Digital Business Fundamentals
Pipe Thinking
Vs
Platform Thinking
Video links for pre read
1. Platforms: A shift from Software to Data | Sangeet Paul Choudary
https://youtu.be/apFrfinrBMU
2. The shift from pipes to platforms
https://www.youtube.com/watch?v=57IYsA7H6tY
3. Five Factors That Lead to Exponential Growth | Sangeet Paul Choudary
https://youtu.be/YTEKwIRu74k
4. Platform Economy: The Dark Side | Sangeet Paul Choudary
https://youtu.be/emyVEGWa3sE
5. Multi-sided Platform Strategy
https://www.youtube.com/watch?v=BCrTqNW_C_A
Pipes Vs Platform Business Model
 Why do most social networks never take off?
 Why are marketplaces such difficult
businesses?
 Why do startups with the best technology fail
so often?
Pipes Vs Platform Business Model
 There are two broad business models: pipes
and platforms.
 You could be running your business the
wrong way if you’re building a platform but
using pipe strategies.
Pipes
 Pipes have been around us for as long as we’ve
had industry.
 They have been the dominant model of business.
 Firms create stuff, push them out and sell them to
customers.
 Value is produced upstream and consumed
downstream.
 There is a linear flow, much like water flowing
through a pipe.
Pipes
 We see pipes everywhere.
 Every consumer good that we use essentially
comes to us via a pipe.
 All of manufacturing runs on a pipe model.
 Television and Radio are pipes spewing out
content at us.
 Our education system is a pipe where teachers
push out their ‘knowledge’ to children.
 Prior to the internet, much of the services industry
ran on the pipe model as well
Pipes
 This model was brought over to the internet as
well.
 Blogs run on a pipe model.
 An ecommerce store like Zappos works as a pipe
as well.
 Single-user SAAS runs on pipe model where the
software is created by the business and delivered
on a pay-as-you-use model to the consumer.
Courtesy: Stockholm School of Commerce
Platforms
 A platform is a business that creates value by
facilitating direct interactions between two or more
distinct types of customers.
 Had the internet not come up, we would never
have seen the emergence of platform business
models.
 Unlike pipes, platforms do not just create and push
stuff out.
 They allow users to create and consume value.
Platforms
 Platforms represent a fundamental shift in how
businesses relate to each other—from linear to
more networked business models.
 Platform businesses can often be very light in
assets but generate large revenues.
 Instead of building features and seeking to get
customers to use their own products, they build
ecosystems by getting customers to interact with
each other.
Platforms
 At the technology layer, external developers can
extend platform functionality using APIs.
 At the business layer, users (producers) can create
value on the platform for other users (consumers)
to consume.
 This is a massive shift from any form of business
we have ever known
Platforms
 TV Channels work on a Pipe model, but YouTube
works on a Platform model.
 Encyclopedia Britannica worked on a Pipe model,
but Wikipedia has flipped it and built value on a
Platform model.
 Our classrooms still work on a Pipe model but
Udemy and Skillshare are turning on the Platform
model for education.
Courtesy: Stockholm School of Commerce
Examples of Platform Business

Retail: eBay, Amazon Marketplace

Media: YouTube, Forbes.com * Advertising: Google, Baidu, Craigslist

Finance: PayPal, Kickstarter, Alipay * Gaming: Xbox, PlayStation

Mobile computing: iOS, Android, Xiaomi

Business software: SAP, Salesforce * Home appliances: Philips

Hospitality: Airbnb, TripAdvisor * Transportation: Uber

Education: Coursera, Udemy

Recruiting and job search: LinkedIn, Glassdoor

Freelance work: Upwork, Amazon Mechanical Turk

Philanthropy: Kiva
Properties of Platforms



Distinct type of customers: For example, buyer and sellers.
Skype, for instance, is not a platform since the customers are
of the same type.
Direct interaction: In a platform such as Airbnb or eBay, the
two parties are free to create their own profiles, set and
negotiate pricing, and decide how they want to present their
services or products. This is a critical distinction between a
platform and a reseller or sales channel.
Facilitating: The interactions take place and are facilitated by
the platform business.
Types of Platforms




Exchanges: they bring together two distinct group of customers for a
direct value exchange
Transaction Systems: they act as an intermediary between different
parties to facilitate payments and financial transactions. To succeed
(e.g. PayPal or Apple Pay), these platform must get sufficient numbers
on board from each party.
Advertised-supported media: as the platform attracts more people, its
value to advertisers increases. The advertisers, in turn, provide value to
the audience by reducing or eliminating the cost of content for them.
Hardware/software standards: they provide a uniform standard for the
design of subsequent products to enable their interoperability and
benefit the ultimate consumer.
Key Elements of Platforms
There are four key elements of platforms




