This lecture describes the Platform model or Two-sided Markets. Platforms serve multiple customer groups and benefit from network effects that take place with and between those groups. Businesses based on Platforms are able to adopt innovative pricing structures in which one side subsidizes another. When the marginal costs are near zero it can be practical to drop the subsidized price all the way to zero.

1. (Stanford BUS-21)
Martin Westhead
Mastering Marketing
Platforms – Two/multi-sided
markets
How to make money
by giving things away

2. Overview
 Theory of Two-sided markets (Platforms)
 Platform Examples
 Strategic Challenges
 Free Platforms

3. THEORY OF TWO SIDED MARKETS
Strategies for Two-Sided Markets
by Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne
http://en.wikipedia.org/wiki/Two-sided_market

4. Two-sided market
 Platforms with two (or more) user groups
 Provide each other with
- beneficial network effects
Market
Side 1
Market
Side 2
Multi-Sided Platform
(MSP)

5. How Platforms are
Different
Multi-Sided Platform
(MSP)
Conventional business
Market
Side 1
Market
Side 2
$ $
Supplier Customer
$ $

6. Externalities
 Negative
- Air pollution
- Competing vendors
 Positive
- Number of users of
Facebook
An externality is the cost or benefit that
affects a party who did not choose to incur
that cost or benefit - Wikipedia

7. Network Effect
 A kind of externality where value of
the product changes with number of
users
 Examples
- Telephone
- Facebook
- Twitter
 Can be negative
- e.g. Traffic congestion
 Scale network effect business
- Cost fall with scale (nothing special)
- Also value increases
 Leads to dominant vendors

8. Two-sided Market
Interactions
Market
Side 1
Market
Side 2
Cross-Side
Network Effect
Same-Side
Network Effect
Multi-Sided Platform
(MSP)

9. Network Effects for MSPs
 Same side
- Positive – more players => more online interaction
- Negative – more sellers => more competition
 Cross side
- Positive – more games available to players
- Negative – more adverts in programs
 Must capture cross-side network effects
- Avoid: subsidize a side that uses someone else’s paid
- E.g. Netscape browser NOT tied to servers

10. Multi-Sided Platform
(MSP)
 Platform that facilitates interactions
- Architecture – product design and infrastructure
- Rules – terms of engagement and pricing
 Platforms can be shared e.g. cars and gas stations
- Usually no subsidies in shared platforms
- Internet makes it easier to own both sides
 MSP is not a reseller
- Must facilitate direct interaction between markets
 Typically, each side has verydifferent requirements
- E.g. Credit card customers vs. merchants
- Providers may specialize in serving a single side
 Key feature: novel pricing and business models
- Often one market side subsidizes the other
- E.g. Adobe PDF needed to drop reader price to $0 to succeed
Hagiu A., Wright J. "Multi-Sided Platforms" Harvard Working Paper 12-024

11. PLATFORM EXAMPLES

12. Platforms: HMO
Platform
HMO
Doctors
Patients
Care facilities

13. Platforms credit cards
Platform
Credit card networks
Card holder Bank
Vendor

14. Platforms Games Console
Platform
Games Consoles
Players
Games writers

15. Platforms: Shopping Mall
Platform
Mall
Shopper Store

16. Shared platforms
Platform
Standards for car fueling
Cars Gas Station

17. Why is CNG not more
popular?
 Compared to gasoline
- Cheaper
- Safer
- Much cleaner
- White carpool sticker
 Too few fueling stations
- Reduced cross-side
network effect

18. PRICING IN TWO-SIDED MARKETS

19. Pricing in Two-Sided
Markets
 In TSM one side can subsidize
the other
 Traditionally price is bounded
- Min: Marginal cost per unit
- Max: Customer’s willingness to
pay
 Look for the biggest rectangle
under the demand curve
Price
Quantity

20. Independently maximize
each market
Price
Quantity
Price
Quantity
Neglects critical network effects
Side 1: Consumer Side 2: Business

21. Collectively maximize
both markets
Price
Quantity
Price
Quantity
Side 1: Consumer Side 2: Business
Leverage network effects
Network
Effects
Total of red boxes must exceed blue

22. STRATEGIC CHALLENGES IN TWO-
SIDED MARKETS

23. Strategic Challenges
1. Which side to subsidize?
- Who pays and how much?
2. Winner-takes-all or shared?
- How to manage winner-takes-all dynamic
3. Threat of envelopment
- Competitors can come at you sideways

24. Challenge 1
Which side to subsidize?
 Users that are price
sensitive
 Users that are quality
sensitive
- Charge users responsible
for quality – eliminates low
quality users
 Marginal costs
- If marginal costs of subsidy
side are low (~$0) pricing
becomes easier
- Counter example: FreePC

25. Other Factors
 Same side network effect
- Consider excluding users to avoid negative network
effects
- Examples
- Covisint – failed due to seller competition
- Autobytel – succeed by offering only 1 dealership in a region
 User Brand Value
- Marquee users can be key
- Celebrities for Twitter/Ning

