Have you ever thought about what newspapers, estate agents, and technology companies such as Amazon, Google, and Facebook have in common? The answer to this question lies in the business model that these companies adopt, namely that of a multisided platform. Some of the most valuable companies in the world such as Apple, Amazon, Alibaba, and Google operate multisided platforms. By learning about this business model you will understand how these companies work, their impact on the global economy, and the challenges they pose for digital governance as major players in the global digital ecosystem. At the end of this lecture you will be able to explain what multisided platforms are, and identify the features of this business model, and the impact of multisided digital platforms on the economy. A multisided platform is a business model that involves distinct but interdependence sets of users interacting with one another via the platform. A platform is an entity in the middle of two or more sets of distinct users on different sides of the market that brings those sides together. For example, a music streaming platform matches listeners with artists and with advertisers who want to advertise to music fans. A ride-hailing platform matches drivers with passengers. A search engine matches users searching for information with content providers, and advertisers, and so on. How do multisided platforms differ from more traditional firms, for example, manufacturers. A manufacturer creates value by producing a product within the firm. In contrast, multisided platforms create value through the exchanges they facilitate between different user groups. They are matchmakers and generate revenue through the activity of making matches between users who have something valuable to exchange with one another. But how does a multisided platform make money? This is quite tricky, particularly at the earlier stages and it's quite common that multisided digital platforms do not make any profit for some time. Let's think about why that might be the case. In order to succeed and generate any revenue, platforms must get on board users from all sides. For example, a ride-hailing platform needs to have both passengers and drivers. Successful platforms benefit from so-called network externalities or network effects. This means that the participation of one group of users in the platform creates externalities, generally benefits for users on the other side of the platform. For example, the more drivers who join a ride-hailing platform, the more riders are likely to join the platform too. This can happen on the same side of the platform too. The more friends you have on a social media platform the more likely you will join that platform rather than a competing platform which none of your friends have joined. Can you see the chicken and egg problem that the platform must solve to succeed? A platform has to figure out whether to get the riders or drivers on board first, and in any case, how to attract either side to the platform in the first place. To solve the chicken and egg problem the platform may offer to service for free to one side of the platform. Think about it. Have you ever paid to use a search engine, or have you ever paid an online marketplace to shop on the platform? You almost certainly have not. It's because of network effects that such platforms often do not charge anything to users on one side. When those users are on board the platform then tries to get the paying side on board. The users on the paying side usually want to reach the users on the non-paying side. For example, they may want to advertise to them. To reach the users on the platform they will pay the platform to show their advertisements. This is how search engines such as Google and social networks such as Facebook and Twitter generate revenue. Other platforms generate revenue in different ways. For example, one common method is to facilitate transactions, contracts between two sides, in return for a commission, usually a fee charged as a percentage of the transaction value. This is how marketplaces like Amazon or Alibaba, and online travel agents like booking.com operate. On platform markets, network effects can also lead to so-called winner-takes-all or winner-takes-most dynamics. As a platform starts to succeed and grow, it can get larger and larger as more users join that platform to the point that no other competing platform can enter the markets and attract users. It's like a snowball effect. This can lead the market to tip in favor of one platform, leaving no room for competitors. Strong network effects can lead to concentrated markets where users have high switching costs or do not multi-home. That means that users do not or cannot switch between our simultaneously use competing platforms for the same service. Having said that, network effects can make these platform markets also more efficient. Now that you know about the important features of multi-sided digital platforms and how these may affect the structure of a market, let's turn to the impact of platforms on the economy. Multi-sided digital platforms generate numerous benefits for all users. You have probably used their services at least a few times today to connect with your friends or to read the news. You're using a platform right now to watch this video. Platforms can increase efficiency of markets by lowering transaction costs and enabling new types of transactions. For businesses, they can simplify and reduce the costs of logistics and payment processing, enhance communications between suppliers and/or consumers, and offer tailored advertising possibilities. They can also enable new firms to establish an online presence and generate revenue in a global marketplace. As platforms provide both small and medium-sized enterprises and large companies with a distribution channel, they level the playing field between them by providing the same exposure to potential customers for both. For consumers, platforms lower search costs, facilitate price and product comparisons, and distance shopping. Similarly, platforms create new options, such as shared workspaces, ride-hailing, food delivery, and freelance employment opportunities. These features provide consumers with more information, convenience, choice, and competition, which lowers prices and improves quality. This is not to say that the economic effects of platforms have all been beneficial. In recent years, digital platforms, particularly those of the big tech, have raised many competition and privacy concerns. Some commentators argued that the big tech platforms such as Google, Facebook, and Amazon, have become so powerful, they should be broken up. Numerous tax, employment, and data-related concerns voiced globally also suggest that there are wide-ranging governance issues that require consideration when discussing the overall economic impact of platforms. Platforms may have also put companies out of business. In the long run, it's beneficial for less efficient companies to exit markets and be replaced by more efficient ones for consumer welfare and productivity. But this has to happen within the competitive environment, and these effects must be distinguished from those that distort competition. This video explain the business model of multi-sided digital platforms and the unique features of this model. It also covered the main impacts of platforms on the economy. In later lectures, you will learn about how one particular area of law, competition law can tackle the market distortions that multi-sided platforms can effect to their business practices. In the meantime, if you'd like to find out about the arguments in favor of and against breaking up the big tech companies and the stakes involved, you can use the link below to watch a live debate on the topic in which I participated.