Frictionless acquisition: The process of acquiring new customers is
frictionless thanks to the Web, APIs, SDKs, and so on.
Scalable growth: Cloud computing allows any size business to rapidly
scale the size of its platform as fast as it can acquire new customers.
On-demand access and speed: Mobile computing means that every
platform now can be accessible to all of its customers any time.
Trust: The ability to authenticate customers through their Facebook,
Google, Twitter, or Linked-in identities make it much easier for even a
small start-up to use a verification system for new customers on its
platform.
Business Model Failure
 So why is the distinction important?
 Platforms are a fundamentally different business
model.
 If you go about building a platform the way you
would build a pipe, you are probably setting
yourself up for failure.
 We’ve been building pipes for the last few centuries
and we often tend to bring over that execution
model to building platforms.
Business Model Failure
 The media industry is struggling to come to terms
with the fact that the model has shifted.
 Traditional retail, a pipe, is being disrupted by the
rise of marketplaces and in-store technology, which
work on the platform model
Pipe thinking Vs Platform thinking
Summary of the ways that these two models of building
businesses are different from each other.
 User acquisition: Getting users onboard is fairly
straightforward for pipes. You get users in and convert them
to transact.
 Much like driving footfalls into a retail store and converting
them. Online stores also focus on getting users in and
converting them.
 Many platforms launch and follow pipe-tactics like the
above.
 Getting users in and trying to convert them to certain
actions.
Pipe thinking Vs Platform thinking
 However, platforms often have no value when the first
few users come in.
 They suffer from a chicken and egg problem
 Users (as producers) typically produce value for other
users (consumers).
 Hence, without producers there is no value for
consumers and without consumers, there is no value
for producers.
Pipe thinking Vs Platform thinking
 Product design and management: Creating a pipe is
very different from creating a platform.
 Creating a pipe requires us to build with the consumer
in mind.
 An online travel agent like Kayak.com is a pipe that
allows users to consume airline tickets.
 All features are built with a view to enable consumers
to find and consume airline tickets.
Pipe thinking Vs Platform thinking
 In contrast, a platform requires us to build with both
producers and consumers in mind.
 Building YouTube or AirBnB requires us to build tools
for producers (e.g. video hosting on YouTube) as well
as for consumers (e.g. video viewing, voting etc.).
 Keeping two separate lenses helps us build out the
right features.
Pipe thinking Vs Platform thinking
 Monetization: Monetization for a pipe is
straightforward.
 You calculate all the costs of running a unit through a
pipe all the way to the end consumer and you ensure
that Price = Cost + Desired Margin.
 It captures the fact that the customer is typically the
one consuming value created by the business.
Pipe thinking Vs Platform thinking
 On a platform business, monetization isn’t quite as
straightforward
 When producers and consumers transact (e.g. AirBnB),
one or both sides pays the platform a transaction cut.
 When producers create content to engage
consumers (YouTube), the platform may monetize
consumer attention (through advertising).
 In some cases, platforms may license API usage.
 At least one side is usually subsidized to participate on
the platform.
 Producers may even be incentivized to participate.
Platform Business
 Every business on the Internet has some Platform
properties
 As mentioned earlier ecommerce stores and singleuser SAAS work on pipe models
 However, by virtue of the fact that they are Internetenabled, even they have elements that make them
platform-like.
Platform Business
 Blogs allow comments and discussions.
 The main interaction involves the blogger pushing
content to the reader
 But secondary interactions (like comments) lend a blog
some of the characteristics of platforms.
 Readers co-create value.
 Ecommerce sites have reviews created by users, again
an “intelligent” platform model.
The End of Pipes
 In the future, every company will be a tech company.
 We already see this change around us as companies
move to restructure their business models in a way that
uses data to create value.
 We are moving from linear to networked business
models, from dumb pipes to intelligent platforms.
 All businesses will need to move to this new model at
some point, or risk being disrupted by platforms that
do.
Post Read Articles
1. Pipe thinking Vs Platform Thinking
2. Pipelines, Platforms and New Rules (HBR Article)
Q&A
and
Discussions
Quiz
1. How is the business model of Facebook different
from Wikipedia? How do they create value for the
users?
2. When pipelines launch platforms, what are three
critical metrics to be monitored by the managers?
3. Managers of pipeline businesses focus on -------------while for platforms, the focus shifts to -------------------
Quiz
4. State the roles played by different players of the
platform ecosystems.
5. What are the forces faced by the owners of the
platform within the platform ecosystem?
6. In demand side economies the Porter’s forces can
be -------- because of ------------ effects