While platform business models such as Uber have been hugely successful, in a winner-take-all scenario, the platform as a service model is going to be a different story. In just five years, a small number of platform-based enterprises have dominated the market and gained widespread recognition.
Developers can make more money by creating cloud-based apps that live on a platform and act as a “pipe” value chain that delivers value straight to end-users.
The speed with which things change is fascinating. Take, for instance, the platform business model. Uber used this method to establish a ride-hailing platform that links riders and drivers, and it was a huge success. The market certainly recognizes the value in this company, as evidenced by its recent $120 billion valuations! But what about the service providers that are now pursuing the platform as a service model? Will their future be as profitable and produce similar results?
What Advantages Does a Platform Business Model Offer?
Platform businesses thrive when both supply and demand are established, and each side continues to extract value, resulting in a larger ecosystem. Here are three factors that lead to its development:
- Search costs are reduced (ex: all you need is simply indexed in a website or a platform that you can enter in a few clicks)
- Transaction costs are reduced (It easy to find what you are looking for without paying third party providers that take part in the selling process)
- Enhanced efficiency (Faster is more efficient)
Other advantages might not be as obvious. The value of data obtained from both buyers and sellers’ interactions, for example, might be used to fuel Artificial Intelligence queries or anticipate future customer behaviours or trends. When these platforms are enhanced with a social component, new demand channels or supply categories may emerge, resulting in increased company value.
Let’s See An Example
A practical example of how having an online platform developed in different markets is ARGO Gaming Group. ARGO is a lead generation tech startup based in Sweden. The company, which was founded in early 2020 and is based in Stockholm, has already made a significant impact in the markets it has entered. ARGO offers high-value and quality casino comparison sites across many GEOs and languages.
Besides being a Stockholm-based startup company doing business in the Swedish market, its platform let it expand in other foreign countries such as the Canadian market and the Japanese market.
The Business Model for Pipes
WIRED published an article in 2013 about why company ideas fail. Sangeet Paul Choudary, the author, proposed that there are only two sorts of businesses: “Pipes” and “Platforms.”
Sangeet explains in this essay that most traditional businesses are “Pipes.” He means that normal businesses develop something (a product, a service, etc.) and then sell it to their clients. Like water running through a conduit, value is created upstream and consumed downstream in a linear pattern.
This is a very typical form of business. All consumer items, produced products, and most leisure options, such as going to the movies or watching a sitcom on television, are examples. Online retailers, for the most part, operate in the same way. The key feature of this model is that the end-user or consumer “consumes” an offering created by the seller on their own.
Delivering a Pipe in the Cloud is Today’s Best Option
Sangeet’s observations were spot on at the time of publication. The new wave of platform-based enterprises was gaining traction at breakneck speed. Five years later, at the start of 2019, I would question the practicality of founding a Platform Business today. Several companies have effectively crushed this model to the point where the chances of launching a new one today are slim.
There is, however, a silver lining. Those who provide value through a cloud-based application will benefit from continually decreasing operating and infrastructure costs. Application providers now stand to benefit significantly from the cost reductions resulting from the PaaS business model approach.
Consider cloud-based apps to be the “Pipe” business model of the twenty-first century. The value is important because it is delivered in a linear format – from a supplier to the end-user – that gives highly specialized capability at a competitive cost.
It’s strange how things stay the same as they change.
