To understand Apple’s success, look at Ancient Greece
If you’re reading this, then you know that platform businesses like LinkedIn and Airbnb have disrupted entire industries. By creating the App Store, Apple create the app economy, valued at $6.3 billion today!
But when I teach my students about platforms, I don’t start in Silicon Valley. I start in an Ancient Greek Vineyard. This is because platform businesses have been around for millennia, but technology has allowed them to reach unprecedented scale in our time.
When thinking about tech businesses, smart non-technical professionals often suspend their reasoning because they are intimidated by the technical aspects. But technology is just a tool to solve problems that have been around for millennia.
(Also, Sophia means wisdom in Ancient Greek, which is why I’ve chosen the Athens as our setting).
Would you like to out on your best toga and come with me to class?
Imagine that it’s 556 BC and everyone is binge watching The Iliad by Homer. You recently bought a vineyard and have just produced your first batch of wine.
You’ve packed it up into amphorae, which you decide to sell from a shop you’ve built at your vineyard. You set your price as one amphora of wine for one drachma.
What would you need to do to sell your wine to other Ancient Greeks?
Firstly, you would need to tell everyone that you have wine for sale and tell them to come to your vineyard. You might have an opening party for your shop, when you wear your best toga, and hand out free samples. Your aim is to get as many people to try your wine, so they end up buying it and telling their friends.
Obviously, Sophia the Wise, comes to your wine shop opening and buys one amphora of your wine for one drachma. I want my students to succeed and am willing to drink wine to help.
Let’s break this down.
The transaction here is that you have a product, which you give it to me in exchange it for money. The value that you have created is wine. The value that you are capturing is the money I have paid you.
The transaction flows one way: you give me one amphora of wine wine; I give you one drachma. Unless I decide to buy more wine, our interaction is over.
Now let’s imagine that instead of owning a vineyard, you have inherited a market square from your uncle Oedipus.
You are now the owner of a busy market in Athens, where you have sellers selling wine from their vineyards, fruit from their orchards and honey from their beehives.
This time, Sophia the Wise, can come to the market square and not only buy wine, but also get figs, cheese and honey to go with it.
In this scenario the shop owners get more customers than they would have by themselves, and the customers have a variety of choice and can save themselves time.
Let’s break this down: as a market owner, you are interacting with two constituencies, i.e. you need to get two types of people to think your market square is great:
- The shop owners
- The shoppers
Platforms create MUCH more value than they capture
Let’s look closely at the transactions: customers buy more than one type of product from different stores. Buyers have more customers than they would attract by themselves. There are lots of new transactions happening.
An average shopper might spend 2 drachmas on wine, 1 drachma on cheese and 1 drachma on fruit. Because there is more to choose from, they buy more and thus spend more.
As the market owner you capture some of that value but not all of it. You might charge shop owners a fee for putting up their stalls in your market square. You might even charge admission from customers to get into your market.
But whatever you end up charging, if your market square is a success, the value you help create is far higher than the value you capture.
This means the total amount of money that people spend at your market is much higher than the money you make as the owner of the market square. This is the core of successful platforms: they must create far more of the value than they capture.
Now, let us step out of our sunny vineyard and go to an economics class (sorry). You need to learn some core definitions before we go any further.
A wine seller is a pipeline business
A pipeline business employs a step-by-step arrangement for creating and transferring value with producers at one end and consumers on the other.
Most traditional businesses are pipeline businesses. This is the case for our wine seller, but also for the auto-industry and for supermarkets.
Pipeline businesses grow and prosper if they have Supply Economies of Scale.
In our car industry example, if Ford makes lots of cars, the unit cost of producing each car falls.
The market square is a platform business
Platforms dominate if they have Demand Economies of Scale. This is another term for network effects.
A Network Effect is a phenomenon whereby a product or service gains additional value as more people use it.
The more sellers you have at your market, the more buyers become interested. The more shoppers there are at the market, the more the wine makers, and farmers want to sell at the market where all the customers are.
In a more modern example, if you are the only person with a telephone, it is useless. The more people have telephones, the more useful the network.
Therefore, network effect growth is exponential, not linear.
(Source: Platform Revolution, Sangeet Paul Choudary, Geoffrey G Parker, James Foster)
Some businesses are both a pipeline and a platform business
Apple started off as a pipeline business when they began making beautiful hardware: the Macintosh computer, the iPod and eventually iPhones and iPads.
But a pivotal moment was when Apple launched its App Store in 2007, and thus launched the entire app economy. Today, the app economy is valued at $6.3 billion, according to Statista, and didn’t even exist as a concept 15 years ago.
The platform business supports the pipeline business and vice versa. Consumers want to buy phones with the best apps, and the best apps want to reach the best consumers.
This pipeline to platform model is also what other connected devices are trying to do, because when this flywheel works, it can be the key to sustained long term growth.
To learn more about platform fundamentals, listen to the Platform Strategy mini-series on the Tech for Non-Techies podcast. Start with episode 1 of the mini-series:
What makes platform businesses SO successful
Listen on Apple, Spotify or on your browser
