All New Technology is not subjected to the Platform Effect
I was born 1970. During my half century long life, so much of technological innovation has materialized. I remember when my dad came home with our first computer, a Sinclair ZX81. Doing my first BASIC program was exciting but at the same time, hard to foresee what the usefulness would be. One of my first programs was one that posted a question on the screen saying: WHAT IS YOUR NAME? If you answered my name –?Magnus?– the screen flashed in green and typed: YOU ARE GREAT. If you answered my sisters name –?Anna– the screen fleshed in red and typed: YOU SUCKS! Since then, a continuous flow of innovations has entered our society. Internet, Google search, cell phones, Appstore, social media, ride sharing (Uber), car pooling, home sharing (Airbnb), electrical scooters sharing and more. In common for all these innovations are that they take benefit of the?network effect?that enables them to build?platforms. It is easy to be lulled into faith that all?New Tech?is subjected to platform effect. But what if that is not true, and acting as it is, leads us to wrong decisions. In this post I elaborate on the network/platform effect and how it is NOT the right approach for understanding electrification of heavy transport.
What is the network effect?
We all benefit from the network effect.?Network effect is defined as the incremental benefit gained by an existing user for each new user that joins the network. The most used, and easy to understand, example is probably the cell phone. When the first customer purchased a cell phone, the value was zero since there was no one to call. When the second customer bought a phone, they could at least call each other. But already when there are five users in the network there are 10 possible connections to make. And so, it goes on. The value of the network increase exponentially as new subscribers enters.
The illustration with the cell phone network is an example of a?direct network effect. That is when the value of a service simply goes up for all users as the number of users goes up. Other examples of the direct network effect are Facebook or Twitter. When the network has two sides, for example a demand and a supply side, we talk about an?indirect network effect. One example here is Uber. As the number of drivers in the network increases, the utility for the riders also goes up. At first glance, the direct effect for a single driver, if anything, is negative with increasing number of new competing drivers entering the network. But indirectly, more drivers in the network are good since it attracts more riders. Hence the indirect network effect. Other examples of businesses that ride on the indirect network effect are Airbnb, Amazon and dating apps.?
A related effect is the so-called?Bandwagon effect?that describes?the tendency for people to adopt certain behaviors, styles, or attitudes simply because others do so. For all of us Facebook rejectors, we know how hard it is to be an active parent without the seductive app. That is a result of the Bandwagon effect.
The Platform effect and “the winner takes it all”
The platform effect is a business model that rides on the back of the network effect. A?platform?(or a multi sided platform – MSP) is a technological, often digital, tool that mediate a transaction between sellers and buyers. It facilitates and match supply and demand on a market. Obvious examples are Airbnb, Uber, Doordash and Amazon. But it doesn’t necessarily need to be digital.?
Platform business models have become the holy grail of entrepreneurship lately.
One reason is that the balance sheet for platform business is usually very light (for example Uber owns no cars) and revenue is made by cutting a share (mediator rate) of the transaction between seller and buyer (extremely scalable). Moreover, platforms, with the enormous amount of data they generate, are well suited to be analyzed (or should we say manipulated) with algorithms. But what has made them so popular among investors is the built in “the-winner-takes-it-all-nature” of the platform effect. And that is a biproduct of the network effect. Here is an example.
Say two companies come up with the same brilliant idea to mediate home sharing between house owners and visiting tourist. At first, they both compete over the same landlords. But as soon as one of them float up as the one with more houses for rent on its platform, there is no reason for a prospect renter to go somewhere else. The bandwagon effect kicks in and a positive spiral starts for the one with the upper hand in regard to number of houses for rent (for example Airbnb). With the same logic but opposite outcome, a negative spiral, starts for the loosing company. In the end of the day, the winner takes it all. This is what we have seen for App-store, Amazon and more.?
The winner-takes-it-all-nature of platforms create certain behaviors in the companies themselves as well as among investors. One is a race for users on the platform (on both side if it is a MSP) in the early phase of the company.
If a “bucket of gold” in the shape of the-winner-takes-it-all looms in the future, it is worth spending some money to be the platform that emerge as the one with most users.
Right now, that fight for users is what we see with electric scooter sharing companies like Voi or Bolt.
Not all new tech is subjected to platform effects
Now when we have established the network effect, the platform effect and the-winner-takes-it-all concept, let’s investigate my business; the one of heavy transports.?
