Saturday, August 1, 2015

Platform Capitalism, or why your parents can't understand the Internet

Picking up on the previous post that looked at some of the debates surrounding digital disintermediation, today on the blog we delve a bit deeper into the tensions that have emerged between the radical openness of Internet technologies and what can only be called the unlikely economic structures enabled by online platforms, or marketplaces.

There was a time, and it was not all that long ago, when the principles of business went more or less like this: a manufacturer made something at a cost of X, a distributor or wholesaler bought the item in bulk and then made it available to retailers for X + Y, who in turn marked up the item to X+Y+Z and sold it to customers. If the goods produced filled a market need in ways superior to competitors then the manufacturer could end up reasonably well-heeled. If the anyone in the chain misjudged the market they got saddled with a bunch of inventory they couldn’t sell. There was pretty much no way of knowing what was going to resonate with customers and what wasn’t. This was a world based on best guesses. It was also a world based on things, put into boxes, then wheeled onto trucks, then stored in warehouses, then shot out to retail outlets, where the customer, at long last, came face to face with the good and decided whether or not s/he would buy it.

Contrast this with:

- A business based on individuals renting out their car on an hourly basis

- A business based on deploying civilian drivers to deliver groceries to your door

- And in one of the better known examples, a business based on individuals renting their home, or a room within their home, while they themselves are in the home, to strangers, on a night-by-night basis

There are a million reasons why a rational person, in the pre-Internet sense of the term, would be inclined to think that none of these businesses would work. For starters, these are marketplaces of people unknown to each other, they are often transacting at a relatively low dollar level, the consumer is not incented to adequately care for the property being used, etc. etc.

All this brings to mind discussions I’ve had over the years with an old friend, who is an Ivy league MBA and who was living in the Bay Area during the first dot com boom of the mid 1990s. At that time she got called into several ‘litmus test’ meetings for these new things called eCommerce businesses, one of which was a company called eBay that was proposing to do the world’s biggest yard sale, but transacted online. She was the person in the room who argued vociferously that it would never work. Why? Because what systems are in place to ensure that the person in Wisconsin who wants to buy the toaster I put on this website will pay me? And how will they pay me? By check? And how do they know I”ll actually send the toaster? How does any of this make sense? And she wasn’t wrong….except in the perfect hindsight sense of the term. (We have since joked, many times, that she should make herself a t-shirt that reads “I said eBay wouldn’t work”).

So what’s changed?

The best explanation I’ve heard for why these businesses work is the ability of the Internet to couple anonymity with trust, and commodify the latter.

Some have dubbed this phenomenon platform capitalism, a reference to the wildly successful slew of platform-based companies, or enterprises that build facilitating marketplaces as opposed to physical products or conventional services. These are the co’s that have figured out that facilitating access and communication, as opposed to owning real estate, or fleets of vehicles, or warehouses stocked with inventory, or even bearing the expenses of creating editorial content, is how the road to 21st century riches is paved.

So counterintuitive is this phenomenon to many that is has also been referred to as the WTF economy.

The WTF economy at a glance:

“WTF?! In San Francisco, Uber has 3x the revenue of the entire prior taxi and limousine industry.

WTF?! Without owning a single room, Airbnb has more rooms on offer than some of the largest hotel groups in the world. Airbnb has 800 employees, while Hilton has 152,000.

WTF?! Top Kickstarters raise tens of millions of dollars from tens of thousands of individual backers, amounts of capital that once required top-tier investment firms.”

And so, the Internet has morphed from being the communal, we the people, cybertopia of the early 90s, to one which has become dominated by what can be understood as privately owned public spaces.

By inviting the public in for free, or more accurately for “free” (meaning strings are attached, and you trade things such as your online history and personal data for services and products delivered digitally), platform-based businesses are able to move large portions of the public away from an ownership-based economy or a subscription-based economy to one in which we can access as little or as much as we need, whenever and wherever we are, usually using an app on our phone as our control panel.

Disincentives for participation are removed and large-scale, global user bases in the millions to hundreds of millions (and beyond) can be built relatively quickly.

