Tag: Sangeet P. Chaudhary

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Announcing Platform Scale, the book: The pre-orders campaign is now live

Are you building a marketplace, social network or a platform?

Do you ever describe what you’re doing as the Uber for X, Airbnb for Y or the Twitter for Z?1

Do you want to understand why certain startups scale and others fail?1

Over the last few years, I’ve been obsessed with platform business models and their ability to scale. Unlike traditional enterprises, platforms do not scale by scaling internal employees and resources. Instagram gets to a billion dollars with 13 employees while Uber doesn’t own any of the taxis it dispatches. They scale through network effects. As more producers use the platform, consumers find greater value, and vice versa.

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Announcing Platform Scale – The Book

I’ve written about this topic extensively on the blog. And now, I’m bringing it all together as a book meant specifically for entrepreneurs and innovators.

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Platform Scale is a maker’s manual, a guide, for entrepreneurs, innovators and makers looking to build platforms and benefit from this new form of scale. The book provides codified, actionable steps to design and implement platform-based businesses. Platform Scale is a book about unlocking the scale advantages that are possible in today’s connected world.

If you’s building a marketplace social network or a platform, you need to understand Platform Scale. Click to tweet

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Why did I write this book?

I wrote this book because the rules of achieving scale are fundamentally changing but they aren’t understood very well. Platforms need to focus on interactions between users, not simply growth. They need to invest in building feedback loops that keep re-engaging users. The traditional metrics of user growth and active usage do not apply anymore, tracking actual interactions between users is far more critical to scale. We need a new playbook to achieve scale in a world of platforms.

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Platform Scale – The Book Trailer

To learn more about the book, watch the trailer below:

If you’d like to pre-order your copy of Platform Scale, just click on the link below to get to the pre-orders campaign:

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Platforms may be more important than you think

Platform Scale lays out the new rules for scale in today’s connected world. Even if you are not building a platform, you can benefit form the same principles that powered the growth of successful platforms like the ones in the image below.

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If you’ve ever wondered how to solve the chicken and egg problem for a platform or wondered which metrics best show success of a platform, you’ve seen the need for a structured approach to building platforms. That’s what Platform Scale aims to provide.

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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How Alibaba, Android and Airbnb change the geometry of business

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

A keynote laying out the shift that platforms are bringing about in the nature of business today. 

One of the central concepts I talk about on this blog is the shift from linear business models to networked business models: from Pipes to Platforms. The business priorities while building these two contrasting forms of businesses are very different and I’ve explored that in detail inan earlier essay here.

We also note that this shift has already happened in several industries. I explore that in detail in the essay here. (I would highly recommend reading both essays in tandem even if you’ve read them separately earlier.)

Media has already been transformed by this shift and become social. Telecom has been transformed by the explosion of the app economy. Professional services of all kinds are being transformed with the rise of the peer-to-peer sharing economy. And I believe that significant opportunities exist in the manufacturing and traditional goods industries for platforms to come in and create new markets. The rise of the Maker Movement and the growing democratization of 3D printing will accelerate this shift further.

There are three fundamental changes that accompany every such shift in the industries that start getting transformed:
1. New networked markets get created
2. New sources of supply start to emerge
3. New consumption patterns are created

We looked at all these shifts in detail in the rise of YouTube, Airbnb, Elance-Odesk, and to a lesser extent, Kickstarter, in this essay here.

To bring all of these concepts together into one cohesive whole, I want to share a keynote that I delivered earlier this year as the closing keynote at CrowdSourcingWeek 2014. I was invited to speak at the G20 Summit events in Brisbane last week and I shared a further more evolved point of view on how resource-intensive industries like oil and gas and mining will also change because of platforms and how new job creation will be spurred by the creation of new markets.

In this essay, I would like to share the first keynote from CrowdSourcing Week 2014. I hope to share the second set of thoughts from the G20 Summit events in the coming weeks. The video doesn’t incorporate the slides but much of the talk should be self-explanatory.


Industries are getting transformed. While it’s important for startups to understand how things are changing, it’s even more important for the old guard to realize that the traditional rules of business do not apply any more.

One of my constant endeavors through this blog is to address both sides and help share the message of how many of the fundamental rules of value creation in business have changed forever.

