Multi-sided platforms are a unique new model for business. Often backed by venture capitalists willing to risk a lot in exchange for the promise of an exponential return, this strategy has taken the business world by storm through the combination of several components:
The most commonly-recognized multi-sided platforms are on the device we perhaps use more than any other today, the smartphone. App stores, which allow users and software developers to come together with support from hosts like Apple and Google, led to an exponential explosion of value and entirely new markets for software.
Amazon, eBay, and other online marketplaces are well-known examples of multi-sided platforms connecting buyers and sellers directly.
What sets these brands apart is that they combine several exponential strategies which themselves may be thought of as platforms: interoperable technology, community platforms/platform thinking, and a platform (or network) value model.
To get a deeper understanding of these platforms, read on to see how the three parallel narratives of platform technology, platform thinking, and platform value models combine into the business model of the multi-sided platform (or MSP).
To benefit from 'digital,' companies need to rethink their infrastructure. From the early days of digital computers to the 1990s and early 2000s, companies integrated information technology into their existing processes to streamline production and sales. Most early gains with digital tech were created through improved efficiency.
But in the Digital Age, technology's role now shifts from optimizing production to powering multi-sided platforms.
Given today's user expectations, new digital infrastructure needs to create entry points for participation, allowing users and strategic partners to co-create, consume, and extract value in surprising ways.
To rethink tech infrastructure, we have to understand where information technology (or IT) came from. IT originally was thought of as the 'pipes' of the business world: a necessary expense that ensured the functioning of tangible processes like products, manufacturing, service, or sales.
In other words, IT was a utility that enabled analog businesses to function more smoothly. The pipes-based model of IT focused on streamlining sales and production but didn't provide capabilities for creating new value. In the old model, infrastructure is a cost center, and it requires its host organization to conceive of, design, and deliver all value to the customer.
Initially, these systems were comprised of only a few key technologies and datasets. They expanded relatively uniformly, cloning functions for other departments and users.
Technologies of the early IT mindset were usually focused on what happens inside the company's walls. Consequently, they were generally closed to other systems, proprietary, and difficult for end users to access. Because of the cost and the learning curve for new technologies, early IT projects focused on specific functions (such as account reconciliation within a finance department or inventory tracking in a grocery store chain). We can think of this era as "IT-streamlined" but not fully digital in the way the term is used now; most forms of IT work focused on 'faster, better or cheaper' versions of analog approaches to work. In other words, the benefits were still limited to business models and offerings which would be recognizable to someone who wasn't aware of computers.
Because of this, less attention was paid to interoperability and user interface than was paid to basic functioning. Value creation for companies with this mindset still tends to be limited to a linear, analog perspective, that of production 'pipelines.'
Most corporate employees are familiar with what happened next: Systems needed to connect to each other as technology became more prevalent. Digital infrastructure became hard to manage, secure, and keep within budget. In response, many technology leaders attempted to create modular platforms and enterprise architecture to bring control and order to the rising chaos. Taking command-and-control management strategies of the industrial era to their logical conclusion meant consolidating systems into centralized IT departments.
This approach worked reasonably well for predictable, low-change functions like payroll preparation. But as more users, institutions, and datasets were added, technology interdependencies became ever more complex, causing challenges when one company needed to connect to (or had acquired) another.
A classic example is the merger of Continental Airlines and United Airlines in the US—it took many, many years to combine and consolidate their two IT infrastructures.
Centralized command and a one-size-fits-all approach to technology doesn't work for every situation. As infrastructure components advanced and new tech-savvy competitors arrived, the technology landscape became more heterogeneous and chaotic. Fierce competition in software and hardware industries often resulted in infrastructure becoming a tangled mess of interdependencies.
Custom solutions were built for individual companies or even different departments within the same company. Many companies combined several strategies to address the need for technological innovation and efficiencies:
It was (and still is) common to see a combination of all of these approaches.
When overwhelmed by the complexity, risk, and cost of those strategies, many companies postponed modernization altogether, creating what is sometimes referred to as 'technology debt,' or an ever-increasing backlog of necessary tech updates.
The increasing importance of digitization gave rise to the concept of 'technology as a platform.'
However, depending on who was asked, 'platform' could mean anything from a collection of software produced by the same developer (like Microsoft, Novell, or Oracle), a company-specific set of tools developed in-house, or a place where lots of different software mixed (where all the tech 'pipes' came together).
'Platform' connotes a shared infrastructure and, sometimes, rigidly hierarchical models of leadership and control. Many firms experience a constant tension between the alignment required for stability and the autonomy necessary for innovation—especially for conglomerates or other complex firms which are growing in size to span many customer groups, geographies, and even moving into new industries.
It isn't sufficient to simply create an aligned set of technologies developed by a central power, because the speed and scope of innovation required for an ever-accelerating world make it hard to develop a central technology—the use cases of technologies aren't as static as they have been in the past. Startups with less inertia and tech debt gladly mix and match more modern software, outpacing large companies' slower rate of innovation. Firms of all sizes need to have room to gracefully add or subtract new technologies in a stable and secure way and sometimes allow 'competing' approaches to co-exist, such as two different customer relationship management (CRM) tools for different parts of the business.
