Podcast Summary
From linear to platform business models: The business world has evolved from linear models to platform models, connecting buyers and sellers through technology and digital data, leading to the creation of innovative companies like Uber, Airbnb, and GitHub.
The business world has evolved from linear models, where value and information flowed in a straightforward manner, to the platform business model, which connects buyers and sellers through technology and digital data. This transition began with ancient bazaars and shopping malls, and later progressed to industrial businesses that created value through machinery and production. However, in the late 20th century, companies began to vertically integrate their value chains and economies of scale, leading to immense value creation. Now, in the late 1990s and 21st century, the platform business model is having a resurgence, allowing for the creation of companies like Uber, Airbnb, and GitHub, which connect buyers and sellers in new and innovative ways. Alex Mosett, the author of "Modern Monopolies," discusses this transition and the future of business models in his book and in his conversation with Patrick O'Shaughnessy on the Invest Like the Best podcast.
The Rise of Platform Companies and Their Impact on Business Landscape: Platform companies like Facebook, Amazon, Microsoft, Google, Apple, Uber, Airbnb, and Snapchat are dominating markets by reducing search and transaction costs and creating new markets. They are profitable but need to continue growing and are seeking to expand their platform model to other industries.
We are in the early stages of a technological shift where platform companies, such as those in the FamGA group (Facebook, Amazon, Microsoft, Google, and Apple), are dominating markets by facilitating the exchange of value between individuals and companies. These businesses, which also include Uber, Airbnb, and Snapchat, take a long time to reach critical mass and become modern monopolies due to their network effects and winner-takes-all dynamics. Over the past 15-20 years, these companies have created new markets and disrupted traditional industries by reducing search and transaction costs. They are extremely profitable but need to continue growing and are now seeking to bring their platform model to other industries with fragmentation. For example, Apple, which has both a linear hardware business and a platform business (App Store), can create value by more effectively coordinating the exchange of supply and consumption in an industry. Platform companies are still in their growth phase and will shape the business landscape for the next 20 years.
From linear models to platform models: reducing transaction costs: Platform businesses like Amazon and Uber thrive by reducing transaction costs for consumers and businesses, leading to increased productivity and economic growth.
Businesses have evolved from linear models, where they own and sell inventory, to platform models, where they facilitate transactions between buyers and sellers, reducing search and transaction costs for consumers. This concept has been present since ancient times, as seen in the British East India Company's dominance in the spice trade. Transaction costs refer to the expenses incurred during a business transaction, including searching for potential trading partners, negotiating terms, and enforcing contracts. By reducing transaction costs, businesses like Amazon and Uber can create value and thrive in their respective industries. Coase's Theory of the Firm explains that businesses exist to minimize transaction costs, and platforms like Amazon and Uber do just that by connecting buyers and sellers efficiently. The reduction of transaction costs is beneficial for both individuals and businesses, leading to increased productivity and economic growth.
Platforms and marketplaces reduce transaction costs in fragmented industries: Platforms and marketplaces consolidate costs, bring pricing transparency, and standardize pricing to optimize transactions in fragmented industries
Platforms and marketplaces can significantly reduce transaction costs in industries with high fragmentation and lack of pricing transparency. By separating the roles of service providers and demand aggregators, these platforms can create more efficient businesses and optimize pricing. In fragmented industries, numerous small and mid-sized players often duplicate marketing, sales, and general administrative costs. By consolidating these costs through acquisitions or by acting as a central arbiter, large players can create more efficient businesses. Moreover, platforms can bring pricing transparency, pitting suppliers against each other to offer optimal prices. In commoditized markets, platforms can even standardize pricing to further reduce transaction costs. The example of GitHub illustrates this well: by removing the hassle of managing software development projects, it became a game-changer.
Platforms solving consumer pain points: Platforms offering unique solutions to consumer pain points have increased consumer surplus and created opportunities for investors and entrepreneurs.
Platforms that make life easier for consumers by solving pain points, such as finding a car quickly or writing code, are indicators of significant value in today's business landscape. The rise of data, the Internet, and transparency have led to more consumer surplus, benefiting both consumers and producers. For investors and entrepreneurs, platform business models offer the potential for increased consumer surplus and success for the winner. However, the competition to become the dominant platform can be fierce, making the odds of success lower, but the potential rewards are significant. Development platforms, such as iOS and Android, have paved the way for new opportunities, and the emerging auto development platform is expected to present interesting opportunities. Ultimately, platforms that leverage consumer data to provide unique experiences and solutions can have a significant impact on industries and consumer behavior.
Opportunities in Transportation and Industrial IoT: The shift to self-driving cars and industrial IoT presents massive opportunities for software platforms to optimize transactions, access untapped supply, and streamline operations, leading to significant growth and innovation in the trillion-dollar transportation and industrial sectors.
