Podcast Summary
From controlling value chains to facilitating transactions: The platform business model enables companies to create value by connecting buyers and sellers, rather than controlling the entire value chain, leading to the success of disruptive companies like Uber, Airbnb, and GitHub.
The business world has evolved from traditional, linear models to platform models, which facilitate the connection between buyers and sellers through technology and data. This transition began with ancient marketplaces and continued through the industrial revolution, where companies focused on creating and controlling value chains. However, the platform business model, which emerged in the late 1990s and 21st century, allows for the creation of value through the facilitation of transactions between multiple parties, rather than controlling the entire value chain. This shift has led to the success of companies like Uber, Airbnb, and GitHub, and has disrupted traditional industries. Additionally, the founder and CEO of Aplico, Alex Mozab, shares his insights on this topic in his book "Modern Monopolies" and in this podcast episode.
Platform companies revolutionizing industries: Platform companies like Facebook, Amazon, Microsoft, Google, Apple, Uber, Airbnb, and Snapchat are disrupting traditional industries by facilitating the exchange of value between large networks of individuals and companies. These businesses, with a strong critical mass in 10 years, will continue to grow and expand into new industries.
Platform companies, such as Facebook, Amazon, Microsoft, Google, Apple, Uber, Airbnb, and Snapchat, are revolutionizing industries by facilitating the exchange of value between large networks of individuals and companies. These businesses, often referred to as modern monopolies, have only been around for a relatively short time but have already created new markets and disrupted traditional industries. It takes around 10 years for these companies to reach a strong critical mass and become dominant players. Apple is an example of a company that has both a linear business model (efficient production of hardware) and a platform business model (App Store, connecting consumers and producers). Platform companies are still in their early stages, but they will continue to grow and seek to bring their model to industries with fragmented markets and inefficient distribution. The next 20 years will see these businesses becoming even more profitable and expanding into new industries.
From Traditional Linear Models to Platform Models: Reducing Transaction Costs: Platform models, like Amazon and Uber, reduce transaction costs by connecting buyers and sellers directly and streamlining the process, benefiting consumers and increasing business efficiency and profitability.
Businesses have evolved from traditional linear models to platform models, which allow for the reduction of transaction costs and the creation of new value propositions. The British East India Company, established in 1600, serves as an early example of this concept, as it outsourced manufacturing, shipping, and retailing while focusing on the selection of goods and efficient delivery. Transaction costs refer to the expenses incurred in conducting a business transaction, such as search costs (finding the right product or service) and negotiation costs (agreeing on price and terms). By reducing these costs, businesses can create more value for both buyers and sellers. Platform models, such as Amazon and Uber, excel at this by connecting buyers and sellers directly and streamlining the transaction process. This not only benefits consumers but also allows businesses to increase efficiency and profitability. Understanding transaction costs and their impact on business models is essential for anyone looking to navigate the modern business landscape.
Platforms reduce transaction costs in fragmented industries: Platforms streamline processes, eliminate redundant costs, and increase pricing transparency in industries with high fragmentation and a lack of pricing transparency, leading to more efficient businesses and optimal prices for consumers.
Platforms and marketplaces can significantly reduce transaction costs in industries with high fragmentation and a lack of pricing transparency. By separating the roles of finding a product or service from providing it, platforms can streamline processes, eliminate redundant costs, and increase pricing transparency. This leads to more efficient businesses and optimal prices for consumers. For instance, in the heavy equipment rental industry, large players can buy out smaller competitors to reduce marketing, sales, and general administrative costs. However, platforms can further optimize this model by acting as the central arbiter, matching supply and demand effectively and setting standardized prices for commoditized goods or services where providers have little differentiation. Ultimately, this leads to a more efficient marketplace, where the hassle and uncertainty of traditional business models are eliminated. As the example of GitHub illustrates, platforms can make previously complex and time-consuming processes "no longer a pain in the ass" for all parties involved.
Platform businesses connect consumers and producers efficiently increasing consumer surplus: Platform businesses leverage data, internet, and transparency to create more value for consumers, presenting opportunities and challenges for investors and entrepreneurs.
Platform businesses have the power to significantly increase consumer surplus by connecting consumers and producers more efficiently. The rise of data, the Internet, and transparency have coincided with the platform business model, allowing consumers to capture more value than in the past. For investors and entrepreneurs considering this business model, it presents both opportunities and challenges. While the potential rewards for the winner can be immense, the competition to become the dominant platform in a given market can be fierce. Development platforms, such as iOS and Android, have paved the way for new types of platforms and industries, like ride-sharing with Uber. Looking ahead, the automotive industry could present new opportunities for development platforms, particularly in the context of the vast amount of passive time people spend in cars using their phones.
