A panel held yesterday at the World Economic Forum in Davos, Switzerland, addressed the disruption from platform consolidation that many organizations will undergo to remain relevant. Transitioning to a world of monolithic platforms, such as YouTube and Airbnb, will test even the best companies on more than technical vision and systems development execution. The difficulty of building and scaling a platform pales in comparison to triggering the network effect between buyers and sellers who will use the platform.
During the panel, YouTube CEO Susan Wojcicki said that triggering the network effect is so difficult to accomplish independently that Google paid $1.6 billion to acquire YouTube before it was even a year old. Wojcicki, who led Google’s video business at the time, lobbied to acquire YouTube at the time because of the site’s network effect between content publishers, viewers, and advertisers. With the Wall Street Journal estimating $4 billion in revenue, 400 hours of video content uploaded every minute, 1 billion users, and 70% market share last year, it’s safe to say Google and Wojcicki made the right move.
Airbnb CTO and founder Nathan Blecharczyk recounted for the audience how the company triggered the network effect eight years ago. Airbnb recruited 40 Manhattan homeowners, professionally photographed their homes, and held their hands preparing their listings so they could promote Airbnb to friends and family. It worked; Airbnb built a platform that matched its growth generated by the network effect it sparked in Manhattan.
But there is a lesson to be learned from each generation of digital disruption. Like Airbnb, the leading search engine Google, leading social network Facebook, and leading video platform YouTube have limited competition, making platforms a high-stakes, winner-takes-all game. Every company facing digital transformation runs the risk of losing relevance and becoming redundant in a future consolidated by platforms.
Panelist and NYU economist Arun Sundararajan defined these platforms as conduits for crowd-based capitalism that give large, distributed groups of people access to services that otherwise wouldn’t be available. Sundararajan cited the example of the rapid digital transformation of transportation by Uber and Lyft in the U.S., Ola in India, and Didi Kuaidi in China. By publicizing the accumulated reputations of buyers and sellers after each transaction, platforms self-regulate the community, creating trust. The platform’s branding and legitimacy provide riders with the trust to hire a stranger to drive them.
Sundararajan said that, as an economist, he is excited about the future of platforms for two reasons. The first reason is that “we are at the early stages of inventing a new model of organizing economic activity,” he said. Secondly, Sundararajan is excited because “platforms vastly expand the set of industries in which network effects are going to be prevalent.” If Sundararajan is right, the global economy is staring down both barrels of digital transformation producing decades of disruption similarly to how the web displaced newspapers and ecommerce changed retail.
The regulation of these services will change too. Many of the standards once set by the regulators are now set by the platform, such as who can drive a taxi and how to regulate video content. YouTube’s Wojcicki explained how the community flags videos that don’t match the site's values. She noted how most content that clashes with these values is removed within 24 hours, but in more extreme cases, such as the beheading of the first American by ISIS, they are removed within minutes. Wojcicki also pointed out that the only entity that can regulate YouTube videos at the scale of 400 hours uploaded every minute is the community.
Community regulation of YouTube content suggests that regulators will not be able to monitor the enormous data flows throughout these platforms for compliance to the rules. Platforms are in a much better position to delegate some of this responsibility, using machine learning to set and enforce some of the regulatory standards.
Any type of commerce in any industry is a candidate for the redefinition of supply and demand as a platform. In the short term, forecasts of the network effect of platforms will be overly optimistic. It’s taken Airbnb eight years to become pervasive. And Uber still isn’t available in every city in the U.S., which flabbergasts travelers from Boston and San Francisco. In the longer-term, the forecasts will be too pessimistic.