Digital platforms and the future, opportunities for innovation and entrepreneurship
On 20 January 2022, the Rafael del Pino Foundation organised the conference live on the Internet through www.frdelpino.es entitled "Digital platforms and the future, opportunities for innovation and entrepreneurship" which will be delivered by Michael A. Cusumano, Deputy Dean of MIT Sloan.
Michael A. Cusumano is Distinguished Professor of Management and Deputy Dean at the MIT Sloan School of Management. He previously held a joint position in the School of Engineering. Professor Cusumano specialises in strategy, product development and entrepreneurship in software, as well as in automobiles and consumer electronics. At MIT, he recently taught Platform Strategy & Entrepreneurship, as well as Strategy & the CEO. During 2016-17, he was on leave as Special Vice President and Dean of Entrepreneurship and Innovation at Tokyo University of Science, where he founded the Tokyo Entrepreneurship and Innovation Center and designed a new Technology Management curriculum, as well as a new business school that merged the Graduate School of Innovation and the School of Management. Cusumano graduated from Princeton in 1976, received his Ph.D. from Harvard in 1984, and completed a postdoctoral fellowship at Production and Operations Management at Harvard Business School during 1984-86. He is fluent in Japanese and has lived and worked in Japan for over eight years, with two Fulbright scholarships and a Japan Foundation grant to study at the University of Tokyo. He has been a visiting professor at Imperial College, the University of Tokyo, Hitotsubashi University, the University of St Gallen, the University of Maryland and the Ludwig Maximilian University of Munich. He has consulted and lectured for some 100 organisations including Alcatel, Amadeus, AOL, ARM, AT&T, BMC Software, Business Objects, Cisco, Ericsson, Fiat, Ford, Fujitsu, GE, Fidelity, Hitachi, Huawei, i2 Technologies, IBM, Intel, Liberty Mutual, Lucent, Microsoft, Motorola, NASA, NEC, Nokia, NTT Data, Philips, Robert Bosch, Schlumberger, Siemens, Texas Instruments, Toyota, Toshiba and Verizon. He is currently a director of two publicly traded financial services and technology companies: Orix Corporation in Japan and Ferratum Group in Europe. He has been a director of Patni Computer Systems in India (sold in 2011 for $1.2 billion) and Fixstars Corporation, a Japanese developer of high-performance software applications. Most recently he was a director of Zylotech, a predictive analytics company operating in Cambridge, MA. He is a former editor-in-chief and president of the MIT Sloan Management Review and writes regularly on technology strategy and management for Communications of the ACM. In 2009, he was named one of the most influential people in technology and IT by Silicon.com. Cusumano has published 14 books and more than 120 articles and columns. His latest book is The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power (2019, with Annabelle Gawer and David Yoffie).
Summary:
On 20 January 2022, the Rafael del Pino Foundation hosted a lecture by Michael A. Cusumano, Deputy Dean of MIT Sloan, entitled "Platforms and the Future. Opportunities for Innovation and Entrepreneurship.
Cusumano began studying platforms in the early 1990s. Platforms are a combined explosion of technology, government policy and entrepreneurship.
Platforms are all around us. We talk about different types of platforms. They can be computers, mobile phones, video games, enterprise systems, the internet of things, web services. Virtually everything is organised through platforms. In Europe there is a concern that almost all the big platform companies are American or Chinese. There is a long history that should make us think about how things are.
Another important thing is that the platforms work together. The Internet works on top of computers. This is how the world of technology is organised, layer by layer. This concerns us as people and as investors. These companies are now worth billions, Apple, Alphabet are very powerful, more and more. It is very important to understand how they work and how we can create new generations of these companies.
There is a difference between a company's platform and the industry platform. The industry platform is a component that many companies have access to in order to create their products or services. So it is a lower layer or product that becomes an ecosystem and companies produce complementary products or services. In addition, there is another phenomenon, it is the network, i.e. the more users there are on a platform, the more valuable that platform becomes. This results in exponential growth, not the old-fashioned linear growth. The effects are feedback loops. Platforms allow these network effects to happen.
The concept of effects dates back to the beginning of the 20th century, when telephony started to develop, because it is a network. Modern platforms mean that there are several entities involved. We also talk about platforms in industry, for example, a car company developing an underbody that can be used in several cars. This concept of components that can be used in different groups has been very common in engineering. With platforms we open that up to other parties, through open innovation, so that various modules are available for third parties to invent. That's what we call the industry platform, with customers, partners. Millions of users and thousands of companies can participate.
The iPhone is fantastic with its functions and applications, but there is something wonderful. It exists with a camera and a flash that develops in a wonderful way because someone says that with a code the flash turns on and it can be a torch. That's what makes it a platform, not a product. Apple doesn't come up with this. Now there are millions of these things, which Apple can't think of, but other people can.
The platform in an industry brings together more than two market participants. In the case of the iPhone, creators and users come together and the platform is the nexus. This creates direct and indirect effects. They can be very powerful. The value of the platform emanates from these network effects, from being able to attract more innovations to create more connections than we could ever get. A third reality is that these companies have to start up, how to create that value. Value results when both sides exist. If the value of the iPhone depends on combining creator and user, this problem can be solved with a product strategy, opening up the value for the user and waiting for the other side to arrive. All platforms have to solve this more complicated problem.