Opportunities in Transportation Industry with Self-Driving Cars: Software platforms can optimize and monetize transportation industry through transactions, resource management, and new sources of supply in B2B and B2C sectors. Industrial IoT and B2B distribution markets present significant opportunities.
The shift towards self-driving cars and the resulting increase in free time presents a massive opportunity for software platforms to optimize and monetize various aspects of the transportation industry. This includes improving transactions, managing resources, and unlocking new sources of supply in both the B2B and B2C sectors. One specific example given is the potential in industrial IoT, where software developers can tap into machines on factory floors for various applications, leading to significant efficiency gains. Another area mentioned is the growing B2B distribution market, which Amazon Business is targeting and estimated to be worth between 3 to $8 trillion. Overall, the conversation emphasizes the vast potential for software platforms in various industries as they continue to evolve and adapt to new technologies and market trends.
Marketplaces Dominating Transportation, Freight, and Heavy Equipment Rentals: Amazon and other marketplaces are creating efficiencies and consolidating market share in transportation, freight, and heavy equipment rentals. The future depends on traditional businesses adapting and creating moats.
Marketplace models, particularly those in industries like transportation, freight, and heavy equipment rentals, are creating significant efficiencies and are expected to continue dominating these markets. Companies like Amazon are consolidating market share through superior user experiences, leading to the question of how many platforms will ultimately rule these industries. The creation of monopolies may not be a bad thing, as these platforms can offer significant benefits to consumers. However, the future of these markets depends on the ability of traditional businesses and entrepreneurs to adapt and prevent marketplace giants from dominating their industries. The value of these platforms lies in their ecosystems, which are enabled by the software they provide. To build a successful platform and create a moat, companies must focus on audience building and matchmaking, among other strategies.
Strategies for building an audience in a business model: Effectively build an audience by offering monetary, product feature, or psychic rewards. Focus on acquiring a relevant and engaged audience and ensure all business model components align.
Building an audience in a business model requires a strategic focus on subsidizing the value proposition until critical mass is reached. This can be achieved through monetary subsidies, product feature subsidies, or psychic rewards. Monetary subsidies include referral codes and other incentives. Product feature subsidies involve offering free or discounted services to attract users. Psychic rewards include social validation, exposure, and a sense of community. OpenTable's early success is an example of effective product feature subsidies, as they provided free reservation management software to restaurants and charged a fee once they had a sufficient number of consumers. However, not all strategies are successful, and failures like the hyperlocal app Color serve as reminders of the importance of a well-executed audience building strategy. This includes being hyper-focused on acquiring a relevant and engaged audience and ensuring all components of the business model are in sync.
Simple beginnings lead to complex success: Focusing on a niche, providing excellent service, and optimizing around the core transaction in the early stages can lead to exponential growth and success
Successful complex systems and platforms emerge from simple, localized beginnings. This was a recurring theme in our discussion, with references to Peter Thiel's entrepreneurship philosophy and the early days of platform businesses like OpenTable and Airbnb. These companies focused on a niche, provided excellent service to early adopters, and optimized around the core transaction. Alibaba, specifically, stands out as an example of this approach in the Chinese market. Instead of imposing a US-style monetization model with transaction fees, Alibaba allowed buyers and sellers to transact in their preferred way, leading to a significant user base and eventual dominance over competitors like eBay. The lesson here is that simplicity, focus, and adaptability in the early stages can lead to exponential growth and success.
Modern Monopolies Benefit Consumers: Modern monopolies, like Amazon, Uber, and Google, create consumer value through ecosystems and have competitors ready to capitalize on missteps, offering inherent checks and balances. Asset-light business models add to their competitive edge and protect consumers.
Modern monopolies, contrary to popular belief, can actually benefit consumers by providing subsidized value for an extended period. These companies, such as Amazon, Uber, and Google, create ecosystems that offer significant consumer value and have multiple competitors ready to capitalize on any missteps. The competitive nature of these modern monopolies, with their overlapping consumer and producer bases, creates inherent checks and balances. However, the situation is more complex in regions like China, where a smaller number of dominant platforms could potentially lead to more significant consumer harm if they overstep boundaries. The asset-light nature of these businesses, which don't own the cars or produce goods, adds to their competitive edge and protects consumers.
Platforms with significant asset intensity may have longer timelines for success: Platforms with heavy asset requirements can provide defensibility and longer-term growth potential, but may face longer timelines due to high barriers to entry and increased competition.
When considering investments in platform companies versus linear businesses, asset intensity and the resulting switching costs for producers can be important markers of a potentially successful platform. Platforms that require significant hardware investments, like development platforms or those transitioning to autonomous vehicles, may have longer timelines for success due to higher barriers to entry and increased competition. Asset-heavy platforms can also provide a higher degree of defensibility due to the significant investment required to switch to a competing platform. Ultimately, the decision between investing in a platform or linear business depends on various factors, including the specific industry, competition, and the potential for long-term growth.
