The Rise of Platforms

“We connected (almost) everyone: there are 5.5 bn adults on Earth; 4 bn have a smartphone” — Benedict EvansWhat now and what next? What happens when everyone has moved online? What is left to disrupt? Are all internet-marketplaces opportunities already sought after?

At Samaipata, we believe in the Rise of Platforms. Conveniently, it’s hard to be held accountable by such statement as the world “platform” can refer to basically anything. Yet — unfortunately — we’ll come back to a more specific definition further down.

More precisely, we believe that :

• Platforms are here to stay: they have inherent qualities that make them very attractive & defensible business models
• Platforms can further disrupt existing verticals: new waves of platforms can displace incumbents in existing marketplaces categories. No one saw Booking.com coming into Travel; yet Airbnb also took everyone by surprise >10 years later
• Platforms can take on new verticals as the technology stack & business models quickly evolve. Only c. 15% of total global retail has moved online after all and there is still a lot of white space.

I. What exactly do we mean by Platforms?

At Samaipata, the world “platform” refers to a “digital framework that creates the means of many-to-many connections and that defines the terms on which participants interact with one another”

So our definition includes business models beyond the standard 2-sided transactional marketplace that merely connects buyers and sellers of goods & services (e.g Blablacar). We also include:

• SaaS-enabled marketplaces (e.g. Doctolib): platforms combining a marketplace component with SaaS & workflow features on one side at least of the marketplace. The “go-to-market” approach can be one or the other — “Come for the tool or Come for the network”
• Market networks (e.g. AngelList): n-sided platforms where transactions happen in a 360-degree pattern like in a social network. Hence multiple stakeholders can interact and transact on the same platform across different projects
• And many more hybrid models such as payment solutions with software layers (e.g. Stripe), social networks with a matching component (e.g. Tinder), D2C brands powered by a network of suppliers (e.g. Made.com), Neobanks with a financial hub approach (e.g. N26), ML-powered SaaS platforms…

Basically, we need to see “many-to-many” relationships and some kind of network effects built into the model. You can have a read here of what we mean exactly by network effects.

As such, we are interested in both “direct platforms” enabling 1st party commerce (e.g. Amazon) and also in “platforms for others” (e.g. Shopify, Stripe, IG, Youtube). We understand that platforms can provide products and services, but also payments or software interactions as described below:

II. How have “platforms” performed historically?

Platforms have over 25 years in the making:

• Everything started in the 1995s with the rise of Classifieds such as Ebay and LeBonCoin
• Over the last 20 years, we’ve then witnessed 4 waves of new platform models as defined here by a16z (i.e. from “listings” platforms to 2-sided marketplaces, to on-demand platforms, and eventually managed marketplaces).

As with most trends, B2C was faster to adopt those new models with B2B lagging behind:

• In B2C, the disruption is most prevalent in some verticals (for instance in Travel and Food Delivery). And the first phases have been focused on industries making “goods” or tackling simple services rather than more complex services industries
• B2B has been slower as B2B segments are typically trickier to disintermediate & digitalise with higher transactional friction typically involved (due to larger baskets, stronger interpersonal relationships etc.)

As of today, approx. 80% of the Top 10 largest companies (by market cap — Microsoft, Apple, Amazon, Alphabet, Alibaba, Facebook, Tencent & Visa) can be considered as platforms benefiting from strong network effects according to our definition. And by 2020, it is estimated that 40% of the global online retail market could be accounted for by marketplaces.

III. Why is a platform such a powerful business model?

We see 3 main reasons for this.

1. Platforms are highly defensible models, primarily through network effects at scale

• Platforms are basically architected to allow users to participate in value creation: network effects are mechanisms in a business where every new user makes the product or the experience more valuable to other users — it translates into higher defensibility and retention
• This is even more powerful in verticals & segments that can benefit from global network effects, which are a very strong defensive moat (think of Airbnb) as opposed to local network effects, strong on a city-basis for instance (think of UberEat) which suffer from more severe competition
• As such, over the past 23 years, 70% of value in Tech has been driven by network effects according to a study published by Nfx. Other key sources of defensibility include scale, embedding & switching costs, brand asset, and IP.

2. Platforms are highly scalable models

• They have the potential for capital efficient growth: platforms are facilitating transactions between suppliers and customers rather than taking possession of products & services. They’re only owning the “match” or the “liquidity” (i.e. the efficiency with which a platform matches supply & demand units). That translates into lower capital costs and higher gross margins
• They also have the potential for highly viral growth: platforms typically display positive feedback loops of additional users joining; existing users bring new users for free, accelerating growth.

3. Platforms are efficient models from a wider societal perspective

• They’re not developing the supply themselves but bridging existing gaps and ultimately increasing society efficiency by doing so. As such, marketplaces have been at the centre of many of society key evolutions (e.g. the Gig Economy, the Passion Economy etc.)
• Platforms in their purest form (as opposed to Aggregators as defined by Ben Thomson here which are striving to commoditise suppliers) only capture a small share of the value they create. They’re externalising network effects to create an entire ecosystem of differentiated suppliers and strong businesses can be built on top of them eventually. Think of Shopify for instance.

IV. Where do we see opportunities in Platforms moving forward?

We believe that the potential for new platforms to emerge is huge.

1. New platforms could further disrupt existing verticals

• i) By unlocking a “new” supply and triggering new transactional behaviour (e.g. Cameo or Airbnb)
• ii) By finding better ways to serve a specific vertical (both the demand & supply sides) of a broad horizontal: disruptors can capitalise on a tailored approach for a specific niche, ultimately improving user experience and using product to leapfrog incumbents’ liquidity. There are still multiple platforms that could be unbundled (e.g. LinkedIn, Instagram, Zoom etc.)
• iii) By capitalizing on new distribution channels (with distribution defined as the intersection of a new device + acquisition channel): for instance, Classifieds emerged using Desktop + Search (SEO / SEM), while they were disrupted by on-demand platforms capitalising on Mobile + Social advertising (Fb / IG ads)
• iv) By moving from an aggregator model to a “pure” platform model as described above: a good example of this would be Shopify, which are indirectly competing against the aggregator Amazon in ecommerce. We’re buying products directly from e-shops powered by their technology without even knowing it. Yet they’re not going head-to-head as it’s hard to fight against an incumbent benefiting from strong economies of scale on the same model, but are rather favorising the emergence of an entire “bottom-up” ecosystem, ensuring true differentiation.

2. New platforms could attack new verticals

• i) We see many opportunities in regulated services industries with complex services layers (e.g. Healthcare, Education, Legal, Heavy Construction — basically all industries in which suppliers are licensed by the government or certified by an industry body). The unlocking of those laggard industries might be accelerated by the Covid-19 crisis with some of those services forced to migrate online
• ii) There are also huge opportunities in B2B. New business models & technologies are increasingly enabling to capture new types of on-platform transactions.

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