The success of platform businesses like Alibaba, Airbnb, and Uber is so remarkable that discussion about them often misses just how hard they are to build. For every successful platform, there are many more that struggle or simply don’t make it. Apple and Google, two of the world’s most valuable companies, have had their share of platform failures as we’ll show. Studying these successes and failures, we’ve identified half a dozen key reasons platforms fail, all of which boil down to managers’ misunderstanding of how platforms operate and compete.
Platform businesses bring together producers and users in efficient exchanges of value – Uber, for example, connects drivers and passengers just as YouTube connects videographers and viewers. And, they leverage network effects – the more participants on the platform, the greater the value produced. Managerial mistakes that inhibit value exchange or network effects can kill a platform. Let’s look at the key errors.
1.Failure to optimize “openness”
Because platforms depend on the value created by participants, it’s critical to carefully manage the platform’s “openness” – the degree of access that consumers, producers, and others have to a platform, and what they’re allowed to do there. If platforms are too closed, keeping potentially desirable participants out, network effects stall; if they’re too open there can be other value-destroying effects, such as poor quality contributions or misbehavior of some participants that causes others to defect.