Platform businesses disrupting traditional markets: Uber's high driver switching costs and potential in-car integrations, sneaker secondary markets, and platform investments in Apple, Google, Facebook, and the broader sector offer significant opportunities for disruption and high returns.
Uber's high switching costs for drivers and the potential for auto manufacturers to integrate transportation apps into their vehicles create opportunities for Uber to dominate the ride-hailing market. Meanwhile, secondary marketplaces for limited-supply items like sneakers present intriguing platform businesses that can disrupt traditional retailers. Looking ahead, investing in dev platforms like Apple, Google, and Facebook, as well as the broader platform sector, could yield high returns over the next decade. Despite my value investing background, I believe the potential rewards of these platform businesses outweigh the risks. The creation of marketplaces for in-demand products, like designer sneakers or Broadway tickets, challenges traditional retailers and their set pricing structures. It's an intriguing time for businesses and investors alike, as platforms continue to reshape industries and create new opportunities.
The resurgence of glamour stocks and the rise of platform businesses: The speaker suggests investing in platform businesses as an alternative to glamour stocks, which are experiencing a resurgence but are unsustainable due to cheap money and subsidized growth.
The glamour category of expensive valuations, historically underperforming compared to value stocks, may be experiencing a resurgence due to the dominance of big cap tech companies. However, the speaker believes that this trend is cyclical and unsustainable, fueled by cheap money and subsidized growth. He suggests building a portfolio focused on platforms as an alternative investment strategy. The speaker also mentioned the influence of books like "The Master Switch" by Tim Wu and "0 to 1" by Peter Thiel on his thinking about monopolies and platforms. Regarding Aplico, the company was founded 8 years ago by its CEO, who saw the potential of apps and started building them for himself and others. Over time, he noticed the rise of platform businesses and became interested in understanding why they were different from traditional enterprises. He saw a lack of research on the subject and started advising platform businesses, leading to the focus of Aplico as the world's first platform innovation company, helping traditional enterprises navigate the intersection of modern monopolies and their own businesses.
Competing with Tech Companies: A Large Enterprise Recipe Book: Large enterprises can outcompete tech companies in certain areas by applying Silicon Valley strategies, but understanding the best approach for each business is crucial for success. The authors' work provides guidance for informed decisions and achieving success.
Large enterprises have the potential to compete with tech companies using the Silicon Valley recipe book, but it's time to put that potential to the test. The history of failed attempts and acquisitions, such as Walmart's marketplace initiative, highlights the importance of understanding the best approach for each business: building, buying, or investing. The authors' work aims to help these companies make informed decisions and achieve success. The most memorable day of the author's career was the book launch, which marked the culmination of three years of hard work and the beginning of its global impact. In the financial world, the robo-advisory space is a prime example of incumbents outperforming newcomers, and the potential for platform opportunities in finance is vast. The exchange model and the allocation of capital are areas where significant efficiencies can be gained, and the 2 and 20 model in the asset management industry is identified as having significant bloat.
Connecting capital with investors directly: The private markets could benefit from increased efficiency and standardization through marketplaces that connect capital with investors directly, potentially reducing intermediary fees and creating a more evenly dispersed pool of capital among a larger investor base.
The current investment industry, particularly in the realm of private markets, could benefit from increased efficiency and standardization. This could be achieved by creating marketplaces that connect capital with investors or investment algorithms more directly, potentially reducing the need for intermediaries and their associated fees. The speaker also noted the potential for creating a more evenly dispersed amount of capital among a larger pool of investors, rather than relying on a small number of large firms. While there are existing platforms that offer some level of access to investment opportunities, the speaker believes there is value in addressing the fragmented supply of investment opportunities and bringing order to the market. This could lead to new business models and opportunities for those with strong investment theses but limited resources to scale their operations.
Understanding Perspectives in the Creator Economy: Learn about the interplay of creators, entrepreneurs, investors, and consumers in the creator economy. Gain insights into the benefits and impacts for each group.
Learning from this episode of Invest Like the Best is the importance of understanding the various perspectives and roles within the creator economy. The discussion highlighted how entrepreneurs, venture capitalists, consumers, and producers all interact on these platforms and how they can benefit or be impacted. This conversation offers valuable insights for anyone interested in this space, whether as a creator, investor, or consumer. To dive deeper into these topics, sign up for Patrick's book club at investorfieldguide.com/bookclub, where you'll receive a full investor curriculum and regular book recommendations. Don't forget to leave a review on iTunes to help spread the word about Invest Like the Best. As always, follow Patrick on Twitter at @Patrick_Oshag for more updates and insights.
