newnetland

European Tech Analysis

It’s free!

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Fred Wilson (with Union Square Ventures investor in Twitter, Delicious before its sale to Yahoo, Tumblr, Zynga, Etsy and others) on free main components in business models:

Wikipedia, Craigslist, YouTube, Flickr, Instagram, Facebook, Twitter, Tumblr, WordPress, etc, etc. There is no value to any of these platforms if the users don’t create the content. The users create the service, curate it, and make it what it is. I do not believe it makes sense to charge users to create the value. We’ve seen folks try this model. Typepad (where this blog is hosted) charges to host a blog. How well did they do? Phanfare charged to host photos. How well did they do? The list could go on and on but I don’t want to focus on failed services.

When scale matters, when network effects matter, when your users are creating the content and the value, free is the business model of choice. And I don’t think anything has changed to make that less true today. If anything, it is more true.

And Luke Chamberlin in a comment on that posting:

The “free” model could also be called the “marginal cost of distribution” model and it’s been with us for a long time.

 [..]

The difference today is that through the internet, the marginal cost of distribution is essentially zero, so they don’t have to sell subscriptions anymore to offset the distribution cost. The other difference is that they have better information about who you are, because they track your behavior online through browser cookies.

People are entitled to the opinion that free, and therefor ad-based, media is bad, but they need to be reminded that it’s not a new model, and has in fact been the dominant model all along.

Define web platform

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What is a web platform? The term that is being used by lots of people to describe web services new and old is actually not understood by many. A portal like Yahoo is not a platform. eBay is a platform. Amazons core business as an online retailer doesn’t fall under the term ‘platform’. Amazons marketplace however is one.

Online marketplaces are platforms. Etsy, Amazon Marketplace, eBay.

You got an API? You got yourself a platform. From Facebook to Twitter, every web service with an API is a platform. And there are lots of them.

Now how you define platform?

A platform is infrastructure. 

A platform is also a promise like Horace Dediu once said.

A platform is the basis for, and here we finally come to the definition, a two-sided market.

In a two-sided market two (or more) distinct groups of users come together. They both are subject to cross-side network effects meaning one group extracts more value out of the platform the more members of the other group are using it and vice versa.

Wikipedia:

In two-sided networks, users on each side typically require very different functionality from their common platform. In credit card networks, for example, consumers require a unique account, a plastic card, access to phone-based customer service, a monthly bill, etc. Merchants require terminals for authorizing transactions, procedures for submitting charges and receiving payment, “signage” (decals that show the card is accepted), etc. Given these different requirements, platform providers may specialize in serving users on just one side of a two-sided network. A key feature of two-sided markets is the novel pricing strategies and business models they employ. In order to attract one group of users, the network sponsor may subsidize the other group of users. Historically, for example, Adobe’s portable document format (PDF) did not succeed until Adobe priced the PDF reader at zero, substantially increasing sales of PDF writers. Relative to Apple computer’s initial pricing, Microsoft also steeply discounted systems developer toolkits (SDKs) leading to more rapid development of applications for MS Windows. 

Cross-side network effects and differing price sensitivities between the distinct groups are the basis for every decision by platform providers.

If you want to understand the world of web platforms you have to understand the dynamics of two-sided markets.

The goal of this blog is to explore this emerging world which is dominated by these network economics and starts to touch every sector of the economy.