Pipelines, Platforms, and the New Rules of Strategy
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ARTICLE 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.
KEY TAKEAWAYS
- 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.
- 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.
- Pipeline managers aim to grow sales; platform managers aim for strong up-front design.
- 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 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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About Geoffrey Parker
Geoffrey Parker is Professor of Engineering at the Thayer School of Engineering at Dartmouth College where he also serves as Director of the Master of Engineering Management Program. He is also a Visiting Scholar and Research Fellow at MIT’s Initiative for the Digital Economy. Professor Parker has made significant contributions to the field of network economics and strategy as co-developer of the theory of “two-sided” markets. His current research includes studies of distributed innovation, business platform strategy, and technical/economic systems to integrate renewable energy.
See more with Geoffrey Parker
About Marshall Van Alstyne
Marshall Van Alstyne is the Questrom Professor in Management, Professor of Information Systems, and Department Chair of Information Systems at Boston University's Questrom School of Business. He is one of the leading experts in network business models. Professor Van Alstyne conducts research on information economics, covering such topics as communications markets, the economics of networks, intellectual property, social effects of technology, and productivity effects of information.
