Digital Transformation is a term that’s become almost as ubiquitous as Cloud Computing and Big Data, but what does it actually mean? How is it related to a digital platform and how does the openness of a platform influence its successfulness?
In his book, The Digital Transformation Playbook, David Rogers writes about the five domains of strategy that Digital Transformation is changing. These are:
The Strategic theme I’m going to focus on here is competition, with a particular focus on the sub-theme of building platforms, which, as I'll explain is not the same as building digital products.
Let’s take a moment to understand what a business platform actually is. Andre Hague and Julian Wright define a business platform as:
“A platform is a business that creates value by facilitating direct interactions between two or more distinct types of customers”
It therefore follows that a digital platform facilitates the digital interaction between multiple customer types. If there is only a single customer type, then its a digital product or service.
Let’s reinforce this definition and strengthen the distinction between digital products and platforms with a well known, but simple example. Airbnb provides a digital platform that facilitates an exchange between homeowners and guests (two customer types), whereas a hotel operator with a website typically only serves guests (single customer type) and therefore provides a digital product or service.
With a better understanding of what a digital platform is, let’s now look at why they are disrupting established businesses and focus on how the degree of openness often impacts their successfulness.
Digital Platforms are effective at disrupting established business models for the following reasons:
- Potential for low-friction acquisition of new customers through APIs, interfaces and control points
- Scalable growth through the adoption of cloud computing or web services with flexible consumption models
- Ease of access - access anytime, anywhere via internet connected devices
- Resource leverage - The ratio of revenue to employees and capital investment can be several orders of magnitude higher than that required to support traditional business platforms
Of these four areas, I will focus on how the potential for a low-friction acquisition of new customers with a bias towards being open can rapidly accelerate adoption onto a platform, and subsequently its successfulness. Let’s take a look at three examples to support this argument.
The first example of an open Digital Platform is Wikipedia. While content quality control is a mature process that relies upon an army of volunteers organised under various departments that check to make sure content conforms to Wikipedia’s high standards, creation of content is largely unrestricted (open). This has allowed Wikipedia to displace Encyclopedia Brittanica, a 250 year old institution with strong controls over who could create content. Not only did Wikipedia’s open collaborative model result in displacing one of the world’s best known and trusted sources of knowledge, it did it without paying contributors to generate content; furthermore, it achieved this goal in a relatively short period of time.
The second example we’ll consider is that of Uber and the myriad of transport companies that have sprung up in its wake to offer digital transport platforms. While Uber initially created a platform to allow users to book a black luxury car, it quickly realised the massive opportunity of the platform and opened it up by creating UberX, allowing anyone to drive for Uber using their own car. This led to Uber’s meteoric growth with revenues in 2016 of $US 6.5B from only 6,700 employees, a revenue of close to $US 1M per employee.
The last digital platform type we’ll consider relates to digital video. The first platform that comes to mind is YouTube. Since it was founded in 2005, adoption of the platform by content creators and viewers has been quite staggering. Recent statistics indicate that 1.3B people actively use YouTube, watch a total of 5B videos each day and over 300 hours of new content is added to the platform every minute. YouTube isn’t the only player in this space, with Netflix and Amazon being two other digital platform providers. It is however a little difficult to make a direct comparison between them as their revenue models are different. In the case of YouTube, it’s mainly based on advertising around user generated content.
In the case of Amazon and Netflix, the content available is significantly less than that of YouTube, however their primary revenue model is based on subscriptions for high-quality content. Both Amazon and Netflix invest a significant amount of money creating content, with investments in the order of $6B and $3B respectively for 2016. In an attempt to make their platform more open (reducing friction to adoption), Amazon changed their content approval process by allowing professionals to have their concepts vetted by Prime’s curators. Instead of submitting a completed work to a film festival, professionals can now submit a minimum viable concept to the studio. In the process, creators can pitch with a much lower hurdle, and the studio can explore and acquire premium programming at a lower cost. This strategic move by Amazon to open up their platform by reducing the barrier for content creation should result in more content of a high quality; in a world where content is king, this helps strengthen its competitive position against Netflix while managing upfront investment in content.
In each of the three cases we’ve considered, Wikipedia, Uber and YouTube each underwent rapid growth, a factor that’s necessary to develop a defendable competitive position by virtue of a strong network effect. While an open platform in and of itself is insufficient to create a digital platform leader, as I've shown, it's common amongst leading platforms across a number of industry segments.
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