Thinking of "platform" as only a technology strategy isn't enough to modernize in the face of the ever-changing needs of companies and users.
Tech platforms are just one part of the equation of a modern business. To truly realize exponential value, organizations of all sizes also need platform thinking. This means reconsidering where value comes from.
Perhaps one of the most classic examples is the entrance of YouTube into the online media space. When YouTube was introduced, the prevailing focus of online video services was about the technology of streaming video, and assumed that content would continue to come from familiar media production sources like news organizations, musicians, and movie studios. YouTube, in contrast, concerned itself less with the technology of digital video and more with democratizing the creation of content (hence the "you" in the name). YouTube was focused on enabling co-creation on top of its technology, where users produced content and reviewed, promoted, and even collaborated on new content.
This mental shift—from making and selling things to enabling value—is fundamental to transitioning to a multi-sided platform (MSP) model and can profoundly transform a company's relationships with its customers from 'consumers' to 'co-creators.' You can read more about this shift in Platform Thinking: From Pipes to Platforms
A platform value model refers to the connection of third parties to each other and enabling their peer-to-peer collaboration. Another term for the connection of multiple parties. This is also known as network orchestration.
Analog examples include farmers' markets, professional associations, and brokerages; these models tend to be resource-intensive to scale because they are so focused on human relationships, which results in high labor costs. Platform value models (such as marketplaces, content brokers, or shipping service aggregators) tend to charge fees or commissions for their network orchestration work. This value model becomes much more exponential (driven by and driving network effects) when it is combined with digital platform technologies and platform thinking.
Unlike traditional technology platforms, an MSP does not focus only on the 'pipes' of linear sales. Nor does it only focus on matchmaking and buy-sell transactions like a traditional marketplace. In fact, some multi-sided platforms do not directly sell their own products or services at all.
A multi-sided platform combines all the elements of interoperable 'platform' technology, co-creative 'platform' thinking, and network-focused 'platform' value models.
A Multi-Sided Platform brings people together around a shared purpose to co-create value in a community-driven marketplace, enabled by systems and data.
Groups of users receiving value from accessing the platform.
A common motivation for various members of the community to come together.
Ways to exchange value (like an App Store).
Digital modules that connect systems and enable value for users.
Information about users, devices, and the environment that can be used to create value.
Community consists of groups of users receiving value from accessing the platform, such as
The community element of a multi-sided platform sets it apart from traditional marketplaces, as peers can interact with each other directly instead of having to go through a central host.
Digital matchmaking functions add value by helping users find each other via shared interests or goals; these matchmaking services leverage datasets and data processing infrastructure to partially or fully automate matchmaking through the use of recommendation engines.
MSPs have a functional purpose—a reason participants benefit from interacting with each other. For example:
When this functional purpose is elevated into a shared purpose, it provides a 'reason for being' and intrinsic motivation for the community, transcending transactions. For example:
Organizations that attempt platform strategy without a shared purpose may seem to have the correct functionality but will not be as likely to achieve network effects; this is seen in generic marketplaces which imitate larger players but feel 'flat' or less active, more like a listing of advertisements than a community.
These platforms exchange value through monetary and non-monetary marketplaces. Examples include:
Monetization of these marketplaces can take the form of flat fees, commissions, subscriptions, and escrow or asset holding services, among other methods.
Multi-sided platforms have some self-service digital tools to benefit their users. These tools, or modules, provide entry points for participation, allowing users and strategic partners to co-create, consume, and extract value in surprising ways.
For example, common MSP infrastructure components include:
One significant change that multi-sided platforms demand is that firms rethink the place of IT. Traditional IT skills and infrastructure such as networking, database management, and internet access are more important than ever. However, as organizations create or participate in multi-sided platforms, they have the opportunity to expand their focus on IT as a utility—basically confined to a single department in a business—to digital as a capability in every part of the business. IT doesn't stop supporting essential functions of the company—instead, it starts providing and connecting components needed for new and exciting digital value propositions. One of the most well-known examples o f this shift from utility to capability is Amazon's elevation of its internal web hosting technologies into their own product, Amazon Web Services, which then expanded into being a multi-sided platform in its own right.
As part of this shift, organizations and the individuals within them, must embrace data and APIs to ensure they can offer value in today's shifting digital landscape. This poses significant challenges for IT organizations as they sort out the cost centers of the business—tangled webs of interdependent technologies—while also trying to launch new revenue-generating functions.
