‘Platform’ is one of the hottest keywords these days. Out of the 10 most valuable companies in the world, 8 of them are platform companies such as Facebook, Amazon, and Google, and 3 of them are worth more than a trillion dollars. More importantly, 70% of all Unicorn companies (startups worth more than $1billion) partake in the platform industry. It is undeniable that the platform economy is a new wave of change with the potential to create new opportunities for wealth.
Before diving into the business structure of the platform companies, it is important to first have a clear idea about what ‘platform’ exactly means. Platform, as Marco Toregossa puts it very nicely, is “a business model that creates value by facilitating transactions between buyers and sellers in an ecosystem, to capture a part of that value.” In modern macroeconomics, we learn that free transactions can allow every participant to be better off in the end, allowing everyone to focus on doing something he or she has a comparative advantage in. The platform industry allows this transaction to be almost seamless, taking full advantage of digitalization. For example, the Korean unicorn company “Carrot Market” created a new digital marketplace by connecting the producers willing to sell their used goods, with the consumers who want to buy the goods at a more affordable price. “Carrot Market” now has 20 million downloads, and over 10 million active users. For a person with the demand of selling or buying secondhand products, using “Carrot Market” is a no-brainer. It is convenient, easily accessible, and most importantly, free of charge.
So, what makes platform companies so profitable? The answer to this question can be summarized into three important points. First, platform companies do not have to hold assets which can be a risk factor to profitability. Airbnb, a house-sharing platform, can be an example. While traditional hotel businesses expand their business by continuously buying real estate building hotels, Airbnb simply does the same business by connecting the people willing to share their estate with the people willing to pay for that. All Airbnb must do is maintain this digital marketplace with suppliers and consumers. Second, platform companies have very low marginal costs. Traditional companies in the B2C industry have to employ someone to promote and market their product for every transaction made. For example, when Walmart opens a new store, it has to employ many workers to provide service to customers. Platform companies such as amazon simply use AI and digitization to recommend customers items based on their records and allow payment without having to employ anyone like Walmart. All they need is one skilled programmer that can code out such functionalities and use them again for every customer. Third, platform companies can use AI and big data technology to get more information about the customer and provide targeted services. Unlike offline locations, a website is easily traceable. Every click, exit, or any action on a digital environment is traceable. All major platform companies use AI and big data technology to analyze customer data and provide personalized services.
Due to all these advantages platform companies have, these days, traditional companies are also investing billions of dollars to bring their services to the digital world. In Korea, retail conglomerate, Shinsegae recently launched an e-commerce service called ‘SSG.com.’ It aims to gain a comparative advantage in delivery time from other e-commerce giants such as Coupang and Naver Shopping by extensively using its brick-and-mortar stores located all around Korea as distribution centers. Korean Banks, such as Kookmin Bank and Shinhan Bank are also aggressively investing in digitalization of their services, as digital banks such as Kakao and Toss, armed with convenience and digital accessibility, arise as their viable competitor.
The platform industry is an industry where the first-mover advantage is the most prominent. This is because major platform companies can perfect and personalize their services to the levels second movers cannot even imagine, using the Petabytes of data millions of visitors spew every day. Today, the platform industry is dominated by American, Silicon-valley bred tech companies, and the NASDAQ index, a stock index composed of major tech companies, is at an all-time high, almost 8 times its level in 2010. The prominence of the platform economy will certainly be as high in the future, if not higher.