Proliferating digital platforms will be at the heart of tomorrow’s economy, and even government

Special report:Tech startups
Platforms
Something to stand on

Jan 18th 2014 | From the print edition


PROVIDING THE RIGHT platform is sometimes all it takes. Instead of planning new pedestrian plazas by the usual bureaucratic means, New York City’s department of transportation just marks an area on a street with temporary materials and then lets local organisations, architects and citizens decide what to do with it. The programme has so far produced 59 plazas, including the Pearl Street Triangle in Brooklyn, a small urban oasis with big potted plants and shaded seating.

In the physical world, platforms can be simply something to stand or build on, like a New York City street. They can also be basic inputs for many other activities and products. Railways allowed services such as mail order to develop; the power grid brought forth a plethora of electrical household appliances; and standardised containers boosted global trade. Even Barbie dolls can be seen as platforms for all kinds of profitable add-ons, such as shoes, wigs and handbags.

But although physical platforms have been around for a long time, the idea did not attract much attention until the rise of the software industry in the 1980s and 1990s, explains Michael Cusumano, also of MIT Sloan School of Management. The industry quickly split into two parts: operating systems (the platforms) and applications that ran on top of them.

Bill Gates, the founder of Microsoft, realised much earlier than his rivals that power (and thus profit) rests with those who control the operating system, in his case Windows. He also saw that the key to creating a successful platform is building a thriving ecosystem around it to get the network effects going. The more programs that run on Windows, the more users will want it, and therefore the more attractive it will be to developers.

Beyond railways

Some platforms are internal to a company. In the car industry a vehicle’s main components, including steering, suspension and power train, are often shared by different models. Other platforms, such as Windows, serve an entire industry. Yet others are “closed”, meaning that access is tightly controlled, as for Apple’s iPhone. The most widespread are the “open” ones, which everyone can use without asking, such as Linux, the open-source operating system.

Intrigued by Microsoft’s success and its subsequent antitrust woes, academics such as Annabelle Gawer of Imperial College Business School dug deeper and found that platforms are a common feature of complex systems, whether economic or biological. The core building blocks are kept stable so that the other parts can evolve more rapidly by combining and recombining them and adding new ones.

That is what is happening in the startup world: new firms combine and recombine open-source software, cloud computing and social networks to come up with new services. In fact, many of these new services are application programming interfaces (APIs)—mini-platforms that form the basis of another digital product, allowing for endless permutations.

The information-technology industry lends itself to this treatment because bits and bytes can be easily rearranged and replicated at almost no cost. Systems with vertically integrated components such as the mainframe computer tend to give way to architectures with separate horizontal layers such as the personal computer. Today the IT sector looks like a very flat inverted pyramid: the bottom, where economies of scale rule, is made up of just a few powerful platforms; the top, where creativity and agility are at a premium, is becoming ever more fragmented. There is not much in between.

As software eats more and more industries, they will increasingly take on this shape, predicts Philip Evans of Boston Consulting Group. By lowering transaction costs, IT allows big chunks of the economy to reshape themselves and turn into what he calls “stacks”—industry-wide ecosystems that will have large platforms at one end of their value chains and a wide variety of modes of production at the other, from startups to social enterprises and communities to user-generated content.

Stacking up

Outside the IT industry such stacks have only just begun to form. In finance, credit-card networks have long operated as platforms, allowing banks to issue their own plastic money. Yodlee, which aggregates financial data for more than 55m bank customers, now allows startups and other firms to plug into its systems. Some smaller banks, including Bancorp, also see themselves as platforms, keeping the books for innovative online banks such as Simple. Big payment processors, such as First Data and TSYS, are also expected to open up their networks.

In telecommunications and electricity, regulators have pushed firms to go horizontal by forcing them to unbundle their services. As power grids become cleverer, smart-meter apps are likely to appear. A new grid in Amsterdam, for instance, is set up in such a way that startups can use it to develop energy-saving applications. Powerful platforms will also emerge in industries that produce piles of data, such as health care. They can provide startups with opportunities to mine the data to find digital material for new services.

This “platformisation” is spreading even to the very stuff of life. Synthesising DNA is still much more expensive than sequencing it, but the costs are coming down rapidly, and an ecosystem for this ultimate platform is already beginning to form. Half a dozen cities around the world are now home to bio-hackerspaces (such as New York’s Genspace) where genetic hackers learn how to build simple biological machines. Autodesk, a software firm, is developing design tools for DNA, code-named “Project Cyborg”.

As with hardware, America’s west coast and China’s Pearl River Delta may be able to collaborate on this one day—though not everyone would welcome the idea because the implications of such biological machines can be quite scary. Silicon Valley is already home to a few biosynthesis startups, for example Cambrian Genomics, which is developing a machine to print DNA cheaply. Shenzhen is the base of BGI, formerly known as the Beijing Genomics Institute, which does DNA sequencing on an industrial scale.

In business the effects of platforms are already making themselves felt. Companies must either turn themselves into one or become agile ecosystems, complete with startups and accelerators, says John Hagel of the Deloitte Centre for the Edge, a research arm of Deloitte, a professional-services firm. Coca-Cola, for instance, is planning to launch accelerators in nine cities, including Berlin and Istanbul. Such efforts will change the understanding of what constitutes a firm, says Mr Hagel.

The spread of platforms will bring radical changes for workers, too. Many more will become founders or be employed by startups. “They will be labourers in the technological gardens where a thousand flowers bloom, but only a few will grow to become really big,” says Thomas Malone of the MIT Sloan School of Management. And experts note that some people may find it hard to get used to such a fast-moving world of work.

Governments will also have to adapt. Antitrust authorities will need to be alert because platform operators, which are open quasi-monopolists, will have strong incentives to maintain their dominance. The most powerful of them, such as Amazon, Facebook or Google, will amass huge amounts of information and will form the central data banks for the knowledge economy.

No less than companies, governments will have to consider what role they want to play in this new world. Currently they resemble a “vending machine” offering a limited set of choices, says Tim O’Reilly, an internet expert. But they would work much better as a platform for a “thriving bazaar” of government services, offering basic building blocks that others can use.

This suggests that the state needs to limit what it does but do it well. “It has to be both narrower and stronger,” says Paul Romer of New York University. In a future digital world big business and big government may play similar roles, as platform managers and curators of ecosystems. Cities or even governments may offer services to other cities and countries in fields such as online identity and regulatory oversight.

All in all, the impact of platformisation will be monumental. Those who see the current entrepreneurial explosion as merely another dotcom bubble should think again. Today’s digital primordial soup contains the makings of the economy and perhaps even the government of tomorrow.

From the print edition: Special report

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