multisided platform

Topics: Video game console, MIT Sloan School of Management, Harvard Business School Pages: 13 (6948 words) Published: May 19, 2015
WINTER 2014

V O L . 5 5 N O. 2

Strategic Decisions for
Multisided Platforms
By Andrei Hagiu

Please note that gray areas reflect artwork that has been
intentionally removed. The substantive content of the article appears as originally published.

REPRINT NUMBER 55225

S T R AT E G Y

Strategic Decisions for
Multisided Platforms
Multisided platforms such as eBay and Facebook create value
by enabling interactions between two or more customer groups. But building and managing a winning platform isn’t easy.
BY ANDREI HAGIU

MULTISIDED PLATFORMS (MSPS) are technologies, products or services that create value primarily by enabling direct interactions between two or more customer or participant groups. Prominent examples of MSPs and the participants they connect include Alibaba.com, eBay, Taobao and Rakuten (buyers and sellers); Airbnb (dwelling owners and renters); the Uber app (professional drivers and passengers); Facebook (users, advertisers, third-party game or content developers and affiliated third-party sites); Apple’s iOS (application developers and users); Google’s Android operating system (handset manufacturers, application developers and users); Sony’s PlayStation and Microsoft’s Xbox gaming consoles (game developers and users); American Express, PayPal and Square (merchants and consumers); shopping malls (retail stores and consumers); Fandango (cinemas and consumers); and Ticketmaster (event venues and consumers).1 SLOANREVIEW.MIT.EDU

THE LEADING
QUESTION

What are
some of the
strategic
issues that
multisided
platforms
(MSPs) face?
FINDINGS
Decisions need to
be made about
governance, platform design, pricing
and number of
sides.
No side of the
platform will join
without the other
or others.
Most MSPs subsidize at least one side
of their platform.

WINTER 2014 MIT SLOAN MANAGEMENT REVIEW 71

S T R AT E G Y

As these examples illustrate, MSPs include some
of the largest and fastest-growing businesses of the
past decade. Why? Successful MSPs create enormous value by reducing search costs or transaction costs (or both) for participants. As a result, MSPs
often occupy privileged positions in their respective industries; most other industry participants revolve around and depend on MSPs in important
ways. (See “How Multisided Platforms Differ from
Product Platforms and Resellers.”)
This article offers an analysis of four fundamental strategic decisions and associated trade-offs that set MSPs apart from other types of businesses and
that every MSP entrepreneur and investor should
carefully consider. (See “About the Research.”)
These challenges are the following:
•the number of sides to bring on board;
•design;
•pricing structures; and
•governance rules.

Basic Features of
Multisided Platforms
An important feature of most MSPs is that the value
to customers on one side of a platform typically increases with the number of participating customers on another side. This is known as the presence of
“cross-side network effects,” sometimes referred to
as “indirect network effects.”2 For example, sellers
derive more value from eBay when there are more
buyers and vice versa.3 However, cross-side network

HOW MULTISIDED PLATFORMS DIFFER FROM
PRODUCT PLATFORMS AND RESELLERS
There are two key characteristics of a multisided platform: (1) each group of participants (“side”) are customers of the MSP in some meaningful way, and (2) the MSP enables a direct interaction between the sides. Product platforms violate the first requirement: The ultimate customer is not a customer of the platform provider. Resellers violate the second requirement: There is no direct interaction between the sides. Product

platform
Sale of
essential
input
Side A
Sale of
final
product
Side B

Side A

Direct
interaction
or transaction

Affiliation
with the
MSP
Multisided
platform (MSP)
Affiliation
with the
MSP
Side B

72 MIT SLOAN MANAGEMENT REVIEW WINTER 2014...


References: 1. MSPs are a straightforward generalization of the twosided platform — from two sides to multiple sides — as
defined in Boudreau and Lakhani (2009)
selling them to customers. Thus, they are equivalent to
resellers as defined by Hagiu and Wright (2013)
studied by Gawer and Cusumano (2008). Many industry
platforms, such as Windows and PlayStation 3, are MSPs
(2009). One example is the electronic ink technology
developed by E Ink, which is the key component in
no. 4 (summer 2009): 68-76; A. Hagiu and J. Wright, “Do
You Really Want to Be an eBay?” Harvard Business Review 91, no
Wright, “Multi-Sided Platforms,” working paper no. 12024, Harvard Business School, Boston, October 2011.
5. D. MacMillan, “LivingSocial Falls to a Quarter of
2011 Value in Latest Funding,” February 22, 2013,
6. S. Raice and S. Woo, “Groupon’s Boston Problem:
Copycats,” Wall Street Journal, July 8, 2011.
8. See D. Einstein, “Microsoft Betting BIG on Cloud
With Windows 8 and Tablets,” October 11, 2012,
9. D. Yoffie and L. Kind, “LinkedIn Corporation, 2012,”
Harvard Business School case no
Harvard Business School Publishing, 2012).
Apple’s own sales. See D.B. Yoffie and M. Slind,
“Apple Inc., 2008,” Harvard Business School case
no. 708-480 (Boston: Harvard Business School Publishing, 2008).
11. H. McCracken, “Who’s Winning, iOS or Android?
All the Numbers, All in One Place,” April 16, 2013,
Transform Industries” (Cambridge, Massachusetts: MIT
Press, 2006).
15. “eBay Inc. Reports Strong First-Quarter 2013 Results,” April 17, 2013, http://investor.ebayinc.com.
16. K. Regan, “Skype Write-Off Has eBay Seeing Red,”
October 18, 2007, www.ecommercetimes.com.
Competition Policy International 3, no. 1 (Spring 2007):
150-179.
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