Why Platforms fail, How to avoid it.

Why Platforms fail, How to avoid it, Downfall of Color.

To get you to speed, Platform businesses are asset-light marketplaces where the core value of the business is facilitating transactions between the stakeholders involved. Platform often leverage?network effects?and experience exponential growth as long as it creates value to all sides of the platform.?

Unlike linear businesses which focus on creating value internally and selling that downstream (Unidirectional Value Flow), Platform businesses aim to create a?network?where the value exchange is multi-directional and the platform itself mediates the flow of value.?

For example:

Uber is a platform with Cab Drivers and Passengers where the core value that Uber provides is connecting the two. Cab Drivers create value for passengers by being on the platform and transporting passengers whenever they book a ride, Passengers create value by being on the platform whenever they need a ride, Uber itself creates value by facilitating discovery on both sides of the network. If either the drivers or the passengers migrated, the platform would fail and there wouldn’t really be a match made.?

Platforms are the buzz right now due to the edge they hold over traditional linear businesses.

When traditional businesses grow to a certain size and continues to grow, they approach a phenomenon known as the?Diseconomies of Scale –?where information and transactions costs rise rather than decline when businesses produce more. Beyond a certain point, growth costs more than what its worth. Platforms hold advantages over traditional businesses in reducing these transaction costs giving them potential for a hockey stick growth.

Source: https://www.intelligenteconomist.com/diseconomies-of-scale/

Source: https://www.feedough.com/hockey-stick-growth/

Now that the readers are up to speed on why platforms are great, let’s see why platforms could fail and how one could avoid it.

POV:?

It’s 2011, You are a partner at one of the most trusted VC firms – Sequoia Capital.?

Through a tweet, the firm says “Once or twice a decade a company emerges that can change everything. Color is one of those companies.”

Bill Nguyen, the founder of Color claimed that the tech behind the platform could ingest and analyze 4 times the amount of data that Google could in its early days.

You soon partner with Bain Capital and Silicon Valley Bank to release Color a $41 million check in their seed round. Why wouldn't you? It just seemed to be too good (to be true?). A host of patents, sophisticated sounding technology, novel social media strategy, an ambitious vision. Where could it have gone wrong?

Color’s algorithm was based on proximity where photos and videos from users within?150 feet?would automatically appear on your feed in what the company called?an elastic network.?There was no need to login, friend, follow.

Launching on June, 2011, Color was the second most downloaded app on the Appstore becoming David behind Facebook’s Goliath.?

Source: https://www.digitaltrends.com/social-media/color-photo-sharing-app-takes-social-networking-to-an-amazing-terrifying-new-place/

You might ask “Why don’t I know about this?”, You very rightly ask.

Color essentially became the $41 million party where no one actually came. Sure, people downloaded the application but what if the chicken never layed the egg? There would even exist a chicken.

What happened was that the majority of the people weren’t really using the app. There was nothing really to see. The Appstore was soon flooded with one- and two-star reviews, most of them having a similar complaint saying “First-Time experience is terrible: It’s totally blank”. For most people who downloaded the app, the platform was a ghost-town.?

Because of the 150-foot proximity limit, the platforms failed to get interactions from people who lived outside densly packed areas.?

If you are keeping up with the article, you’d know that platform would only exist if there is an exchange of value between the stakeholders. Color lacked this exchange of value between its stakeholders.?

Soon, the founders realized what went wrong and the app soon faded into obscurity. Bill Nguyen, the founder even went to say:

“Oh my god! It’s broken. Holy s***, we totally f***** up”?

The statement was made just 30 minutes after the launch.

Color's seasoned executives failed to see this issue coming and this fact is truly shocking. The ghost-town problem faced by Color is anything but unique yet the founder was so sure that the sophisticated was enough to garner attention for people to begin using the platform. There wasn't much external testing and no discernible launch strategy.

They essentially followed a if-you-build-it-they-will-come attitude, which too is extremely common in the start-up ecosystem. This is why Color couldn't figure out how to jumpstart it's network - to gain enough traction on all sides of the platform such that network effects could kick in and organically grow the user base.

Network effects are a double-edged sword. As fancy as they sound, the same network effects that drive growth also make platforms much harder to build. Platforms, unlike traditional linear businesses needs to acquire at a minimum two groups of users on the platform - consumers and producers.

Color needed some users to upload content for other users to consume content. But without any content on the platform, what really is the incentive for new users to add anything?

Question arises, how would one avoid the Chicken-And-Egg Problem?

There are 7 ways as to how platforms could avoid this issue:

1)????Provide Security through a Large, Up-front investment

Significant up-front investment in a platform is a signal that it’s safe for producers to join the network as it denotes that the platform isn’t going anywhere, producers become more comfortable making a long-term investment.?