The shift towards self-driving cars and the subsequent freeing up of human time presents a massive opportunity for software platforms. With billions of dollars spent on transportation services and an impending wave of extra time and attention from drivers-turned-passengers, the potential for software to optimize and make transactions more efficient is vast. Another area of opportunity lies in industrial IoT, where untapped supply from machines on factory floors can be accessed by software developers for various applications, including workforce management, inventory management, and prototyping. Amazon Business's success in the B2B distribution space, which is estimated to be worth trillions of dollars, also highlights the potential for software platforms in this sector. Overall, the economy's digital transformation is creating numerous opportunities for platforms to tap into untapped supply and streamline transactions, leading to significant growth and innovation.
Marketplaces and Platform Models: The New Monopolies: Amazon's success in marketplaces and platform models is leading to potential monopolies, but these modern monopolies can benefit consumers. To build a successful platform, focus on ecosystem building and matchmaking.
Marketplaces and platform models are disrupting traditional industries and creating massive efficiencies, leading to potential monopolies. Companies like Amazon are seeing great success in this space, taking search share from Google and expanding into various sectors. The question is, how consolidated will this get, and is there an end game where one platform rules them all? While monopolies can be detrimental to consumers, these modern monopolies are the opposite. The future depends on entrepreneurs, VCs, and traditional businesses adapting or being disrupted. Multibillion-dollar marketplace opportunities can coexist, with niche players carving out their own niches. To build a successful platform, companies need to focus on ecosystem building and matchmaking, as software alone is a commodity. The value lies in the ecosystem, and those things play hand in hand. Amazon, with its resources, could replicate technology, so creating a moat requires other key ingredients.
Building an audience in a business model: Attract consumers and producers through monetary and psychic subsidies, but beware the chicken and egg problem. Ensure all aspects of the business model align to succeed.
Building an audience in a business model involves subsidizing the value for consumers and producers until critical mass is reached. This can be achieved through monetary subsidies like referral codes, product feature subsidies, and even psychic rewards like exposure and attention. However, the challenge lies in the chicken and egg problem of attracting consumers to bring in producers and vice versa. An example of a failed platform was Color, which raised $40 million for a hyper-local Instagram but failed due to a lack of a hyper-focused audience building strategy. The key is to ensure all aspects of the business model, including audience building, are in sync to avoid falling on its face.
From simple solutions to complex systems: Focus on a niche, serve early adopters, optimize around core transaction, and allow buyers and sellers to transact in their preferred way to build successful complex systems.
Successful complex systems, whether in business or technology, often begin as simple solutions that are scaled up. This was a common theme in the discussion, referencing Peter Thiel's entrepreneurship principles and the early days of platform businesses. The importance of focusing on a niche, serving early adopters, and optimizing around the core transaction were also emphasized. The Airbnb founders' story illustrates this concept, as they started by manually helping people take better pictures of their apartments to sell on the platform. Alibaba's success in the Chinese market also demonstrates the value of allowing buyers and sellers to transact in their preferred way, rather than monetizing transactions through fees. Instead, Alibaba initially chose not to charge any fees, allowing them to attract a larger audience and eventually optimize their core transaction through advertising. This approach ultimately helped Alibaba outcompete eBay in the Chinese market.
Modern monopolies benefit consumers: Modern monopolies, like Google, Amazon, and Uber, create large ecosystems with competition, preventing excessive consumer exploitation. Competitors within their ecosystems ensure protection from potential harm.
Modern monopolies, unlike traditional monopolies with a negative connotation, can actually benefit consumers. These companies, such as Google, Amazon, and Uber, create large ecosystems with significant reach and competition, which prevents them from exploiting consumers excessively. They initially subsidize value to attract and retain users, but when they reach a modern monopoly status, they may attempt to monetize more heavily. However, due to the presence of multiple competitors within their ecosystems, any potential harm to consumers would be met with alternatives ready to capitalize on the market leader's missteps. The competitive environment, created by a vibrant VC ecosystem and a more open business landscape, ensures that consumers are protected and that no single dominant player can significantly harm them.
Impact of assets on platform companies vs linear businesses: Platform companies with fewer tangible assets may offer longer-term durability due to switching costs for producers and potential impact of emerging technologies on business models.
When considering investments in platform companies versus linear businesses, the presence or absence of significant assets can impact the potential success and return on investment. Development platforms, which often involve hardware production, have higher barriers to entry due to the need for substantial upfront capital expenditures and the creation of switching costs for producers. As a result, they may offer longer-term durability and defensibility within their respective ecosystems. For instance, Uber, as a platform company, might benefit from focusing on its role as a connector between riders and drivers rather than owning and operating its own fleet, especially in the context of emerging technologies like self-driving cars. Ultimately, when evaluating potential investments in platform companies, investors should consider the tangible assets involved, the switching costs for producers, and the potential impact of emerging technologies on the underlying business model.
Uber's Barrier for Consumers to Switch is Lower for Drivers: Uber and Lyft face less consumer switching costs, but Uber explores new partnerships and platforms to gain control over transportation ecosystem.