Tweetable Takeaways

The three key takeaways from the video, the new rules of business in a networked world:

The Ecosystem is the new Warehouse  Tweet

Community Management is the new HR  Tweet

The Network Effect is the new Scaling Strategy  Tweet

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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Why social networks that pay you may be a bad idea

One of the most common questions I get asked, while talking about platforms, relates to the issue of labor on platforms. Facebook and Twitter, among others, get a lot of value from their users and make billions of dollars, but the users don’t see much kickback.

The economics of free-labor platforms

Social networks like Facebook and Twitter leverage free labor from a global talent pool to deliver a business that has near-zero marginal costs of value creation. A mouthful of words but it essentially means the following.

In traditional Pipe models, every act of value creation has an associated marginal cost associated. There are fixed costs of running the pipe’s infrastructure (i.e. the factory, personnel, equipment etc.) and there are marginal costs associated with the production of every new unit of a good or service in that Pipe business. While most Pipe businesses have a good handle of fixed costs, a lot of optimization work focuses on reducing marginal costs, as that directly helps the company scale. If you can produce more units at less cost per unit, your margins improve and your business scales.

This is where free-labor platforms like Twitter and Facebook becomes interesting. They drive marginal costs of value creation to zero. Facebook incurs practically no marginal costs associated with the creation of a new status update. YouTube, likewise, has no marginal costs associated with creation of a new video. It may incentivize the creation of some videos for a variety of reasons but the video creation cost isn’t borne by YouTube.

This allows such platforms enormous leverage. Coupled with the network effect, that creates a natural pull for value producers (in case of YouTube, video uploaders) as the network scales, this model of free labor is guaranteed to create a form of scale, hitherto unprecedented.

These platforms then monetize the value created (in the form of attention, data etc.) but do not pass back any proceeds to these value creators. YouTube, unlike many other platforms, does share some money back with some producers, but most other platforms are run on free labor.

As a result, one of the common criticisms often leveled against such platforms is the argument that they live off free labor and should logically/ethically/morally ‘do the right thing’ and pass some of the kickback back to the users.

That’s a good idea, right? Think Network Effects

When it comes to platforms, the good ideas are typically the ones that strengthen the network effect and the bad ideas are the ones that weaken it.

Is paying value creators a good idea? Only if it leads to desirable interactions on the platform, that in turn, strengthen the network effect.

Every networked platform needs to structure the right incentives for its users. These incentives may be organic (fun, fame, fulfillment) or inorganic (fortune). But platforms need a balance of incentives that leads to the right types of interactions.

Paying someone to use Facebook or LinkedIn may, for instance, possibly encourage the most undesirable interactions. Teenagers in need of some quick money may fill up a professional network. Even when structured on a model that rewards quality, users would tend to game the system. If higher votes mean more money, entire alternate markets could get created to game the system, buy votes and make money. Such markets already exist for gathering fake fans and followers (and votes, actually).

Essentially, shifting the balance of incentives towards inorganic incentives may often lead to unforeseen governance issues.

The problem gets compounded when you realize that higher governance leads to inordinate friction for new users. What sets apart platforms like Wikipedia and Reddit is their reasonably high quality despite the fact that they are open. But this comes at a cost. New users find it very difficult to break through the hierarchy of the Wikipedia and Reddit communities. But conversely, that hierarchy and tight control over actions is exactly what ensure these communities create quality output.

Any platform that functions well on organic incentives may face issues with weakening network effect and frictional governance when moving to inorganic incentives.

The Poverty Line on Platforms

The other issue with paying your users is that it isn’t actually as good an idea as it sounds. Most platforms rely on social feedback as a measure of quality. Votes, likes, ratings, followers etc. typically indicate quality. If platforms were to reward their users, they would likely reward them on the basis of some such parameter that signifies social feedback.

A curious issue with social feedback is the fact that it makes the rich richer and the poor poorer. If I already have more followers on Twitter, I find it easier to add a few more. If my videos are already popular on YouTube, I am likely to have more subscribers making it easier for every subsequent video to also become popular. As a result, platforms develop a poverty line. Users below this line languish in oblivion hoping for their 15 minutes of fame.

