the overall vision for the business to make sure it stays relevant in a fast moving, fluid digital world. 

For platform businesses, the vision questions are less “what products or services are we offering?” and more “How can we address markets with bigger margins?” and “What connections/interactions or sales are we enabling?  

As well as operating outside conventional sector boundaries, platform businesses such as Uber and Amazon focus on the area of the sales/customer interface where, according to Stan Shih’s Smile Curve, a lot of the value is created compared to other areas of the value chain such as manufacturing.

In thinking outside siloes, it’s important for innovative platform businesses to respect the various jurisdictions they cut across, such as sector regulations and employee rights.

2. They excel at creating value by connecting demand and supply

The high valuation of platform business such as Facebook and Alibaba is the result of the value created by the network on behalf of the organisation. So, Facebook can use advertising to monetise its huge community through members interacting online, without investing in a physical space for people to meet up; Alibaba benefits from connecting buyers and sellers by receiving a commission on each transaction, without the cost of physical stores. The concept is not new but has become far more prevalent with the internet opening up mass consumer access to digital markets.

In the B2B world of travel agency booking, global distribution (GDS) providers including Amadeus, Travelport and Sabre have been resolving the complex interactions between travel agents and travel content providers for 30 years. These B2B platforms process more than a billion billable travel transactions a year, generating profit margins in excess of 30%. By contrast, most airlines were barely profitable during the same period.

Platform providers’ network leverage not only creates value, it  also reduces the companies’ marginal costs in their target sectors, often substantially below that of their incumbent competitors, which explains why Airbnb and Uber have been able to disrupt the hotel and taxi sectors so successfully. 

The key to the success of platform businesses is their ability to create rich compelling customer experiences, wrapped up in well-designed customer interfaces, which they constantly develop and expand using sophisticated feedback loops to keep consumers engaged.

3. Platform businesses scale fast

Platform businesses scale quickly because, being tech and information based, they are not held back by the need to invest in tangible assets ahead of a planned expansion. In 2011, Airbnb went from being a US company to an international organisation, %u200Aopening ten European offices in three months and hiring hundreds of people in response to a competitive threat. Meanwhile since its 2010 launch, Uber has penetrated 724 cities and 84 countries.

4. Platform businesses thrive on data and insight

One of the reasons that platform businesses command big valuations is the potential for monetising all elements of the network. Uber, Alibaba and Airbnb currently make money through fees for the transactions they facilitate between buyer and seller. However, these businesses are also in the middle of massive data flows about consumers’ movements, location and decisions which could also be monetised. We are already seeing Facebook and Google harvesting, cleansing and summarising data and developing insights which they can then package and sell to smaller organisations which can’t perform these tasks as cost effectively.

Conclusion

The rapid rise of platform businesses is intimidating to traditional businesses operating on more conventional business models and under pressure to deliver similar valuation multiples. The good news for companies looking to follow suit is that there is often no need to reconfigure the entire business model, it’s possible to experiment with the creation of platforms within discrete areas of their business such as logistics or marketing, or even within attractive product lines or geographical areas. Experimentation carries risk, so it’s sensible to start small and consider all your stakeholders. Ultimately, if there is one rule of thumb for this fast-moving digital environment, it is that the biggest risk is to do nothing at all.