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The writer is a professor at Columbia Business School and author of ‘The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans’
Microsoft joined Apple last month as the second tech titan to exceed the once unthinkable equity value threshold of $2tn. The steady takeover of overall stock market capitalisation by a small group of massive digital platforms during the past decade has changed the way public and private investors think and talk about value, and not for the better.
Increasingly, the term “platform” has come to be used as little more than a kind of trigger word to separate investors from their money. Characterising otherwise more pedestrian businesses as “platforms” has become the go-to move to goose valuation multiples or just attract interest.
For instance, the healthy salad fast-food chain Sweetgreen insists it is a “food platform”. Similarly, the US technology-enabled real estate business Compass included the term platform 291 times in its initial public offering filing earlier this year. But its shares have fallen more than a third since early IPO highs amid questions over how different its business model really is from traditional agents.
There are plenty of extraordinary platform businesses that derive their core value from the connections they facilitate.
Many of the most iconic and valuable digital businesses fit this definition: the operating systems that connect software developers and users (Microsoft and Apple), the marketplaces that connect buyers and sellers (Amazon), the social networks that connect communities (Facebook), the search engines that connect advertisers and digital publishers with searchers (Google).
But this does not mean that these businesses are great because of their platform status or that all, or even most, platform businesses exhibit superior economics. Indeed, some of the characteristics that investors find attractive about digital platforms ensure that many of them are destined to be pretty lousy businesses over the long term.
Two aspects of digital platforms are often thought to be particularly attractive — low fixed-cost requirements and potentially huge addressable markets. But the structural implications of these qualities is that any business can break-even at low market shares. This in turn has an obvious consequence: a future filled with a relentless stream of new entrants and intense competition.
Take so-called marketplace businesses, a quintessential platform business model in which the platform connects buyers and sellers to transact. In some domains, these have been wildly successful, such as Etsy. But others, such as Cars.com, have found it difficult to distinguish their offerings in chronically crowded fields. It is not the mere existence of a “platform” that should inform investor decisions but the structure of the particular market.
Platform promoters argue that the existence of “big data” supercharged by “artificial intelligence” — often used as reinforcing trigger words in the investing environment — serves as the ultimate defence against the constant threat of new competing platforms.
The idea is that these will generate proprietary insights driving continuous improvements that no insurgent could match. It is true that platforms spawn huge amounts of data, but the actual value of this information and the ability of artificial intelligence to amplify its usefulness has been uneven at best. For many business models, a little data goes a long way, and there is not much to be gained after that.
Take one-time market darling Lending Club, the peer-to-peer marketplace for loans. It was the biggest US tech IPO of 2014, sold on the notion that proprietary loan data massaged by powerful software tools would make it a category killer. It quickly became the first large-cap fintech company.
The problem with this prognosis is that readily available information such as credit scores provides adequate predictive capabilities for anyone, and additional data — no matter how much artificial intelligence is brought to bear — does not do much to improve it. As new entrants have piled in and anaemic profitability has persisted, Lending Club’s stock has fallen 87 per cent from post-IPO highs, languishing in recent years.
The relentless climb of technology stocks, particularly the largest “platform” companies, makes it easy to forget how hard it is to outperform the market over the long haul. A careful analysis of the achievements of the best of these companies reveals a surprisingly diverse set of paths and structural advantages. Relying on trigger words that bear little relation to that success is a recipe for long-term financial disappointment.