The platform economy has advanced unabated over the past two decades, especially accelerating over the course of the past decade. What can we expect next?
Looking to the past shows us the rise of the platform economy, from around the turn of the millennium. The present reality is, as with every aspect of life, shaped by the repercussions of Covid-19. But the future holds many opportunities, not least the increased need for digital public goods (open data and accessible content, helping to diminish the digital divide and key to achieving the UN’s Sustainable Development Goals). Decentralization and the other forces at play in the coming years will create a new ecosystem, ripe for innovation.
“Connectivity has driven the creation of a global network of connected producers and consumers, allowing businesses to create new markets of value exchange.”
The rise of the platform economy
As I observed in my books Platform Revolution and Platform Scale, as well as the recent Building Blocks Thesis, three key forces drove the rise of the platform economy over the past decade:
- First, global connectivity – enabled by mobile penetration and social technologies – has driven the creation of a global network of connected producers and consumers, allowing businesses to create new markets of value exchange.
- Second, the adoption of the cloud as a global ‘compute’ infrastructure enables process interoperability across the value chain (e.g. through API-based connectivity) and provides the ability to leverage external innovation by allowing third parties to innovate on a company’s resources.
- Finally, the explosion of data production, spurred by global adoption of social technologies and sensors, combined with improvements in our ability to process and interpret data, enable businesses to serve markets at scale while informing all market participants and making market interactions more efficient.
Collectively, these forces drove mass adoption, pushed our assumptions on addressable markets as well as valuation multiples, and drove a ‘growth-at-all-costs’ approach, in a macro environment characterized by easy access to capital and low interest rates.
Post-pandemic forces shaping the platform economy
But the start of the 2020s have signaled a significant shift in market forces and regulatory dynamics.
First, digital platforms have drawn increasing regulatory scrutiny, both around their usage of user data and their anti-competitive practices after they gain scale. This regulatory scrutiny was further accelerated owing to geopolitical concerns. Starting in the mid-2010s, the European Union started regulating data capture by US-based platforms, most prominently through the GDPR (General Data Protection Regulation). The US has, in turn, launched antitrust probes against its own homebred platforms, while also regulating entry of Chinese platforms into the USA (for instance, Alibaba’s failed acquisition of Moneygram). Finally, since the start of the pandemic, China has turned on regulatory scrutiny over its own platforms while also seeking greater government control over the large platform firms. This is in sharp contrast to the 2000s and the early 2010s, where Facebook’s “Move fast and break things” was the motto that many platforms lived by, with scant regulatory scrutiny.
Second, the shift in supply and demand patterns has driven significant shifts in value pools since the start of the pandemic. For instance, demand shifts in online media consumption and online commerce have fundamentally changed value chains to support those shifts. Retailers, who optimized their supply chains to fulfill nationwide orders through 1-2 distribution centers via their store network, now struggle to compete with the vast array of fulfillment and returns options that online shoppers demand. Players that solve this supply chain challenge will unlock entirely new value pools.
Third, the rise of Web3 and digital public goods provides an alternative to the centralized platforms that have dominated the past decade. Centralized platforms scale value creation through network effects, but centralize gains from such value creation, often disempowering other actors in the ecosystem. Third party merchants competing for the Buy Box on Amazon and drivers struggling with ever-changing policies on ride-hailing applications highlight these issues. The rise of the blockchain and the subsequent rise of Web3 platforms provides a decentralized alternative, one where gains from value creation are shared across all actors participating in value creation. The success of India’s India Stack and the recent launch of the ONDC (Open Network for Digital Commerce) also highlights the importance of digital public goods in providing open, public, and decentralized alternatives to the centralized platform model.
“The rise of platforms and their importance in shaping economic activity will continue, but the next decade of the platform economy will be very different from the one that’s gone by.”
Finally, the market downturn of 2022 and the drawdown in the valuation of technology stocks forces revaluation of the ‘growth-at-all-costs’ approach that most platforms have pursued over the past decade. As ride-hailing and food delivery platforms demonstrate, market-making built on subsidies and negative unit economics will face stronger headwinds, as the cost of capital increases with falling stock prices and rising interest rates.
The rise of platforms and their importance in shaping economic activity will continue, but the next decade of the platform economy will be very different from the one that’s gone by. These four forces will fashion a different regulatory and competitive landscape and firms that recognize these opportunities early on will be best positioned to succeed in this new landscape.
Future opportunities in the platform economy
The shift from pipelines to platforms will continue over the course of the coming decade. Across industries, the adoption of digital technologies is driving the digitization of assets and workflows, as well as activities across the value chain. Platforms will continue to emerge and play an important role, especially in the more asset-heavy and regulated parts of the economy: financial services, healthcare, heavy industry, and energy.
“Network effects – where greater usage of the platform creates greater value – helps create scalable businesses with higher margins.”
However, investors will be more disciplined in looking for markets built on true network effects. Network effects – where greater usage of the platform creates greater value – helps create scalable businesses with higher margins. As evidenced by ride-hailing and delivery platforms over the course of the past decade, platforms without defensible network effects struggle with profitability. Both drivers and travelers switch easily across Uber and Lyft, making it difficult for either platform to sustainably benefit from network effects and gain market dominance.
Next, as regulation intensifies, the value of data towards creating sustainable competitive advantage will need to be reassessed. The unregulated platform economy of the last decade gained massive advantages through data extraction and harvesting. Such data extraction may prove increasingly difficult as platforms face growing regulatory scrutiny.
Finally, decentralization and the rise of digital public goods will create a new innovation ecosystem. As outlined in the Building Blocks Thesis launched in June 2022, protocol-based innovation and digital public goods will drive solutioning and innovation across a much larger ecosystem. Solutions built by actors will be open and available for use by others. Innovation in the Ethereum ecosystem already demonstrates the power of such open and decentralized solution creation.
The platform economy is here to stay. But the future of the platform economy looks nothing like its past.
