Why Platforms Are Modern Monopolies
Principal at Applico
August 19, 2019
Why Platforms Are Modern Monopolies
Platforms are disrupting traditional industries at a rapid speed, becoming modern day monopolies.
In this episode of Platform Players, Applico’s Nick Johnson discusses the state of the platform economy and how players can gain their own competitive edge.
Yapstone presents Platform Players – bringing YOU the sound of platform innovation at work!
Platforms are disrupting traditional industries at a rapid speed…and we’re dying to know who is winning the race. So, we’ve got Applico’s Nick Johnson here to discuss the state of the platform economy and how players can gain their own competitive edge.
But first. This is your Platform Player FLASHBACK!
Two years after the iPhone came out, it became abundantly clear that apps would be the next technology craze – and 20-year-old college kid, Alex Moazed, was going to build them.
“I’m starting an app company,” he told his friend, Nick Johnson.
“That’s awesome, man. How are you going to get the money to do that?”
“I’ve got credit cards.”
“You sure about the risk?”
“What risk? In the next year, millions of businesses are going to want an app!”
Nick couldn’t argue. As a tech lover and world news junkie, he could see the profound impact of smartphones already. He thought back to the days before the release of the iPhone. Many of his friends didn’t use the internet at all and now, everyone had 24/7 access!
Years went by. Alex and Nick graduated from their respective schools and Nick took a job as the Editor for the Institute of Economic Thinking – pouring over the world’s greatest theories about innovation.
Alex had been right. The explosion of mobile had defined this time in history. And Alex had certainly cashed in on his risk, building mobile technologies for startups and enterprise businesses through his company Applico.
But Nick was starting to notice another trend.
“Apps development might have been a wave. But the tsunami about to hit our society is the emergence of platform businesses,” he told Alex one day.
“I agree,” Alex said. “I’ve been seeing the same trend.”
And after the two friends geeked out online marketplaces for about an hour, Alex turned to Nick and said:
“So…you want to do this platform thing with me or not?”
“Let’s do it.”
And thus, Nick Johnson joined Applico.
FLASH FORWARD! Applico has worked with large enterprises for more than 10 years. With the release of their best selling book, Modern Monopolies, Alex Moazed and Nicholas Johnson coined a new industry focused on platform businesses. In the past few years, Applico’s Platform Innovation® work has created hundreds of millions of dollars in enterprise platform value.
Welcome back to Platform Players. I'm super excited to have Nick Johnson joining us from Applico this morning to talk about platforms, marketplaces, and monopolies. Nick, welcome to the show.
Thanks for having me, Kurt. I'm happy to be here.
Awesome. Why don't you talk to us a little bit about the work that you guys are doing at Applico?
Yeah. At Applico we are, what we call, a platform innovation company. We focus entirely on this platform business model. The work that we really do is helping large traditional enterprises figure out how to embrace this platform model.
A lot of these companies are increasingly under threat from either large platform companies like the Googles, Amazons, Alibabas of the world coming into their industries. Or they are trying to figure out how to compete with new platform startups coming into their industry, and rather than playing the typical incumbent game, whereas you can consolidate and play a lot of defense, we're helping them figure out how you go on offense, how you actually launch and eventually spinout your own platform business and have that interact with your core business in some interesting ways where some of the process is greater than you might expect.
Help me understand what you think of as a platform.
Sure. We're pretty particular when we talk about platforms. At Applico, it's basically this business model where rather than owning all the underlying assets or having everything sit on your balance sheet, you're really just facilitating transactions, interactions between some kind of third party, providing that value that we call a producer in connecting that with the consumer.
So you have basically what we call a court transaction. We are connecting both sides of that network, and you're doing that at a scalable manner. What the platform does is provide the means of connection between both sides of that network and facilitates those transactions to happen.
Cool. I think we're aligned on the definition of how we look at platforms and marketplaces. I think the one thing that people think about is, all of these sorts of disruptive technology companies, primarily the B2C platforms that we see, but where else are you seeing disruption and adoption of platform technology?
Yeah. I think this is actually pretty interesting. We have a data product that we've created called Platform Insights, which is all the large public platform companies translating our book, Modern Monopolies, into who out there is actually these platform companies, and how much revenue do they get from them?
If you look at the kind of basket of companies in there, the notable gaps are in the health care space, and then in certain B2B sectors where those have lagged a little bit behind – I think areas where you've seen these business models be in play for a while.
