Efficiency is a key goal of platform business models

Platform business models generate value by bringing consumers and producers together — ideally in a way that is more efficient and qualitatively better than in the past. The framework for achieving this objective rests on three elements, according to Sangeet Paul Choudary, founder of the think tank and advisory firm Platformation Labs: First, of course, there has to be an “ecosystem” of participants who want to interact. Second, there has to be data analytics to intelligently match up the right consumers with the right producers, and finally there is the underlying technology and governance to ensure these interactions are as efficient and high quality as possible.

Choudary spoke with SearchCIO staff at the MIT Platform Strategy Summit in Cambridge, Mass., about the success of Uber as a platform, the role of governance and spelled out the responsibilities that each of the three building blocks of a platform business model shoulders to ensure success.

What are the goals and requirements for building a platform business?

Sangeet Paul Choudary: A platform needs to provide an infrastructure that enables producers and consumers to come together and start interacting with each other, and producers and consumers of value will come together only if the platform makes the interaction between them more efficient than when it was offline. Think of how you’d interact with a taxi driver in the real world. You’d walk up to the curb, hail a taxi, the taxi would stop, and you’d take the ride and then pay cash at the end of the ride. And all of that interaction is now abstracted and internalized into Uber as a platform. And the reason we use Uber is because it makes the interaction much more efficient than it was traditionally. So the goal of the infrastructure is to ensure that the interaction becomes more efficient.

To make the interaction efficient is not just an infrastructural problem. It’s also a governance problem because you want to ensure that the right producers match to the right consumer, you have good quality; you have good quality on both sides, and a good experience of usage. And the responsibility for a lot of that governance lies with the platform to ensure that a minimum level of quality is delivered.

What this leads us to is that platform business models fundamentally have three building blocks. The first building block is the infrastructure itself and that sits in the middle of the two other building blocks, sandwiched right in the middle. Under the infrastructure sits the data. The data is what gives the platform intelligence about how to match producers and consumers. Above the infrastructure, the platform accumulates a network of participation of producers, consumers, the value they create, and the value that are exchanged between these two sides. And so these three layers — the infrastructure which contains the tools and rules of participation, the data that contains the intelligence for enabling this exchange, and the network that participates in this exchange — are the three primary components of platform business models.

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