The challenge with any form of monetary incentivization is that it would award the rich (in terms of social feedback) way more than it would avoid the poor. This, in turn, discourages the poor (again, in terms of social feedback) all the more from participating further. A feedback loop sets in and the poor start to abandon such a platform. We already see this in Twitter’s challenge in engaging new users who have just been on boarded.

Summary

This leads us back to the original debate. Is it a good idea to build a social network that rewards its users? If it can do that without harming the network effect, creating clunky governance, or disincentivizing certain types of users, it possibly is a good idea. But more often than not, we see things work out the other way.

Hence, the entire hue and cry about Facebook not sharing money with its users when it makes some $x per user, is too simplistic an argument to be judged purely on ethical grounds. And platforms that take the moral high ground on launching in competition with free-labor platforms often realize that they completely messed up the balance of incentives.

There is a reason why platforms which cater to organic incentives well, perform better than the more transactional ones.

Tweetable Takewaways

Social networks that pay users often fail when they end up weakening network effects. Tweet

Platforms with high friction discourage new users from coming on board. Tweet

Platforms reward some users disproportionately owing to the rich-becomes-richer feedback loop. Tweet

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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How To Model and Evaluate Your Consumer Web Business

Premise: Wealth creation by humans happens in 2 forms, by making “something desirable” or by helping the maker sell it. Everything else is a support function that brings efficiency to these 2 activities. The Web being a communication medium can only help sell something, which happens through some form of lead generation. One might argue that SaaS tools are “desirable” products on the web but the way to see it is that web or the Internet only acts as a distribution medium for the actual product.

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There are 3 dimensions or criteria for evaluating a web business.

  1. How far is it from the “something desirable”?
  2. How exhaustive or selective the target audience is?
  3. Is it single power centered or distributed?

1. Distance from Product: Transaction – Information – Network

The representation above will help you visualize the value chain. The transaction layer is the closest to the product and has most control over the chain – in terms of pricing, availability, purchase experience. Though, this is also the most commoditized layer since most factors are internally controllable.

The information layer helps you discover a product and decide about the purchase. The Network layer helps you connect with the information. The outer most layer has little control in terms of purchase but it is the most defensible layer for a web business.

  1. Value in this chain is created when you push a user inwards from an outer layer. Every change in layer is a lead generated. User moving from one destination to another in the same layer leads to more confusion and is a sign of feature gap.
  2. Facebook and Google Search* are network layer that generates traffic for information sites, like FindYogi, TripAdvisor etc., which in turn generates leads for transaction layer.
  3. Most web businesses are generally an overlap of two of these layers. An effective use of these network with information – like Quora or Twitter is powerful. Tripadvisor is probably the best example of marrying the info+network layer. Ecommerce companies are making a decent attempt at marrying transaction with information so that they can influence the value chain better. MakeMyTrip, Cleartrip already enable transactions; with ratings/reviews they are covering the information layer as well.  Since there is nothing like review/rating in flight booking, this business is getting commoditized and the players are looking to move to lesser standardized products like selling hotels, holiday packages.
  4. Sticking to transaction layer only will make you no better than a payment gateway, which has been commoditized. The fulfillment part in the transaction layer is mostly offline. PayZippy from FlipKart and PayUMoney are making small steps to capture the network layer along. PayPal is a great example of transaction+network layer execution.
  5. The success of each layer depends on what bait you can fetch from the inner layer to entice the user and push her inwards for more. A good basic bait does not generally generate revenue but helps you keep your destination alive. A promoted bait generates revenue for you.
  6. Any layer is useless by itself. You have to do a lot of seeding from inner layer initially and develop relations with your adjacent layers to grow (through SEO, Affiliates, SMM, Content marketing, Ads). Networks by itself are not useful unless it has information. The information layer by itself is not useful if it does not push you to a transaction and the transaction layer triggers the end fulfillment.

*Google search is essentially driven by what human networks are referring to, the search result page is an organized way of showing the information. An overlap of network with information layer.

2. How exhaustive or selective the target audience is: Bundling – Unbundling

The bundling-unbundling theory has been well highlighted by Benedict Evans through his examples of Craigslist and Linkedin. Most web business are trying to solve the same problems in more efficient ways. The eCommerce, travel, social networking and classifieds industries have existed for long on the web, yet every day we hear of companies trying to disrupt these spaces.

