Digital platforms: taking over the world

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15 Nov
15/11/2017
Foto del profilo di Olga Annushkina

by Olga Annushkina

SDA Professor of Strategic and Entrepreneurial Management

Digital platforms are creating anxiety among “traditional” incumbent businesses. “What if Google enters our business…?” is a common quest emerging from participants at a certain point of the scenario planning exercises we run in our classrooms. Every single business “household” in every single industry and in every single location seems to be threatened by these approaching massive waves of linked and networked clients and suppliers. Not only Airbnb it threatening the hotel business, taxis with Uber or Lyft and retailers with Amazon and Alibaba and the like, also the producers of industrial goods are watching closely Nest, Samsara, Greenwave systems and many others.

The platforms operate via a two/multi-sided market business model, connecting suppliers and buyers or providers of a service and its users, like Alibaba, Uber, or Taskrabbit. The financial sustainability of the business models based on platforms is related mainly to the economies of scale and to network effects. Once the core technology and business processes are in place, the cost of adding any new user to the platform is negligent, therefore contributing to strong economies of scale effect. In particular, once the “chasm” is crossed, the economies of scale continue persistently creating value for the platforms except for the moments when the growing amount of users is requiring the sequential production capacity updates. The network effect is enhanced by every new user (or supplier) that is making the service or the product more valuable to the existing or potential users. The scale economies and the network effect are both pushing the platform-based companies to grow, domestically and internationally.

internazWhat is the role of the internationalization in the platform success? The growth necessity stimulated by the network effect is satisfied by the expansion on the domestic market, even if in some cases the domestic users are benefiting from the arrival of new international users, for instance in international travel, career management or tourism businesses. The strongest pressure to grow is arriving from the economy of scale that is pushing platform-based companies to cross the national boundaries. The attempts to cross the border are too often becoming tricky. The same underlying economics of platform businesses, in case of success, is making them good candidates to become monopolies, thus attracting a lot of attention from regulators in the target markets. An abuse of monopoly power may artificially block competition, lead to an increase of prices to locked-in users, reduce managerial efficiency and slow down innovation. Local regulators usually don’t appreciate if that kind of power is going to the hands of a foreign-owned corporation.

Challenges in going global: regulation and the incumbent's reaction

dominantForeign-owned monopolies earning super-normal profits and benefiting from super-normal market power start being targeted, directly or indirectly, by local regulators. In the first place, the fast growth of platform-based business models is raising the question about the liabilities for the safety of the products and services that these companies provide. The safety of B2C services of Airbnb, Uber and Lyft services is still mostly entrusted to the deterring effect of negative reviews by the users, rather than the safety regulations, even if all companies acknowledged the importance of the issue. In September 2017 Uber's license in London was not renewed by Transport for London authority, as the platform was accused of dealing superficially with criminal offence cases, of treating poorly it's paid-per-job drivers and of failing to implement other safety-related procedures. Similar legal issues as well as more or less energetic protests from local taxi drivers were faced by the company in Asia, Latin America and Europe. Secondly, the platform-based businesses are enabled by important amount of private data on users, and the compliance with privacy legislation became a problem for Facebook in Belgium, Spain, Germany, Netherlands, France and Russia , for Google in Europe. The pressure from regulators, of a different kind, but still effective, pushed Google out of China. Super-normal marketing power comes at a price too: in 2017 Google was fined 2.7 billion in EU Antitrust rulling.

The regulatory issues represent only a part of the potential challenges in the internationalization of platforms: local competitors are proactively defending their territories using also ad hoc competitive strategies and “localized” value propositions, for instance in Russia, China and Japan (Rakuten or Line). Uber’s exit from China in 2016 was the result of a fierce competitive battle with the local platform Didi.
In some cases the local players are even joining forces to create oligopolies to block competitors away, like in case of German’s Verimi platform joined by Lufthansa, Deutsche Telekom, Allianz, Axel Springer, Daimler, Deutsche Bank with Postbank. Verimi is an cross-industry open platform that is providing the benefit of a single username and password for all kind of services provided by companies using the platform: insurance, connectivity, automotive, airtravel, media content, finance.

socialGrowing pains

Understandably, most of platforms are struggling to create value out of the international expansion. The domestic sales by Facebook and Google were higher than all their international sales until 3 years ago.
In 2016 the international revenues of Facebook were only 20% higher than its domestic revenues. In the same year Amazon’s international sales were more than 40% lower that its sales in the North American region. Moreover, in 2014-2016 its sales in the North American region increased by 57%, while its international sales grew by 31%. In 2016 Amazon was still losing money, at the operating income level, from it international operations.

Most of giant platforms selected the organic growth approach to the internationalization by building from scratch its greenfield international divisions. It took time, resources and a lot of learning organizational effort. May the entry mode be different, for instance local alliances, joint ventures or acquisition, the internationalization could have been faster, smarter and less painful. The question remains open as the game is far from being over.

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1 risposta
  1. Foto del profilo di Giuseppe Rotunno
    Giuseppe Rotunno says:

    Very interesting post. The last paragraph, “Growing pains”, took my attention, as I didn’t know that the international performance of those platform-based giants is shrinking, or at least decelerating. As the paragraph focuses the attention on those giants’ perspective, what do you think about our national companies’ reaction to their market entry? Do you think that those digital platform’s internationalization strategy (building from scratch international divisions) has had positive effects on our companies in terms of competitiveness? Moreover, could the suggested alternative strategy (alliances, joint ventures and acquisition) have fostered more efficient market conditions for both giants and local companies if correctly implemented?

    Thank you in advance,
    Giuseppe Rotunno

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