By Bhaskar Ghosh
The Digital Economy is estimated to account for 25 percent of the entire world economy by 2020, compared to 15 percent in 2005. The advancement and consumption of technologies is pushing forward the idea of a Fourth Industrial Revolution, where a combination of new technologies will create many new innovations. One of the big elements in the Third-Fourth Industrial Revolution era is the platform-based business model, where companies are using technology platforms to create entire ecosystems to grow their business and drive strategies.
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The platform has become the business model to open up entirely new growth opportunities in every industry, and attain scale rapidly. A fine example of this is that the top 15 public ‘platform’ companies including Amazon, Google and Alibaba represent $2.6 trillion in market capitalization worldwide and signify the rapid expansion of the platform. The impact of the platform-based business model in the global economy has been so disruptive that the last such comparison can be made to the Industrial Revolution era. The potential of this “Platform Economy” is recognized widely in global business – in a survey on technology adoption and investment which we conducted with more than 3100 business and IT executives across 11 countries and 12 industries, it was found that 81 percent of the respondents agreed that platform-based business models will become part of their organization’s core growth strategy within three years.
Business in India, and particularly entrepreneurial companies understand the unparalleled opportunities that platform-based models offer. Digital businesses in India have fed off a strong economic and digital environment – a young and sizeable population, a growing smart phone consumer base, a growing Internet user base, the rollout of 3G/ 4G networks and now, the government’s ambitious Digital India initiative. Thanks to that, there is a growing Platform Economy around us in various industries in India – cab aggregators, food delivery, online shopping, household services, customized/ private education services, payment banks, healthcare, travel services and so on. These companies are definitely ahead or at least poised to power ahead in their respective industries as they are operating a platform-based business and disrupting the status quo and traditional incumbents.
While this is happening, there is good indication that the Indian digital economy is maturing in understanding the power of the Platform Economy. Almost 50 percent of the executives in India surveyed consider that adopting a platform-based business model and engaging in ecosystems of digital partners is critical to the success of their business. A majority of the executives in India also believed that platforms will be the ‘glue’ that brings organizations together in the digital economy.
To sustain their growth opportunity though, platform-based businesses around the world and in India need to keep in mind three key economic principles that come into play distinctly in a platform economy:
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- Network Effects/Two-Sided Market: The realization that when two user groups (typically, producer and consumer) generate network value for each other, there are mutual benefits that generate demand-side economies of scale as well. With more connected users and transactions, the network effects of platforms drive scale and value creation.
- Distribution Power Law: Unlike traditional (linear) value chain models, platform business models enabling scale also allow others to generate profits in the “long tail” of the distribution curve.
- Asymmetric Growth and Competition: The demand of a core market is driven through complementary markets, which are often subsidized (or free) to users and which often cross industry lines. Asymmetric competition exists when two companies go after market opportunities with very different approaches and resources.
Businesses also need to appreciate that platform-based business models are defining new rules of business in the digital economy. They must realize that power is shifting to the demand side from the supply side. Companies in several industries, such as hotels and cab services, compete on the basis of their access to supply. As a result, companies create value for customers by merely tapping into resources that they don’t even need to own.
The Apple iOS App Store is an excellent example of the demand-side economies of scale. Since its launch around eight years ago, the iOS App Store today boasts of an ecosystem of almost 380,000 developers who have created 1.5 million applications. Consumers have downloaded these applications over a 100 billion times and Apple achieved sales worth $33 billion in the company’s fiscal year ended 2015. Apple has handsomely rewarded its developers who have significantly helped create this platform model as well by adopting a 70/30 revenue model with them, in turn meaning that Apple has clocked-in revenues worth around $10 billion through resources it doesn’t directly own.
Looking forward, what is important for platform-based businesses to focus on is having a sound platform strategy along with the expertise to make the best use of it, which begins with identifying the parts of business that are essential for adaptation to platform business models, along with the ones that are most susceptible to unexpected attacks from other platforms. The key is to have a strong vision of the Platform Economy, the operating principles and the technology changes that can further disrupt this trend.
Businesses in India are agreeing to the efficacy of platform-based business models and the significant role it plays towards the core growth strategy of the organization. With digital penetration only looking to increase in India and the war to capture the customer base only set to intensify, we are in for an interesting period ahead in India, where more innovative and consumer-friendly platform-based businesses will thrive and more industries and incumbents will get disrupted.
The author is Group Chief Executive – Accenture Technology Services
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