For any new business the easiest way to get a foothold in a saturated market is by unbundling a very specific feature for a very specific audience and doing it better than the large established players. As the market grows and your business matures, you add more features and start bundling everything in your industry. The cycle continues. The unbundling-bundling evolution will never cease.

Unbundling can be done based on geography, user demography, product category or a particular feature. Whatsapp is a great example of unbundling of chat from social network and only for your phonebook contacts. Ixigo started as price comparison for flights, then bundled all forms of travel comparison and is now bundling reviews, all this while focusing on a single geography and single industry of travel decisions.

In eCommerce in India, unbundling has failed big time. Most vertical commerce players haven’t survived. The basic reason for this might be the fact that when unbundling based on product category, a major component of fixed costs remains same. Since the game is about scale, the economics does not work out if you try execute a single category better than the market leader. Have we seen any vertical ecommerce player adding more value than FlipKart/Amazon/Myntra and not survived? Zivame has done a focused execution and seems to be surviving.

The parameter you choose to unbundle on is very important. A lot of times unbundling can only get you noticed, you have bundle up to justify economics and user behavior.

Paytm is taking a bold step of unbundling based on user interface. Paytm’s marketplace is available only on mobile app. We will have to wait to see how it pans out.

Good part of unbundling is that it lets you keep a smaller audience 100% happy and grow there on, rather than keeping a larger audience partially happy. As Paul Graham says, “it’s easier to expand user-wise than satisfaction-wise”. The way to evaluate the scalability of business is to see how easily can more geography, user, target product be bundled up.

Unbundling lets you get deep into a vertical, the way FlipKart did with books. Though, there is an issue of market positioning when you later try to bundle more target products. MakeMyTrip faced this challenge trying to re-position from a flight booking site to a holiday booking site. You could mean different things to different users but one user is going to remember you for just one thing – you have a choice of how broad or narrow you want that to be. TripAdvisor, as a company, is focused on travel decision making but it maintains 17 websites, each solving a different travel need with minor overlap, to avoid any dilution in individual value proposition.

Examples of successful unbundling that might happen in India –

  1. While some players, like FindYogi, are trying to crack the buying decision problem, Roposo is taking a crack only at the influencing female fashion.
  2. There is Holidify that is trying to crack only the first step of travel planning – “where to go”.
  3. Jaypore is taking a crack at only high end fashion ecommerce and doing quite well.
  4. Zomato was good at unbundling restaurant search from horizontal local search. There is LoyalOye that is unbundling only event venues search.

3. Is it single power centered or distributed – Pipe vs. Platform

This theory is borrowed from Sangeet P. Chaudhary. He professes this theory in detail at his blog, platformed.

A pipe type web business is one in which the atomic unit of value is created by a single source, or the business under-writes the original source. Example – Ecommerce stores, Blogs. This gives you great control over quality and can usually work at all scale.

A platform is when business opens up to let a larger set of audience create value. Example – Marketplaces. This gives you lesser control over quality but is more capital efficient at scale.

The differentiator is more around how the value is created and not how it is consumed. Both Pipe and Platform have their pros/cons.

When you look at scale in a web business, converting from pipe to platform can give you a great leverage in the market. A lot of businesses change their proposition when looking to scale, though a good move from Pipe to Platform is when the end value delivered and the target audience remains unchanged or expands. What you do as a business internally will change tremendously but that should not affect the end product delivered.

  1. The move by FlipKart from Ecommerce to Marketplace is a good example. Though the company is yet to adopt to a pure play marketplace but the slow transition is making sure the end value is intact. If you look internally the company is now doing less of trading and more of technology.
  2. At small scale, FakingNews is a good example of converting Pipe to semi-Platform when they launched my.fakingnews.com – a UGC based satire news destination. Same target audience, same value proposition but more value creators. “Semi-platform” because the decision making around what gets published is highly moderated by editor. A full-fledged platform is more like 9gag, where everything gets published but only the best gets surfaced.

You create ‘entrepreneurs’ by distributing powers, that means more rewards in the whole system as a function of higher risk taking capability. Platform also enables decentralization of power/decision making, thereby creating lesser bottlenecks and higher efficiency.