The Future Belongs to Multi-Sided Platforms

Uber and Airbnb are what economists call “multi-sided platforms,” because they each depend on more than one set of customers. Uber can’t attract riders if it doesn’t have enough drivers, and Airbnb can’t rent rooms to people if it doesn’t have enough other people offering their rooms to rent. Both Uber and Airbnb are fundamentally in the business of facilitating the match-up of one type of customer with another.

Although some kinds of multi-sided platforms have actually been with us since the beginning of commerce (e.g., marriage matchmakers), today’s interactive technology has brought them to the forefront of business competition. Understanding how they operate, however, is not something you’ll find out from reading a traditional Economics 101 textbook.

Start with the simple fact that it often makes sense for a multi-sided platform to subsidize one set of customers in order to ensure it attracts enough of whatever other kinds of customers it needs to operate a profitable business, overall. It would never make sense in a traditional business to give your product or service away at a loss, but this is something that is often done by a multi-sided platform business, and can easily spell the difference between success and failure.

Consider, for instance, why Sony’s Betamax lost the videocassette format battle to VHS, while Sony’s Blu-ray won the HD format battle, in competition with the HD-DVD standard.

If you were a consumer when videocassettes first became available (the late 1970’s), you probably think VHS eventually put Betamax away simply because the VHS format (originated by JVC) was the first to get out there, the first to sell devices to a large number of consumers. The more VHS-format machines were already in consumers’ hands, the more likely that new buyers would choose the VHS format, which was incompatible with Betamax. This was the conclusion of the many analysts who reviewed the conflict. Despite the fact that Betamax's technology was actually superior, the argument went, “network effects” created a winner-take-all market, and if you wanted to take it all, you absolutely had to be first.  

It turns out, however, that this analysis – that VHS won because of its “first mover advantage” – is significantly flawed. It didn't win the battle just because more consumer buyers bought VHS-format machines. It won because more content providers adopted the VHS standard for the videotapes they were putting on sale. VCR buyers began to prefer the VHS format rather than Betamax simply because there was more VHS content available. In retrospect, if Sony had simply spent more to get content providers to make their movies and other content available in the Betamax format, then the VHS standard would have lost the battle.

The proof of this can be found in the struggle between HD-DVD and Blu-ray video discs. In this case, even though the HD-DVD format took an early and significant lead in the number of players that were sold to consumers, the format still lost to Sony’s Blu-Ray. According to economists David S. Evans and Richard Schmalensee, in their new book Matchmakers, this time Sony won because it “attracted more content providers that made more movies and other content available only in its format...There were press reports, unconfirmed, that Sony made large cash payments to Warner Brothers and to Fox Searchlight Pictures, which were reportedly thinking of abandoning Blu-ray.”

Apparently Sony learned its lesson, because its Blu-ray format became the new standard, even though its Betamax format lost out. This, of course, is just one of the nuances involved in trying to make a multi-sided platform successful.

Multi-sided platforms are now dominating the new-venture space. In addition to Uber and Airbnb, four other multi-sided platforms are among the top ten unicorns: Snapchat, Flipkart, Didi Kuaidi, and Pinterest.

So watch this space carefully, because for a multi-sided platform it’s not necessarily the biggest player that wins, ultimately. It’s the one that develops the best mix of customers, both users and providers, riders and drivers, renters and landlords, whatever. 

And sometimes it may even be necessary to offer negative prices to get them!