Backend infrastructure for internal use only
Siloed and inflexible set of closed systems and data, built for specific goal(s)
Cost center: infrastructure streamlines existing processes but does not attract new customers or create new revenue opportunities
The company creates, delivers, and maintains all value in the customer relationship via a single product or suite of products
Backend infrastructure also interacts with users and partners
Fully open and interoperable systems and data, built for third parties to 'plug and play'
Revenue generator: infrastructure supports a marketplace where third parties can create independent offerings that attract new customers
The company hosts a platform that enables customers, strategic partners, and other third parties to co-create and extract value as well
Data is a critical element that enriches multi-sided platforms. Effective use of data to create value is often the difference between a platform that feels flat, 'clunky,' and lifeless and one which feels more customized and navigable. Information about users, marketplace offerings, devices, and the environment can be used to create value. These data sets include:
You can find more data types in the Data Types Explorer.
Often platforms employ a 'big data' strategy; big data is the aggregation of data points into large datasets, then analyzing those datasets to find patterns. It's called 'big' because this strategy involves merging many different kinds and sources of data to run machine learning processes that were not possible before.
Where this is most useful, however, is when it is connected to 'little data' strategies. In this context, 'little data' means specific data points about an individual. For example, the Apple Watch collects a large amount of data from individual users. Apple emphasizes using the watch for health reasons, pairing insights about simple steps users can take to improve their general health with gentle encouragement.
Using machine learning (a subset of artificial intelligence), predictive analytics, and other tools, a platform can make recommendations to users about people they might want to connect with (as a social network does), what apps or products might be useful to them (as app stores and online marketplaces do) or information (such as news stories) which might be of interest to them.
As an example, Facebook applies its advanced data capabilities not just to advertising but also to the real needs of its users, like suggesting connections with old friends and fostering good memories by suggesting users revisit old content in which they and their friends are 'tagged' and expressed a positive sentiment.
A multi-sided platform’s host has a crucial job: to reduce the friction of interactions on the platform and increase the value of the community’s engagement.
Examples of friction-reducing of value-adding jobs for hosts of MSPs:
MSP hosts may also be expected to create common modules or shared functions, depending on the platform's purpose. They may:
Community members bring life to MSPs. Participants often:
Think of Apple. While the company began as a computer manufacturer, it undertook a transition from products to platforms with the introduction of its iTunes software and iPod devices. In the mental model of the multi-sided platform, these initial components would be considered 'infrastructure.' iTunes created an entirely new music experience whose value extended far beyond the songs themselves. Users could organize their music and build playlists. Later, Apple partnered with content developers to offer a podcast directory (an example of community), as well as music labels to offer online song sales (a marketplace). Users could then discover new artists and recorded shows (podcast episodes), stream songs and leave reviews. In fact, they didn’t need to buy a single song on iTunes or own an Apple device to extract a great deal of value from the platform and its free tools, but that value earned attention from those users, many of whom later became paying customers. Over time, Apple added functionality and enriched its datasets, offering even more recommendation and curation value.
According to standard business models built around the idea of selling “things,” a user who never translates into a paying customer is an unsuccessful sales conversion.
Within a multi-sided platform model, which encompasses many different kinds of value, users like this can be a prized and vital source of co-creation through contributing reviews, sharing playlists, etc.
Airbnb is a helpful example here. Emerging from the vacation rentals market, the company was clear that its true value proposition was to provide customers with on-demand beds. But instead of creating every single part of the supply chain necessary to deliver on that offering, they linked up with strategic partners to build out their MSP and create additional value simultaneously.
They also tapped into the infrastructure, communities, and marketplaces of Apple, Google, and Facebook's multi-sided platforms. In this way, they could promote the company via targeted ads, encourage users to refer their friends to the service and create an even more seamless user experience via features like single sign-on (SSO), which meant users didn't have to create new usernames and logins but could just use one of their existing accounts to get started.
Each party in this constellation of platforms had a key role to play.
Airbnb paired hosts and guests in search of beds. They focused on matchmaking, facilitating transactions, and mediating user relationships.
Mastercard and Visa facilitated secure online payments, so users didn't have to transact in cash or checks with people they didn't know.
Apple's iOS and Google's Android paired users and developers looking for apps. This meant Airbnb didn't have to build as much technology infrastructure and gained a channel to find new users.
Facebook brought together communities around stories. This allowed Airbnb users to get recommendations from their friends at the same time that the Airbnb brand got 'earned' exposure to new potential users.
Each platform has at least one role to play, and together, they are greater than the sum of their parts. They all benefit from increased traffic and connect securely and stably via application program interfaces (APIs). While it would have been possible for Airbnb to develop the components of their multi-sided platform all on their own, they were able to grow quicker by tapping into the network effects and specialization of other MSPs.
Multi-Sided Platforms are powerful business models that may take some time to get started, but this decreases with the availability of off-the-shelf tools and the interconnectivity of other, existing MSPs. MSPs concentrate power in platform hosts, which has increased users' scrutiny of how democratic and fair these platforms are to both creators and consumers.
Participation in MSPs opens up new avenues for connections and livelihood for many users.
Companies considering launching MSPs should be wary of the impulse to re-invent existing platforms or infrastructure; it's often more useful to participate in existing MSPs than to create new ones.