Platform Revolution - xm:institutefrom our guest blogger Dr. Peter Veil

What a hype, what a buzz! Disruption and platform business models is all mouth, everybody talks, everybody acts. The hype has arrived even in the most conservative businesses and institutions. That is good – but from my experience very few people seem to really understand what is happening. Most of the people that at least I interact with have the notion that a platform is in essence an IT application. This is somehow correct, but no- in reality it is totally wrong!

What is a platform? It is a market place! Well a little more precise: I use the following definition: (Multisided) Platforms (MSP) are common grounds where two or more parties can affiliate and directly interact with mutual benefit while only partly being controlled by the platform.

A market is the framework for the interaction – prices, opening hours, rules in case of conflict, etc.  By the way this is not a new thing – they have been around for ages, you might even say that have been around since almost the beginning of mankind.

Why now such a hype? The key to the answer lies in transaction costs, or better why they currently drop so much.

As the word says, transaction costs are the costs that are affiliated with the transaction. Apart from the costs of the search and the costs of the transaction itself like payment it includes the costs of setting up and running the market place.

The benefit of a market in former times was that once on the market the transaction costs were much lower compared to a non-market place approach. But what a challenge to organize the market, ensure enough and fitting supply and demand, get to the market physically, ship the goods back to the customers’ premises, etc.

This explains why most transactions have by now been more efficiently organized in vertical firms instead of a market place logic.

Digitalization now changes the logic massively in favor of attractiveness of the market place approach as it strongly reduces transaction costs: Not only the goods themselves become more digital, but also search costs,  and the costs for setting up a market place go down massively.

And to make it worse the biggest problem for established players working as vertically integrated firms is not that a new market place gradually eats market share from. No, it kills the existing business model as the role of an intermediary becomes obsolete. In other words – transforming your existing business model as many players nowadays try does not help much…