1. Business of Platforms June 2018 Athens College
Prof. Nicholas Economides
Stern School of Business, New York University
NET Institute
Copyright ©

2. Top 5 capitalization companies over time: in 2016, all tech

3. Top 5 also have another feature: all are platforms
Platforms are matchmakers
A platform provides a way for two parties to enter into mutually beneficial exchange or transaction
Example: American Express as platform
Side 1: Merchants
Side 2: Cardholders
Service: Payment facilitation (Amex US market share 26%)
Merchants pay 3%; Cardholders’ rewards 1%
Profit to Amex, about 1.5% per $ transacted

4. Examples of platforms Platform Side 1 Side 2 Service(s)
Uber Driver Rider Transport
Airbnb Apartment User Accommodation
MSFT OS MS-Word User Writing
Apple iOS Phone apps User Various
Google Advertiser User Ads/Search
M-Pesa Money sender Money receiver Transport/Savings
Sony PS3 Game User Game playing
Internet Google Search User Search
Internet Netflix Video user Video
Internet Kindle books Kindle app eBook
YouTube Video creators Video users Video
Facebook User User Discussion, live audio, video

5. Stylized model of a platform charging both sides (Xbox)
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 charging one side, other side free (net neutrality)
Internet platform (AT&T) collects from users, R > 0, wants to collect from the other side, s > 0, but is forced at s = 0 because of net neutrality rules
Netflix, Google s
Platform
AT&T p R
Users

7. Platform Google charging one side, other side free
The Google platform collects from advertisers
s > 0, while it allows free search, R = 0
Advertised product
Advertisers s
Platform:
Google
search p R
Users

8. Uber collects from users and pays drivers
Platform Uber collects from users R > 0, and pays drivers s < 0
Drivers s
Platform
Uber R
Users

9. Windows collects from users and subsidizes apps
The Windows platform charges users
R > 0, but subsidizes applications by s < 0 (and not only for MSFT-made apps)
Applications s
Platform
Windows p R
Users

10. Amex collects from merchants and subsidizes cardholders
Amex charges merchants
s = 3% > 0, and subsidizes cardholders through “rewards,”
R = -1% < 0
Merchants s
Platform
Amex p R
Cardholders

11. Who gets charged
In summary, some platforms collect from both sides, some from one side only and the other side pays nothing, and some collect from one side and subsidize the other
Prices are determined from the two markets’ characteristics

12. Platforms are taking over …

13. Why are platforms taking over? Reason 1: network effects
Network effect: a user will pay more to connect to a larger network
Larger scale increases profits exponentially

14. The more Uber cabs in a city, the more riders they will attract and vice versa
Uber reaps network effects by increasing scale

15. “Winner-takes-most” world
Network effects create high inequality among companies in sales and profits
Larger scale increases profits exponentially
Very concentrated markets
Top company has much higher sales and profits than the second one; second one much larger than third, etc.
Often the fourth or fifth largest company are too small to make any difference in the market structure

16. Winner takes most markets
Successes: Windows, Google, iPhone, Facebook, Adobe, LinkedIn, Visa, MasterCard, Amex, Alibaba, WeChat (Tencent)
Failures: Betamax, IBM OS/2, Blackberry, Discover Card

17. Second reason for success of platforms: they usually have fewer employees and much less fixed investment than traditional companies

18. High platform profits because they have much less fixed investment and fewer employees
Uber, the largest taxi company, owns no taxicabs
Airbnb, the largest accommodation provider, owns no real estate
Alibaba, the most valuable retailer, has no inventory
Facebook, the most popular media company, creates no content

19. Traditionally, the focus of the company was internal
Tweaking the value chain to make perfect products
In contrast, for platforms the focus is external
A 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 them

20. More efficient platforms disrupt traditional business
Amazon displaced bookstores for hard copy books and is now displacing retailers of many types of products
Netflix, Hulu, Amazon displace subscription cable TV
Google, Bing displaced the “yellow pages”

21. Not easy to do platforms correctly
Microsoft almost killed the Mac in the 80s by attracting more developers to write applications for Windows
MSFT killed IBM’s OS/2
Recently, Android and Apple killed Microsoft’s cellphones
Android (Google) is taking over from iPhone as dominant phone platform

22. Micro consequences of the prominence of platform
Data becomes even more important
Companies collect all data “just in case”
Data analysis without a prior economic/econometric model has become the norm
Robustness of these analyses is doubtful

23. Big privacy issues in platforms
Cambridge Analytica collected data from 87mil Facebook users, using a loophole in Facebook rules
Data was used to target voters for the 2016 Trump campaign
Google provided data to the Obama 2008 and 2012 campaigns free of charge for similar purposes

24. Opt-in vs. opt-out
Google and Facebook traditionally collect data with a default “opt-in”
Once data is collected, it becomes the property of the company
Even with an Android phone in “airplane” mode, Google is able to track its movements in minute detail, even knowing when the passenger gets out of the car
Show video here

26. Should there be privacy regulation?
Regulatory objectives
Transparency in collection of data (users know what is collected)
Transparency in use of data (users know how their data is used)
User’s consent in data collection and specific use
Possible compensation to the user for “selling” his data to a company like Google or Facebook

27. Regulation can Make “opt-out” the default
If a user opts-out, FB/GOOG cannot use or sell the data he/she discloses to FB/GOOG
User may be compensated for opting-in, i.e., allowing FB/GOOG to use his raw data as well as his ”activities” and “connections”
Create a market between the user and FB, where the user sells his data to FB

28. How should regulation apply to Google
Opt-out should be the default for browsers and Android
Users should have opt-out choice for other personal data, such as health data, even if not acquired from them
Users can set browser to delete cookies and trackers at end of use/session
Users can avoid Chrome

29. Macro long term effects of platforms taking over
Because of the intense use of computing technology and artificial intelligence, platforms need less labor that traditional industries
This leads to:
High profits
Lower labor share of national income
Higher income inequality because shareholders tend to be wealthier
Both the macro and micro consequences of platforms will intensify over the next decade

30. Conclusions (1) Platforms have high profits because they
Take advantage of network effects
Have low fixed investment and low labor use
Platforms can use a zero price or subsidies on one side of the market or positive prices to both sides
Platforms result in a “winner-takes-most” market with big inequalities in market shares, prices, and profits
Low use of labor results in higher income inequality

31. Conclusions (2)
Facebook, Google and similar platforms should be regulated
Opt-out default
Payments from the platform to the user to buy his information/data if he/she opts-in
No restrictions on free speech in news on platforms