26. Price is all about
perception
 Tom Sawyer
- Persuaded his friends to
pay him to paint
There are wealthy gentlemen in England
who drive 4-horse passenger-coaches 20-
30 miles on a daily line in summer
because the privilege costs them
considerable money but if they were
offered a wage for the service that would
turn it into work and they would resign –
Mark Twain

27. Reversible business
models
 From Derek Sivers, founder of CD Baby
 Night clubs in LA
- Pay to play
- Bands crave exposure more than money
 Doctors in China
- Paid by the healthy
- Payment stops when you get sick
 Gym in Denmark
- Don’t pay if you go every week
- Pay when you miss a week

28. Challenge 2
Winner-takes-all or shared platform?
 Critical strategic decision
either:
- Try to dominate the whole
market or
- Share the platform
 Examples
- Windows at the turn of the
century
- Xbox and PS
- Betamax vs. VHS standards
battle
- DVDs

29. Winner-takes-all market
characteristics
 Multi-homing costs are high
- For at least one side
 Network effects are positive and strong
- At least for the side with high multi-homing costs
 Neither side’s users require special features
- Differentiation is difficult or irrelevant

30. DVDs look like winner
takes all
 Multi-homing costs are high
- Both for consumers and producers
 Network effects are strong and positive
- More content is attractive to consumers
- More consumers is attractive to content producers
 Opportunity to differentiate limited
- By TV standards
 So why did the industry collaborate on a standard?
- To avoid replay of VHS vs. Betamax war
- Consumers held off purchase until winner declared
- Marketing cost to participate in war very high

31. To win the battle
 Require differentiation or cost advantage
 Plus three other factors:
1. Preexisting relationships with market side(s)
2. Reputation for winning
3. Deep pockets
 First-movers can have an advantage
 So can late-movers
- Learn from mistakes of others
 Move fast, but not too fast
- Don’t grow user base faster than you can scale
- Manage cash carefully

32. Challenge 3
Threat of Envelopment
 Rival platform with same
users offers your
functionality
- Bundled as part of a bigger
offer
- Blurs market boundaries
=> convergence
 Examples
- Netscape vs Internet
Explorer
- Real Player vs Windows
Media Player

33. Defenses against
envelopment
 Change business model
- Real changed subsidy market
- Charged consumers and provided content “Rhapsody”
 Find a “bigger brother”
- Real partnered with broadband TV, cellphone co.
 Sue
- Anti-trust law still open in this area
- Real sued Microsoft for $760M
- Time-Warner (Netscape) similar awards

34. FREE PLATFORMS

35. Economics of Free Service
Adding a user
- Increases value of
Platform
- Adds costs
When
Value > Costs
It makes sense to offer
service for free
Value of
adding a
user
Cost of
servicing
a user

36. Understanding the value
of new users

37. Use Case: Adobe PDF
 Leveraged existing user base for PostScript
 Initially charged for both reader and writer
 Moved reader to Free
- Over 500 million users
- Very attractive to content creators
- Everyone has reader

38. Use Case: Glam Media
Audience
Advertiser
Blogger
Content $
Content
Attention
$
Attributed syndication
- Site owner
- Content creator
-Referrer
- Network

39. SampleLab: The Store
Where Everything is Free
 SampleLab (p60)
- Store where everything
is Free
- Can take up to 5 items per
visit
- $13 membership
- $2000 shelf rental for 2
weeks (90 items)
- Focus groups – sell
survey data

40. Practice Fusion
Free medical records software
 Freemium + Advertizing
- $100 for ad free version
- 10% adoption
 Sell access to data
- Longitudinal health records
- $50-$250 per patient per
study
- 250 patents per doctor

41. Kill Bill
Free Billing Software
 Open Source Software
- Available for free
- Build a community
 Network effects
- User base creates credibility
- Support network
 Make money by
- Selling SaaS service
- Commercial plugins (App store)
- Verification program Kill Bill

42. PLATFORM BUSINESS MODELS

43. Platform business models
Give women free admission,
charge men
Bars, singles clubs
Give children free admission,
charge adults
Museums

44. Platform business models
Give away travel services, get a cut
of rental car and hotel reservations
Travelocity
Charge sellers to be stocked in a
store, let people shop for free
“slotting fees” in supermarkets

45. Platform business models
Give away content, make referral
fees
Amazon associates
Give listings charge for premium
search
Match.com

46. Platform business models
Give away content, sell stuff
Slashdot/ThinkGeek
Give away content, charge
advertisers to be featured in it
Product placement

47. Platform business models
Give away resume
listings, charge for power search
Linkedin
Give away limited “Green” house
plans, charge builders and contractors
to be listed as green resources
Free Green

48. Summary
 Theory of Two-sided markets (Platforms)
 Platform Examples
 Strategic Challenges
 Free Platforms