I think finance is the one that's been there the longest where you have companies like New York Stock Exchange, which has been around for almost a century, maybe more. And companies like MasterCard and Visa, which are payment networks that have essentially been around for a long time.
Then in retail, you have, obviously, marketplaces that have been definitely a big component there. I think where you're starting to see it get in is some of these untraditional tech sectors where technology hasn't been as pervasive. So, things like B2B distribution.
Things like certain parts of the health care sector that I think are a bit slower there due to some of the regulatory factors that still come into play as well as the heavy consolidation you see typically on the payer's side both in the U.S. as well as internationally where governments are more involved. I think those are some of the spaces we're starting to see this come in.
I think in B2B distribution, you've seen Amazon business come in as a big marketplace player. But I think you're also starting to see a lot of the traditional kind of distribution companies figure out how to embrace this marketplace model and how that coexists with the traditional distribution model. I can say we have a number of clients in that sector, and there are definitely a number of people that are actively looking at how does this platform model change that traditional distribution model?
And because these platforms and marketplaces are multisided, a demand side and a supply side, oftentimes, you have to focus on one first. Whether it's to prove the model or to prove the value. How do you help companies understand where they should focus when they first start building out their solution?
Yeah, I think focus is definitely the key. I think the hardest part if you're talking about a large traditional enterprise when embracing this platform model is, figuring out that mental model of understanding; you have multiple customer groups. Some of those customer groups, you're talking about the producer side, is sometimes your traditional competitors. You have to open up and embrace those and think about your strengths as a business in a different way than you have traditionally.
I think focus is a key part of this. A lot of these large companies will see the big competitors they have out there like a Facebook or an Amazon and say, "Oh, yeah. They've got all these things, and we have to go and replicate that to go compete with them. The temptation is to overengineer the solution and try to be all things to all people.
I think that initial focus is definitely much more important than that because if you think of Facebook, it started out, originally, literally just a place where you could upload a photo and say what school you went to. All the other stuff that they do today was layered in after that, but they had that initial core transaction of just connecting with friends and having a simple profile. That was it.
So when you talk about that initial phase, you've got to focus in on what that initial core transaction is. Who are you connecting? What is that value exchange between that customer and that producer? Oftentimes, that means you have to take one side of it a little bit early on or reduce some of the complexity.
So if you talk about a company like Uber, originally they just hired drivers to sit around in downtown San Francisco so that they would be available. It wasn't until they actually started to build the demand on the consumer side that that supply side started to come in and they could attract us.
Very often, you have to hold one side of that constant and be very, very focused around who that customer is you're serving so that you can be sure you provide enough value, so you can start to actually build this network, and then start to attract both sides organically.
The interesting thing is, what you're talking about is, you're essentially building two companies. One, on the demand side and one, on the supply side. So understanding your ideal customer profile and what they value and being able to articulate that is super important to building out the desired user base. How do people know when they've gotten to the tipping point of, let's say, "I have enough suppliers, and now I need to turn on the demand side." What does that look like in your experience?
I think it's when you start to see a little bit more of that kind of organic traffic coming in and user retention. So it's when someone not just comes and uses it. Maybe they see an ad, and they come into your app or your website and complete a transaction in the marketplace, and then they actually start to come back.
So if you start to see that user retention go up because they've successfully completed a transaction or coming back, that's when you start to really hit that point of initial critical mass where you can start to see a lot of that organic growth happen.
That certainly makes sense, and I think if you have a business that this is what they do every day, that they truly are founded and started as a platform or marketplace, it makes sense. But let's say you're doing this inside of a company that's been around for a couple of hundred years that has historically sold direct, not using this marketplace.
You're introducing a disrupter inside the business which has all sorts of conflict challenges: how it's going to impact my revenue, my employees, and my sellers. How do you help companies navigate those internal changes?
I think you definitely need a little bit of separation in the core business. Very often, if what you're doing is actually truly disruptive to how you've operated rather than kind of strictly accretive, then you definitely want to have some initial separation. This is something that needs its own dedicated team.
If it's competing with priorities from the core business in terms of time and resources, naturally things will come up, and people will reprioritize on the core business. That's what they've been trained to do. Unless you have that kind of focus, it's very difficult to get something like this off the ground.