This holds especially true for development platforms where the developers incur considerable up-front cost to join the platform and the switching costs are also very high.?

A good example of this strategy is of the launch of Microsoft’s Xbox where a great deal of promotion was made about Microsoft’s commitment to spend $500 Million for promoting the platform. This helped them attract third-party developers to create games for the platform.?

Another example could be that of Tencent promoting its payments platform to compete against Alibaba’s Alipay. Tencent had launched a campaign around the Chinese New Year where advertisers gave away RMB 500 million ($81 Million) as free cash to WeChat Payment users in a single day.

2)????Cooperate with the Industry Incumbents

As Apple’s (another great platform) success with the iPhone greatly increased their bargaining power, Google was worried that the mobile phone industry would soon become Apple’s Walled Garden.?

Handset manufacturers, telecom service providers not named AT&T (Interesting story there, would probably discuss in a future article) shared the same fear.?

Hence, Google created the Open Handset Alliance, a group dedicated to advancing Google’s Android operating system. Google essentially used a cooperative strategy where it tapped into the existing channels of companies to join the OHA instead of trying to build a network of its own.?

3)????Act as a producer??

Rather than trying to attract both consumers and producers simultaneously, the platform acts as a producer to attract an initial group of participants to create interactions within the platform. It then uses its existing customer base to attract producers once the platform has attracted enough consumers.?

This is a very common tactic to kickstart any network. Initially, Uber started out by paying drivers to wait till they got a call, only when the platform gains enough traction was it able to attract independent producers.?

Similarly, Quora and Reddit seeded their platforms by creating all original content in-house and curating content for the users initially till they found enough users to stick around and create value themselves.

4)????Tap into an existing network?

Platforms could use Airbnb’s playbook where it essentially tapped listings made on Craigslist to grow and initially sustain its ecosystem (Unethical but sure, it worked).

Rather than trying to create a network from scratch, platforms could tap into an existing large network present to attract a subset of its users. In order to attract those users, your platform only has to provide incremental value compared to the existing solution.?

Networks don’t necessarily mean digital. Tinder took of by leveraging campus social networks to gain initial traction. Tinder went to the sororities of major college campuses in the US, make a presentation and get the girls to install the app.?

Then a similar presentation was made to the male fraternities where they’d open the app and find women from the same campuses. Before this strategy, Tinder just had about 5000 users which shot up to 15,000 by the end of this technique.

5)????Attract High-Value or Marquee Users

High value users will help you attract other users who want to interact with them. Many platforms make special efforts to subsidize usage for high-value users. This trend was particularly seen in dating websites earlier when the user-base tend to skew heavily male.?

Twitter also used this strategy to attract celebrities and public figures to the platform by creating features catering specifically to them. A team was assigned to just build relationships with such people early on.?

Uber, Lyft, Handy, all have programs that incentivize producers to take more jobs on the platform – making them more valuable.?

6)????Target a user group to fill both sides

The goal here is to find a user group that taking up both producer and user roles on the platform – trying to make the two-sided market one-sided. That way, one wouldn’t have to focus on attracting and balancing the two separate user groups.?

This strategy is specially fit for most social media networks as almost every user will serve a different role at a different time – On Instagram, users both upload content (Producer) and view content created by friends, celebrities, public figures, etc.?

On Snapchat, the same user both sends and received messages, thus acting as both producer and consumer of value.?

7)????Provide Single-User Utility

This is a come-for-the-tool-stay-for-the-network approach as said by venture capitalist Chris Dixon. You attract one side of your multisided platform by offering that user group value even if the other side doesn’t show up.?

Early Instagram and Snapchat are good examples, as they provided its users with a way to take photo, make them look good before it actually evolved into a full-fledged social networking platform.?

Restaurant reservation platform OpenTable used a similar strategy where it realized many restaurants don’t have back-end reservation system. They still used pen & paper to track reservations. OpenTable build a software application to handle e-bookings and targeted top restaurants in San Francisco, offered to help set the system up. After these restaurants were on-board, it was opened doors to allow consumers to book tables and make reservations online.?

A less subtle way to gain traction and provide single-user utility would be to simply find a way to pay users. Doing this could reduce any initial uncertainty users might have about a platform’s value because whether other users show-up or not, they’ll still get value from participating. However, this strategy isn’t sustainable in the long run as monetary subsidies are hard to sustain long term. Once they go away, there poses a risk of the users leaving too.?

While early customer acquisition is especially tough for platforms, the above-mentioned strategies could surely help overcome the initial chicken-and-egg problem and once that phase is passed, the platform moves on to the next stage, climbing the exponential growth ladder.?

References used: Modern Monopolies - Alex Moazed & Nicholas L Johnson