Pipelines, Platforms, and the New Rules of Strategy

Competition Policy and Antitrust, Networks, the Internet, and Cloud Computing, Networks and Infrastructure and Wireless

Article Snapshot

Author(s)

Sangeet Paul Choudary, Geoffrey Parker and Marshall Van Alstyne

Source

Harvard Business Review, April 2016, pp. 54-60

Summary

Many businesses are “pipelines” that channel goods or services to consumers. Today, pipelines face competition from a new business model, the platform. Platforms provide opportunities for consumers and producers to interact, just as Uber connects drivers and passengers.

Policy Relevance

When a platform enters a pipeline market, the platform tends to win. Traditional firms must adopt new strategies and management methods suited to platforms.

Main Points

  • Platforms enable interactions in a two-sided market between external producers and consumers.
     
  • In 2007, Apple’s competitors controlled 90% of global mobile phone profits; by 2015, Apple’s iPhone generated 92% of global mobile phone profits.
     
    • Apple’s handset business is a pipeline; the App Store makes the iPhone a platform that serves both app developers and consumers.
       
  • Traditional platforms include shopping malls, which serve shoppers and retail shops, and newspapers, which serve advertisers and readers.
     
  • Information technology enables platforms like Uber or Airbnb, which do not own physical infrastructure or control physical assets.
     
  • Pipelines provide value to consumer; platforms offer an ecosystem that attracts both consumers and producers.
     
    • Pipeline managers aim to grow sales; platform managers aim for strong up-front design.
       
    • For platforms, external actors like suppliers are assets, not threats.
       
  • Traditional industrial firms enjoy supply-side economies of scale; Rockefeller’s Standard Oil had huge fixed costs and low marginal costs, so it could reduce prices as its volume of sales grew.
     
  • The Internet economy enjoys demand-side economies of scale, also called “network effects.”
     
    • Platforms offer more value to users as the platform grows; more consumers are attracted to phones offering more apps, and vice versa.
       
  • Platforms can rapidly begin to compete in new markets; Swatch knows how to compete with Timex, but now must compete with Apple.
     
  • Platforms often begin with a closed architecture and then open up to new interactions.
     
  • Platforms often allow “permission-less innovation,” but must exert some control to limit low-quality content.
     

 

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