So, I think a dedicated team is number one. I think number two, you need buy-in from the leadership at the very top, from the CEO on down to say, "This is something we're going to do, and this is part of the future vision of the company." I think without that, it's very easy.
For traditional long-term companies that have been around for a long time, you have these kinds of antibodies that have built up in the organization to doing things in a different way and for a good reason. They're protecting the core organization from different kinds of risk. But you have to be able to overcome those antibodies, and it takes leadership to go in and say, "We're going to go try this, and we need you to come along with us in order to make that work."
Yeah. What's interesting is, I think on the B2B side versus the B2C side. On the B2B side, a lot of what's driving the need for disruption isn't just technology. The availability of technology and people's familiarity with platforms and marketplaces is certainly helping, but I see globalization as being the number one driver is that businesses that used to be well insulated, whether they're selling just domestically or in theory had a highly specialized IP-protected product.
A lot of that is kind of going away now. So these companies are being disrupted whether they like it or not. So movements at platforms and marketplaces for a lot of them is probably a survival tactic rather than a point of innovation. Are you seeing the same thing?
Yeah. I think that's definitely the case where a lot of the traditional barriers to entry are collapsing, and you're finding that industries that were previously well-defined are suddenly in competition with each other because it turns out their customers overlap in a lot of ways.
So a lot of this is definitely a question of survival. There are a lot of companies that we work with that view us very much as kind of an existential question of how do we operate in this digital world and how does that kind of marketplace or platform model really fit into this? And how do we change as a company in terms of what we think of as our core competency than what we actually provide to customers when some of those original barriers go away?
I think if you look at an industry like B2B distribution, it's one that's traditionally made a lot of its margin on information a-symmetries between itself and the customer. That's where a lot of that notion comes from.
When that goes away because information on product pricing and things become available online, and we can easily compare across different sellers, you really have to fundamentally rethink, what is your value to that customer? And how are you actually going to continue to provide value to them and get them to come back?
I think the interesting thing is, when you're moving from a traditional business model to this platform model, there's a bunch of legacy data that you can leverage. Never mind the new data you're going to create online probably at massive scale just because you'll see transactions and potentially be able to capture other data elements you historically haven't.
Do you think these traditional businesses start to look at and understand the value of the data they're collecting, or are they just saying we're purely using this to sell more, distribute more, and maybe protect our eroding margins?
Yeah. I think fundamentally, that's our thesis at Applico is that if you look at these large traditional companies, they have a tremendous amount of assets that could actually be used to jumpstart a platform business if they thought about them in that way. I think that data component is definitely a big part of it.
They also, obviously, have things like an existing customer base that they can feed into this platform, and if they have a lot of late demand of customers, but know their brand and come to them but maybe aren't best served by the current model.
There are a lot of ways that you can take the assets you have today from your very successful core business, use them or think about them in a slightly different way and use that to really jumpstart this platform model.
I think you've seen a lot of opportunities that are very amenable to the kind of startup VC approach where it makes sense to start from scratch and build. I think that's been the last 10 to 20 years, we've seen a lot of progress in that. I think there are still a lot of opportunities that are less amenable to that. Then to crack that nut, it helps to have that kind of traditional business that this works in tantamount.
I think you're starting to see a lot more of that come into play. That's the next bounce of the ball so to speak. I think you're also starting to see bigger private equity firms come into play and think about how do you actually engage in platform innovations? They're not just coming in on the traditional private equity model, but actually maybe putting in a little more capital in terms of growing this business and launching a platform to get more of that outside.
Yeah. It's certainly private equity right now. The state is, they're in this massive rollup, which is what they've really always done. But I think what they're doing now is not just rolling them up and looking for optimization or saving synergies, which is oftentimes how they make their asset determination is, what's the incremental value?
I certainly think that's important, but what do you see as the big inhibitors for companies internally to recognize that they could build a platform? Let's just call it digital transformation. I mean, that's the buzzword whether you look at all the different solution integrators that are out there or the big enterprise software companies. They're all talking about how do you digitize your business and platforms in marketplaces is just one part of that. How do they get started?
I think the challenge of a lot of these businesses if they think about it, they think that technology is the biggest barrier. I find that typically, technology is not the biggest challenge. These are all tech-enabled businesses, but that stuff that they have the resources and capabilities figured out, the biggest change is understanding how you're going to use that technology.