The barrier for consumers to switch between transportation apps like Uber and Lyft is much higher than for drivers due to the lower cost per transaction for the ride-hailing companies. However, Uber is exploring new approaches to gain more control over the transportation ecosystem, such as partnerships with auto manufacturers and the development of a platform for transportation apps in cars. Another interesting platform business that has emerged is secondary sneaker marketplaces, which allow consumers to buy and sell limited-edition sneakers at inflated prices, bypassing traditional retailers. This marketplace doesn't need to exist due to the limited supply and high demand, but it has created a viable digital channel for buying and selling sneakers. For investors looking to build a portfolio over the next 10 years, betting on platform companies like Apple, Google, and Facebook could potentially yield high returns, despite the presence of losers like Twitter, Groupon, and Zynga.
The resurgence of glamour stocks and platform innovation: The glamour category of expensive valuations may be experiencing a resurgence, but it's important to remember that these cycles are cyclical. Platform innovation is a growing field, focusing on the intersection of modern monopolies and traditional enterprises.
The glamour category of expensive valuations, historically underperforming relative to value, may be experiencing a resurgence, but it's important to remember that these cycles are cyclical. Big cap tech's dominance, despite high valuations, may not last forever. This trend is fueled by cheap money and subsidized growth, but eventually, it won't be sustainable. Moreover, the conversation started with the author discussing his book and influential books that shaped his perspective on old monopolies versus new platforms. Two notable mentions were Tim Wu's "The Master Switch" and Peter Thiel's "0 to 1." The author, who started Aplico eight years ago, initially focused on building apps but later became intrigued by platform businesses. He noticed a lack of research on the subject and began advising both startups and larger enterprises on platform innovation. Today, Aplico is the world's first platform innovation company, focusing on the intersection of modern monopolies and traditional enterprises, which have significant advantages like cash reserves, strong brands, and touchpoints with both consumers and producers.
Competing with tech companies: Buy, build, or invest?: Large enterprises can compete with tech companies by adopting the right approach - buy, build, or invest - for each business unit, with significant impact on industries and companies' long-term trajectories. Opportunities lie in fintech, particularly robo-advisory, and disrupting the 2 and 20 model in asset management.
Large enterprises have the potential to compete with tech companies by adopting the Silicon Valley recipe book, but it's crucial to determine the best approach - buy, build, or invest - for each business. This idea has the potential to significantly impact industries and companies' long-term trajectories. The speaker, who has worked with both startups and established businesses, considers the book launch as the most memorable moment in his career, which took three years of hard work and resulted in translations into Mandarin and Japanese. Regarding finance, the speaker sees immense opportunities in the fintech sector, particularly in the robo-advisory space where incumbents have been outperforming newcomers. He believes that the 2 and 20 model, an industry standard in asset management, is ripe for disruption due to its perceived bloat. Overall, the speaker's work aims to help businesses make informed decisions and succeed in their respective industries.
Creating a marketplace for smaller investment managers: A marketplace for smaller investment managers could lead to marketplace efficiencies, reduce overhead, and provide more investment opportunities for individuals.
The current investment industry, with its large management fees and centralization of capital in a few large firms, could benefit from more efficiency and equal distribution of capital. The speaker suggests that creating a marketplace where smaller investment managers or algorithms can showcase their track records and receive appropriate compensation could lead to significant marketplace efficiencies. This model could potentially reduce the need for the overhead of marketing, research, and investor relations, allowing more investment opportunities for those who don't want to run a full-fledged investment firm. While there are some platforms that offer access to consolidated supply or large firms, the real value lies in bringing order to fragmented supply and creating a more evenly dispersed amount of capital to a wider range of investment managers. It will be interesting to see how this evolves and if it can challenge the traditional investment industry.
Understanding Perspectives in Building and Utilizing Technology Platforms: Entrepreneurs must identify market opportunities and build strong teams, VCs assess potential for growth and scalability while considering risks, consumers drive demand and shape products, and producers must adapt to the changing landscape. Collaboration and alignment are key to success.
Learning from this episode of Invest Like the Best is the importance of understanding the various perspectives of entrepreneurs, venture capitalists, consumers, and producers when it comes to building and utilizing technology platforms. The discussion highlighted the benefits and challenges for each group, emphasizing the need for alignment and collaboration. For entrepreneurs, it's crucial to identify the right market opportunity and build a strong team. For VCs, it's essential to assess the potential for growth and scalability, while also considering the risks. Consumers play a significant role in driving demand and shaping the product, while producers must adapt to the changing landscape. By considering these angles, we can better navigate the complexities of building and investing in technology platforms. If you're interested in exploring this topic further, be sure to sign up for Patrick O'Shaughnessy's book club at investorfieldguide.com/bookclub for monthly book recommendations. And, if you enjoyed this episode, please leave a review on iTunes to help spread the word about Invest Like the Best.
