Wednesday, August 1, 2007

Two-sided networks

Our discussion earlier this week of the network effect and its derivatives/analogs engaged me to dig a little deeper. What are examples where a ubiquitous (or standard) platform germinates a wellspring of business creation? My first Google search: ubiquitous networks. Not much to chomp on. I returned to Wiki and perused the network effect a little further, therein discovering two-sided networks and platform businesses, highlighted by an HBR paper: Strategies for Two-Sided Markets.

Two-sided networks are everywhere, touching each of us – ambivalently – each day. Examples include newspapers (joining subscribers and advertisers), HMOs (linking patients and health care providers), and operating systems (connecting computer users and application developers). So, if you peruse up the daily fish wrap, visit your doc, or turn on your computer (hopefully a Mac), you’re participating in a two-sided network.

At the core of two-sided networks are platforms, products and services that bring together groups of users. They provide infrastructure and rules that facilitate the two groups’ transactions. Platform businesses include online recruiting (Monster), video games (PlayStation), multiple listing services (real estate brokerage firms), and, of course, Web search (Google). Platforms have power: They can dictate the terms, rules and pricing of their market, while monetizing both sides of the equation. Here’s an interesting take from the HBR paper:

Two-sided networks differ from other offerings in a fundamental way. In the traditional value chain, value moves from left to right: To the left of the company is cost; to the right is revenue. In two-sided networks, cost and revenue are both to the left and the right, because the platform has a distinct group of users on each side.
Two-sided networks are more dynamic and complex than traditional businesses. eBay is a great example. The foundation – getting paid to facilitate commerce between disparate buyers and sellers – is obvious. Dive deeper: PayPal and Skype (which they own and operate), and Craigslist (in which they’ve invested) are tantalizingly powerful platform businesses too.

Back to the network effect and its relation to two-sided networks:
These platforms exhibit two types of network effects, which may be either positive or negative: A same-side effect, in which increasing the number of users on one side of the network makes it either more or less valuable to users on the same side; and a cross-side effect, iin which increasing the number of users on one side of the network makes it either more or less valuable to users on the other side. Cross-side network effects are typically positive, but they can be negative (TV viewers preferring fewer ads). Same-side network effects are often negative (sellers preferring fewer rivals in a B2B exchange), but they may be positive (Microsoft Xbox owners valuing the fact that they can play games with friends).
For the cost of a turkey sandwich ($6.50), you can gobble down the HBR piece … it’s a tasty and healthy meal, regardless of your perch at or around the platform.

No comments: