The Platform Economy is driving the most profound global economic change since the Industrial Revolution, and understanding its nuances is essential.
By Michael Biltz
The growth of the digital economy has put it on course to account for 25 percent of the entire world economy by 2020, up from 15 percent in 2005, according to recent findings from Accenture’s Digital Economic Value Index. As a result, more companies are turning to platform-based business models to capitalize on the unprecedented opportunities today’s digital economy offers.
Identified as the Platform Economy, one of five trends outlined in The Accenture Technology Vision 2016 (along with Intelligent Automation, Liquid Workforce, Predictable Disruption and Digital Trust), the value of this trend lays in companies’ ability to create entire ecosystems that do much of the work to grow the business and drive strategies. The platform has become the business model to open up entirely new growth opportunities in every industry. This rapid expansion is currently represented by the top 15 public platform companies, such as Amazon, Google and Alibaba, which account for $2.6 trillion in market capitalization worldwide.
Companies from every sector are making strong plays to position themselves as the default platform for their industry, including Philips (health care), Fiat (connected car), Disney (MagicBands), and Caterpillar (connected machines), among others. Take Philips for example: Philips has the bold vision to reinvent health care. By launching the Philips HealthSuite platform with three different cloud partners—Salesforce, Amazon AWS IoT and Alibaba AliCloud—the company is placing a major strategic technology bet on a platform business model to unleash new market opportunities, from patient management to data collection to consumer and home devices. Its goal is to grow market share across the continuum of healthcare needs—from healthy living, prevention and diagnosis, to treatment, recovery, and home care—addressing a market with a combined value exceeding $100 billion.
By recognizing and unleashing technology’s power through the development of platform-based business models and strategies, leaders are capturing new growth opportunities, ultimately driving the most profound change in the global macroeconomic environment since the Industrial Revolution. This is reinforced by 81 percent of our Accenture Technology Vision 2016 survey respondents who agree that platform-based business models will become part of their organization’s core growth strategy within three years.
Platform companies are playing an entirely different game with a new set of rules, requiring them to do more than alter their technology approach. Instead, it mandates companies to run their business off of different economic principles. There are three rules that underpin the Platform Economy which can help companies better understand how to maximize its copious opportunities:
*Network Effects/Two-Sided Market: 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. The network effects of platforms, with more connected users and transactions, drive value creation and scale.
*Distribution Power Law: Platform business models that enable scale allow others to generate profits in the “long tail” of the distribution curve, avoiding diminishing returns associated with traditional (linear) value chain models.
*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.
The Platform Economy represents a decisive economic shift–from supply-side to demand-side economies of scale. This results in companies creating value by tapping into resources and capacity that they don’t have to own. Apple, for example, has mastered demand-side economies of scale with the iOS App Store. Launched in 2008, the iOS App Store is an ecosystem of nearly 380,000 developers that created 1.5 million applications that have been downloaded more than 100 billion times. They have generated $33 billion in sales by the end of Apple’s fiscal year 2015. Based on Apple’s 70/30 split with developers, the App Store has generated $10 billion for the company, enabling Apple to harvest the resources of the ecosystem–resources it does not need to own.
Whether a company “owns” a platform ecosystem or is plugging into another’s, what matters is having both a platform strategy and the business expertise to exploit it. Progress starts with a clear understanding of which parts of the business are prime for adaptation to platform business models, along with those that are most vulnerable to unforeseen attacks from other platforms.
To survive and thrive in today’s digital economy, companies must master the strategic use of digital technologies to build successful platform business models. Their business’ future depends on it.
Michael Biltz is the managing director of Accenture Technology Vision.