There are two types of platforms. One is innovation platforms. It is taking a system with some elements and using it as a product and as a foundation for other companies, which can use it as an application for their products and services. There are other platforms that share features, which are what we call transaction platforms, which are those that allow two or more peers to come together to exchange information or buy goods or services, such as Amazon's market place, people who want to communicate with other people, financial transactions. The richest companies in the world are hybrids, they have combined them, like IOS with its App shop to distribute different applications. Almost all platforms have created a mechanism to distribute these applications.
These companies have a spectacular start-up but then they also have spectacular losses. Platform companies have half the number of employees and sell twice as much, have almost twice the profits and almost three times the market value of non-platform companies. They are companies with few assets, where the markets link buyers with sellers, people who want to get hold of the asset without owning it. The success rate is 17%, i.e. 17% of those that try survive.
If you make the product available to third parties to improve it, you have to have an innovation platform. But if you believe that more value can be created by connecting participants, a transaction platform would be a better option. This is what hotel companies are doing. In the case of Apple, they chose to open up the system and allow a platform to emerge in the industry. If you are in a market where entrepreneurs are starting to launch these solutions, then you platformise. The best platform, which is open, modular and fosters the best ecosystems, is going to survive.
Apple created a far better product with the Macintosh, which was launched in 1994, than the IBM computer launched in 1982, which incorporated Microsoft's MSDOS. But Apple didn't manage to take over the market, it didn't get more than 2% until it launched the iPhone. So the winner is a computer with more applications, so the winner was Microsoft. The same thing happened with video. The Beta system disappeared in the face of the VHS system because there were more tapes recorded on VHS than on Beta. The owners did this deliberately through relationships with film producers, etc. This is true in many other cases of platforms.
You have to think about who you are trying to attract, what the platform would be like, whether you are looking to create a product or a market, or a bit of everything. You have to decide what your market is, think about the business model and then there is a set of rules or norms for the ecosystem. You have to think about the importance of governance. ATT launches the yellow pages and thinks about how to get someone to advertise when there are no phones. What it did was get everybody to have a phone, gave away the yellow pages and charged advertisers.
Users are the last to worry about. Bill Gates came to the conclusion that demand would be driven by applications and started creating them. So the user was not so important. Jobs thought the device was more important and he was wrong, the Macintosh didn't take off. In the case of Facebook, Mark Zukerberg hit the nail on the head because the users were the most important thing. The most important thing is that access is free. Bill gave access away for free while Jobs charged $1,000 to give access to anyone who wanted to create an application. Zuckerberg gave it away and thought about charging advertisers, but he opened the interface to developers. Users stick around, generate more information and all this benefits the platform. Manipulation is the dark side of what can happen to platforms if there is no governance.
When something new emerges you are going to have a kind of wild world so you have to pay attention to what you do. There have been problems with platforms that are too powerful and control competition or prices. There are times when the service is given away, Microsoft gave away a search engine and crushed Netscape's competition. Google's Android is free. Because it is given away for free is why these problems, these monopolies, are created. Companies have to control themselves.
Another very important thing is local regulations. Uber says it is not a taxi company, but it has almost become one. Airbnb says it is not a hotel and does not have to pay hotel taxes, but now we have seen that it is a business that has to compete on a level playing field. So does Amazon. At first, the regulation lagged a bit behind. Facebook says it is not responsible, the creator of the information is responsible. The question is who is the employer and who is the employer. These platforms are more efficient than traditional companies, so you have to think that the playing field is going to have to be levelled.
Platformising a bad business does not per se make it a good business. The business has to be good, but many people have mistakenly thought that this is a new world of business and it is not. It is a real business. Industry platforms have to solve a two-part market problem. Digital technology is going to be very positive, but it has to solve the problem. If all it does is give something away or lower the price, it's not solving it. Also, the more the platform grows, the more money it is going to lose. We see it in Uber, which needs more drivers and more customers, but since it doesn't have them, it uses discount systems, which is a formula for losing money that goes to the drivers and the customers. It's a lousy investment. It's like a Ponzi, there will come a time when the whole thing collapses. An example is a company that was buying bicycles and renting them out, but was renting an asset at a lower price. The same with another company that was renting office space. This is not what has happened with Airbnb.
You have to start with a good product or service, look for an imbalance between supply and demand, develop a platform for the parties to meet. You will have to subsidise the most important part, at least at the beginning, but then you have to grow thanks to network effects, not with low prices or subsidies.
There are many new platforms around the corner. There is more combination of innovation and transaction in them, which are getting bigger and more complex. They are new technologies, such as artificial intelligence or machine learning. Data has to be brought together with different devices and you don't know if there is a single company with all the solutions. This is the case of autonomous vehicles, where we have platforms at the group level. And then the sharing platforms for those vehicles. It's a perfect environment to think as we should about platforms, looking at safety and efficiency.
Biotechnology and gene editing are very specific technologies, where there are multiple facets and the value chains are so long that you have to think of a market to share this knowledge. This is how we are thinking about genetic material. With transaction platforms it may also be possible to share services.
Quantum computers are a new platform that harness the behaviour of atoms at the quantum level and use them as circuits that simulate different phenomena that we can programme using microwaves. So there are many opportunities for transaction platforms that guarantee secure communication. There are two types of computers, one analogue and one digital, competing with each other.
These new technologies level the playing field and can solve major problems, such as global warming, mobility, disease, pandemic research, secure communications. The opportunity is unique to come up with a solution, but it requires cooperation between universities, with companies.
The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.
The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.
