THE PLATFORM DELUSION
Who Wins and Who Loses in the Age of Tech Titans
By Jonathan Knee
Over the past two decades, the world’s hyper-ambitious entrepreneurs — is there now any other kind? — have largely pursued a pair of goals in tandem. First: Become a platform. Second: Take over the world. The former is supposed to lead to the latter, as it seemingly has for the five companies conglomerated under the intimidating acronym FAANG. Facebook, Apple, Amazon, Netflix and Google have taken such a bloodsucking bite (get it?) out of the world economy that in the past half decade alone they have more than tripled in value — at a rate three times faster than the growth of the entire S&P 500 — and are now worth north of $7 trillion. The appeal of building a platform is clear.
But what, exactly, is a platform? In the analog world, a platform is where you catch a train or launch a rocket or give a speech — somewhere you go to do something else. In a digital context, platforms facilitate transactions. Facebook and Google don’t sell much themselves; they make money by connecting advertisers to your eyeballs. Apple profits from selling phones, but a major part of its revenue comes from taking a cut each time you buy something from someone else in their App Store. The promise of the platform business model is its magical self-reinforcement: Once the platform is in place, money is supposed to flow through the system without much extra effort at all.
The siren song of platformdom has proved irresistible to countless start-ups, with many finding a way to shoehorn the word into their investor pitch decks — WeWork used it 170 times in its ill-fated attempt to go public — as an easy signal of ambition if not always the reality of their business. Peloton, which sells indoor exercise bikes, calls itself an “interactive fitness platform.” Casper, which sells mattresses, is a “platform built for better sleep.” Beyond Meat, which sells faux-burgers that taste like beef, pork and poultry, insists that these are actually “three core plant-based product platforms.” The world’s most established companies are not immune to the trend. On an episode of a podcast produced by the Boardroom (a “sports business content platform” co-owned by the basketball superstar Kevin Durant), the Goldman Sachs chief executive, David Solomon, said that Goldman is not a bank but a company with “three principal platform businesses.”
The word “platform” has been deployed so many times in so many ways that it has lost almost all meaning, a fact that Jonathan Knee, who teaches at Columbia University’s business school, tries to spell out in his new book, “The Platform Delusion.” Knee isn’t rooting for the big platforms, which he describes as “succubus enterprises” that are “sucking all the value, returns and growth out of the companies that actually do things.” But he isn’t arguing for their dissolution either. He is simply offering a warning: Being a platform isn’t all it’s made out to be.
Knee’s book is filled with business school case studies that might be a bit in the weeds for general readers. (One of the successes he identifies is a company that makes software for a very specific financial accounting function.) But for aspiring entrepreneurs these stories offer a primer on the delusion Knee has identified, and show how to avoid the two primary misjudgments that cause it. The first is a belief that platforms emerged with the dawn of the internet. In fact, they’ve been around for decades. Shopping malls are platforms. Movie theaters are platforms. Credit cards are platforms. (Not to blow your mind, but money itself might be the original platform.) Moreover, Knee argues that these analog businesses were often better than the digital ones that replaced them. A suburban shopping mall operator will never achieve global scale, but the business comes with built-in competitive advantages: Stores are locked into long-term leases, and shoppers traditionally have no choice unless they drive many miles away. In e-commerce, where it is said that 90 percent of businesses fail in their first four months, these barriers don’t exist. My dog’s preferred food is available for the same price on Amazon or Chewy or many other sites I can reach with a few keystrokes. While much has been made of the mall’s decline, Knee writes that the most successful of them still have operating margins of 70 percent. Amazon manages only about 7 percent.
Not that you should feel bad for the FAANGs, who feed off one another as much as they do everything else. (Apple makes billions each year from a deal to include Google as the iPhone’s default search engine — a platform operating on top of another platform.) Clearly something is different about our digital platform behemoths; otherwise your local shopping mall magnate might be financing his own space program, too. The internet has enabled these companies to achieve unprecedented size and scale, such that the most successful competitors — of which Knee cites plenty — are those who choose to nibble off a small corner of a particular business rather than compete with the giants directly.
But the crux of Knee’s argument is that “beyond their size and success” — no small feat — there is little the big platforms have in common. This brings us to the delusion’s second symptom, which involves a blind faith in the supernatural powers the digital platforms supposedly possess: “network effects,” “big data” and other buzzwords that have kept audiences nodding at TED talks for years.
Facebook’s growth, for instance, has largely been chalked up to the power of network effects — the more people use your platform, the more beneficial it is to all of them — which Knee acknowledges is perhaps the company’s key differentiator. But Knee points out that Facebook still has to dig a moat around itself in much the same way Warren Buffett would advise any company to do. When rivals come up with a competing product, Facebook spends considerable time and money either copying it or buying it up, lest users make the easy digital switch to another social network.
Knee grants that the breadth and scope of the giant tech platforms is “awe-inspiring,” but he thinks our collective fear of them is overblown. (Aside from a few glancing nods to their impact on the news business, and the state of our informed democracy, Knee doesn’t consider their societal implications.) The platforms have weaknesses just like any business, he argues, and the succubi themselves push the myth of their own invincibility in order to dissuade any potential competition.
But what the myth has mostly done is tempt young entrepreneurs to try to match them. Knee teaches a course on investing at Columbia, where graduates have largely forsaken Wall Street to work at start-ups, often of their own creation. The personal and societal virtues of starting a business are many, in theory, but no top business school graduate is looking to start a mom-and-pop outfit that will restitch the social fabric torn apart by our digital Goliaths. They almost all want to start a small business that becomes a big business, and the venture capital world incentivizes such bets. One start-up founder I spoke to recently had met a prominent venture capitalist who declared, “I’m interested in finding a company that can own the ocean.”
Knee believes that investors, and many of his students, are fooling themselves into thinking that building a globe-spanning platform is a viable goal. Platforms are successful not because they are platforms, but because they exploit the same kinds of advantages that successful businesses have enjoyed for decades. It’s a boring realization, but one that Knee hopes will save his students not only from pursuing bad ideas, but from ruining their lives. The platform siren song, he writes, “fatally impedes the ability of many to clearly consider what they might actually enjoy.” Not everyone needs to start a company to be happy. And not every company needs to take over the world.