The electrification of heavy transport (Battery Electric Vehicles – BEV) is as groundbreaking as many of the examples mentioned above. Every OEM’s understands that all transport will eventually be electrified, not only because electrified vehicles opens up for 100% green energy, but also since the well-to-wheel efficiency of BEV’s is three times as high as for diesel. And all OEM’s compete to be the one that launch BEV first and build sales volume to show that they are early on the market. The marketing initiatives and flashy film clips on YouTube are numerous. Just to give you a few examples.
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I get a feeling they all act as the platform effect was at play here. But is it really? Let’s dive into the ergonomics of the transition from diesel propelled heavy transport to BEV’s.
The Transition from ICE to BEV in heavy transport
This year, 2021, less than 1000 heavy BEV trucks will be registered in Europe, and that’s on a market of about 300.000 trucks yearly. That means that 0.3% is BEV sales this year. We are really in the beginning of the S-shaped market penetration curve (or innovation diffusion curve as it was named in the?Everett Rogers?1962 book,?Diffusion of Innovations). Let’s assume that the market penetration on the European market follows a quarter SIN-curve that starts 2020 and reach 50% 2030 (that is an ambition Scania and many other OEM’s communicate). This implies that the total transition from ICE (Interna Combustion Engine) to BEV takes 20 years.
One might argue that 20 years is a long time for the ICE to BEV transition, but looking at some other technological invasions penetration curves, it rather looks quite slow, although market penetration seems to go faster and faster (se chart below from New York Times)
Let’s assume that the sales of new heavy trucks are constant at 300.000 per year. Moreover, assume that a truck stays 10 years on the European market until it is scrapped or move to a foreign market. That give us a rolling fleet of 3.000.000 trucks in Europe. Let’s also assume that during the first ten years (2020-2030) each customer who buys a BEV make the shift from diesel (ICE). From 2031 each existing BEV customer replace its previous BEV and the rest of the yearly sales goes to diesel customers buying their first BEV. Then the shift in rolling fleet from diesel (ICE) to BEV will look as follows.
Some interesting conclusions are to be noted. At 2020 we have 3.000.000 rolling ICE vehicles on the market. As mentioned before,
2030 the sales of BEV’s represent 50% or 150.000 units. Despite this, approximately 2.400.000 or 79% of the rolling fleet are still ICE vehicles.
It takes until 2035 until half of the rolling fleet has transferred to BEV. Even 2040, when all sales are BEV’s, there is still 10 % (300.000) rolling ICE vehicles on the market.
Now, zoom in on the curve describing the rolling fleet of ICE vehicles still to be replaced by BEV and view it out of a “Platform lens”.
If the platform effect were at play here, it would be extremely important to be the OEM who has most BEV customers 2030 in order to outperform your competitors and kicks start the bandwagon effect in your favor. Remember, 2030 approximately 79 % of the rolling fleet is still to be exchanged from ICE to BEV. Now, imagine you are a one of the approximately 2.400.000 customers still driving ICE at that time.
How important is it for you if Tesla, Volvo or Daimler have sold some thousand BEV’s 2025? I would guess you could not care less. What is important for you is the properties of the vehicles – the energy consumption, the range and the charging experience. The worst thing you probably could do is to rush development to be early on the market and miss your property goals.
Although, much of new tech has been subjected to the network effect and the platform effect the last ten years, that is not true for all new tech, and certainly not for electrified heavy vehicles.
Remark
One part of the electrification transition that might be subjected to the platform effect and that is the charging network. Right now, Tesla seems to have an upper hand here, and there are certainly customers choosing Tesla only because of the superior charging network. However, as soon as you make a consortium with your competitors in the buildup of a charging network, you have lost the possibility to win the competition by using the platform effect in the charging network.
Engineering, Product Development & Innovation
3 年Great piece. Really appreciate your sharing of content that deep drives under “commonly agreed truths”, and allows for some critical reflection on our business world. I guess speeding up to get users for your thing (platform/ product/ shop or whatever) can be a good thing, cause it forces you to deal with/ and learn from (commercial) reality sooner rather than later. But at the end of the day you must create excellent and irresistible customer experience. Eg. Apple & Amazon were not always the first, but they were “relentless” in their focus over many years. And their solutions (innovation) was often time not even rocket science (buying stuff online and getting it fast). But with superior execution/ implementation…
Managing Director @ Erlang Solutions AB, a part of Trifork
3 年First mover advantage could be valuable in order to shape the future BEV sub-contractor eco-system to your advantage. This is ultimately a question of timing. #ArtOfStrategy
What are your thougts on first mover advantage and winner takes it all for transportation as a service (think Einride)? Thats much more similar to Voi and other ”tech” companies with network effects
Magnus, I really appreciated your thoughts, thank you for sharing.