The 'Platform Economy' has arrived. Here's what you need to know about it

Industry loves a trend. Economists love a trend. In fact, pretty much everybody loves a trend.

The only thing we love even more is a buzzword to describe that trend. For the past few years the trend in business has been toward two-sided – or, better still, multi-sided – markets, and the buzzword to describe this has been “Platforms.” Usually with a capital "P."

As a recent World Economic Forum report explores, the shift underway from the linear, resource-heavy, producer-driven industrial model to the demand-driven, multi-sided Platform model is both profound and irresistible.

Platforms are certainly efficient in their flexibility, transactional speed and ability to scale up. The benefits accruing to all participants are mutually reinforcing, creating network effects that grow the Platform exponentially with each new transaction. Take the recent #PokémonGO phenomenon. Had it not been for existence of such ubiquitous platforms as Google’s Android and Apple’s iOS, it is difficult to imagine how the hype could’ve spread as fast as it had, leading to - initially - a near doubling of Nintendo’s valuation.

Such market models are not new; they have been around for centuries. What is a Bazaar, which brought merchants together since ancient times, if not a platform? The key distinction of today’s model is proliferation of connectivity and the growing power of data and data analytics. Reinforced by Moore’s law, platforms rely on interconnections and, increasingly, on the availability of low-cost, cloud-based processing, storage and tools.

The cut-throat competition, chiefly played out among the emerging Cloud behemoths of Amazon, Microsoft, IBM, and Google’s GCloud, is providing better services and tools and lower prices almost on a monthly basis, it seems. Indeed, these companies themselves are benefiting from being Platform owners and enjoying the attendant network effects. As more users migrate parts or all of their businesses into the Clouds operated by these giants, we witness the classic economies of scale.

The top players are able to invest more heavily in developing bigger, faster, better and cheaper resources and pull further away from their smaller competitors. And herein lies one of the potential pitfalls of the Platform model. The network effects that generate dynamism and scale also tend to consolidate markets just as quickly. In most cases, they reduce the pool of providers down to a few players. Sometimes, only one is left standing.

What’s interesting, however, is that, while competition is highly concentrated at the Platform-owner level, competition on the Platform is vibrant. Indeed, the Platform itself stimulates this competition. Transactions that would never have taken place in the past are happening many thousands of times over. New value is being constantly created and efficiencies realized. There has been a proliferation of new businesses created worldwide, many with just one owner-employee.

The dilemma for policy-makers is how to ensure this positive dynamic continues while preventing abuse in the foundation layer below. Is existing antitrust law too rigid, too slow, and too feeble to cope with these new abuses of dominant market positions? Are new regulatory tools required to be applied ex ante to protect the proper functioning of markets?

We can begin to detect a slowly emerging consensus on the basic requirements of a future policy framework, whose basic components include horizontal regulation across traditional vertical silos and a more principles-based approach to the policies underpinning the regulation. Competition regulation already is well developed in this regard, with only tweaks required in terms of expertise and speed of execution for the regulators themselves.

As we look to the future, we should expect the Platform phenomenon to disrupt all, or certainly, most existing industrial sectors while stimulating the birth of many new ones. This disruption proceeds hand-in-glove with the overall trend towards disruptive digital advances and sees no sign of slowing down. So long as regulators take a cautious, but firm, approach to ensuring markets function well, and existing companies adapt to the new market and cultural challenges the Platform Economy brings, we will all reap the benefits.

The Challenge of Regulating the Platform Economy report is available here.

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