That really comes down to the mental model of understanding your business. Do you think as a platform, is platform thinking really a part of your business? Or are you still thinking as kind of a traditional or linear business where you think, "We're going to own all these assets? This has to come sit in our inventory or on our balance sheet."
We have to own all that value versus the more platform approach. How am I going to connect both sides of this market? How am I going to deliver the most value to that customer so they want to come back? It doesn't matter if I'm the one delivering that value or if it's a third party. You aren't facilitating that.
It's really about how do I create that value and get that customer to come back? I think that platform model is then very successful at doing that. So it becomes about understanding that mental model of, what are the assets that I have today? How do I use those in a different way than I have been traditionally to create this platform business?
I like in this transformation kind of what we saw with traditional on-premise software companies when they started to get into Software as a Service, you know, Cloud. And moving from this massive one-time on-prem and ongoing maintenance revenue streams to this multi-reoccurring revenue.
If you had a large, established business that had to make this change, the biggest concern was what is this going to do to my financials, and how am I going to explain this to the shareholders, and how is it going to be reflected in the stock price? This is a whole sort of downstream applications.
Those that went through the process, it was a painful process, but they certainly emerged stronger with a much more predictable revenue stream. So I think it's more customer-focused, which I think is the exact play that we're seeing with platforms and marketplaces. Are you providing guidance to – because I've got to imagine like the CFO and the COO are major stakeholders in this transformation – helping them understand how this changes? Because if you don't own the inventory, things like caring cost go away or asset-depreciation. There's a whole bunch of downstream applications that – everybody focuses on the top line of what's this revenue going to look like and those sorts of things?
As you go further down in your financial statements, the savings and the impact would be tremendous. How do you help them think through that?
I think it starts with the C-suite, from the CEO on down. You have to have their buy-in and understanding of how this is going to change the business and what the benefits are. I think the best way to do that is to get something into the market and actually get some real data behind it.
So when we work with companies, our approach is, let's go get this into the market, very early-stage prototype. Let's use out-of-the-box tools and a lot what I would call entrepreneur muscle and hustle on the backend to make things work behind the curtain. But let's get some actual real data behind this to prove that there's value here and look at it operating in this different way. If you can do that, then it becomes less of a hypothetical conversation and more about what does actual real momentum behind this?
We've gotten some early wins, and we want to keep building in this direction. Here's the trajectory and what this could look like. That becomes a much easier conversation to have when you have that real data behind this, from the market, rather than, "We think we should do this," and you can get bogged down in those strategic discussions. When you make it real, I think particularly when you're talking with operational people and CFOs, I think that goes a long way.
Platform Players is brought to you by Yapstone, the premier payments provider for the platform economy. And this is Tick-Tock where Kurt takes the last 90 seconds of the show to get up close and personal with our player. Gentlemen, start your engines.
What's your favorite book?
That changes based on the month, I think. The one that I enjoyed recently that I've read and that I'd say had a big impact on me was called, Atomic Habits. It's a book that really breaks down the science behind how we form habits, and then provides what I would call the practical advice around how you can actually change some of the things that you do automatically in life that you don't really think about, but that you can actually be a little more conscious and intentional about their lives. I found it very interesting.
What's the best piece of advice you've ever received?
Best piece of advice I've ever received. I think a lot of it comes down to believing in yourself and persistence. You can't please everybody, and not everyone's going to like you, but if you work hard and really believe in what you're doing and enjoy it, then sometimes good things will happen.
What's your favorite smell and sound?
Favorite smell: I'm going to have to go with the Cinnabon-type smell that you get when you have a bakery. They have a lot of these at airports and malls and stuff. They're really just designed to suck you in, and they're quite effective. That would definitely be on my list. Favorite sound: I'll go with laughter.
What would you be doing if you weren't doing this?
That's a very good question. I honestly can't imagine myself doing anything else at the moment. I think, for me, this was very much not just a career but a passion, and I believe in this platform business model. This is really the model of the 21st Century, and there are a lot of benefits to making this model more accessible. Then accelerating that adoption in society and understanding about how these models work is very much what I want to be doing, and it's tough for me to imagine anything else at the moment.
That's time. Wrap it up, Kurt.
Nick, I really appreciate you taking the time to walk us through your thoughts and the good work you guys are doing at Applico. I really appreciate you joining Platform Players. Thank you.
Thanks for having me.