So powerful are some platforms that, for example, august news organizations such as the New York Times are entering into agreements with Facebook that encourage the Times to publish directly to the Facebook platform. Why does this matter? Because it’s evidence of where the power lies when fewer visit specific publisher/news sites, such as, and a billion plus people around the world spending 20% of their online time on Facebook, a single site/app.

It should come as no surprise, then, that the platform that pulls in the audience has the power.

If you’re a merchant of any sort, yes you have the ability to use your own website to sell directly to consumers, but it’s hard to avoid Amazon, which has become the Walmart of the Internet. Actually that’s not true. As of last week Amazon is bigger than Walmart.

We also have YouTube as the Walmart of video. It has 63% market share for total videos watched per month, it closest competitor, Vimeo, has less than a quarter of that amount, and just 1/10th of the unique monthly viewers.

So let’s not make any mistakes. These 'privately owned public spaces' are not co-ops, nor are they the common property of government; they are enterprises, with investors and shareholders to whom they are obliged to create value and a return on capital. Furthermore, they are built upon a principle in which value to the enterprise accrues as we all participate by joining, uploading, commenting, and sharing. Whereas publishers once had a monopoly on the creation and distribution of content, platforms increasingly have a monopoly on the creation of audiences.

This is one of the realities of the new bypass the middleman and/or gatekeeper of today’s online economy: For better or worse much of it is predicated upon this thing called platform capitalism. In the world of platform capitalism there is little or no cost to get into the game, the game being the ability to make whatever you have created, or are trying to sell, or rent, available to a global audience. One of the ways this game is evolving is through consolidation, as dozens of the smaller players get acquired by larger ones. And many of these larger players were not even in the particular game to begin with. The easiest way to understand this shift is to look at the example of the YouTube multi-channel networks, or MCNs.

They started out as small networks, bringing together individual YouTube channels into what are essentially taste networks – of game enthusiasts, or music fans, or foodies, or whatever the case may be – and then selling ads against the audience corralled. And who’s doing the acquiring of these MCNs? Among the buyers are well-known companies such as AT&T and Disney, who early on weren’t interested in what was likely looked upon as nothing more serious than noise emanating from YouTube.   

And yet....

What starts out as nothing more than desire and drive on the part of individual creators, usually without aspirations or expectations or any sort of industry structure propping it up, has the potential to get multiplied by fans and followers, and turn into something with broader market appeal. And this thing, that begins life outside of the walls of industry has become a new form of currency that traditional media companies, operating very much within the walls of industry. want to leverage.

One of the outcomes of this phenomenon is that over time the democratization of communication, the initial impetus for this blog, gets sideswiped, to varying degrees, by new re-massifying forces. The niche offerings that made the online environment so refreshingly unlike the mass market world of hierarchical decision-making, capital-intensive production and distribution, and limited shelf space, are still there of course, but what we’re seeing is a privileging of those who sign up for more industrial muscle with the new middleman companies such who aggregate the work of podcastersYouTubers, InstagrammersVine creators, etc. and optimize it for an advertising-supported world of content. 

You thought all this stuff was free? Nope, it’s only “free”.

But is it meet the new boss, same as the old boss, though? I believe only the cynical would go that far. Are there trade-offs? Sure there are. But before crying ‘sell out’, you may want to bear the following in mind:

This could be a good thing for both creators and audiences, as it means fewer conventional ads and more entertainment and information products in their place. If we’re not paying for content online – whether it’s music or video or audio or image or text-based -- that means creators aren’t getting paid, unless a third party enters the picture and sponsors/underwrites it. In this model, there are no advances from music labels, publishers, studios – whatever the case may be -- that need to be earned back via a multi-year deal, that in the majority of cases handcuffs the creator.

Also, the risk is reduced for the financial backer of the content (whether it’s the label, studio, publisher, or brand) because online, audience uptake now observable and measurable in real time. Yes, creative destruction is undeniably present, but so are new processes that redefine the landscape for creators and audiences, as well as for the funders of the creative products and experiences who benefit from the affinity created between the creative product and the audience/consumer.

Things are far from being figured out but these are some of the reconfigurations of markets that we can now point to in an environment in which scarcity and closed systems have been replaced by access and (over)abundance.