CATALYST CODE:
HOW TO IGNITE A PLATFORM BUSINESS AND RULE A
PLATFORM-CENTRIC ECOSYSTEM
David S. Evans
Founder | Market Platform Dynamics
Visiting Professor | University College London
Lecturer | University of Chicago
20 April 2012
Catalyst Course 2012
2
Catalyst Panorama
Platform Businesses Dominate the Economic Landscape
OpenTable:
Intermediary between Two Different Kinds of Customers
3
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The OpenTable Business Model
Restaurants Pay and Consumers Use it for Free
4
$100 million revenue in 2010 | $1.35 billion markets cap
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The Result:
Positive Feedback Effects Fuel Open Table Growth
5
 27 million reservations in
2011Q4 a month up
from 19 million in
2010Q4
 25k restaurants in
2011Q4 up from 20k in
2010Q4
 More than 40% yoy
growth in revenue
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Many “Multi-Sided Platform” Businesses Operate Like This
Positive Feedback Effects Fuel Business Growth
6
COMPANY
CUSTOMER SIDE A
CUSTOMER SIDE B
Windows
Users
Developers
Google Search
Searchers
Advertisers
Deutsche Bourse
Liquidity providers
Liquidity takers
eHarmony
Men
Women
Paris Match
Readers
Advertisers
Roppongi Hills
Shops
Shoppers
American Express
Cardhodlers
Merchants
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These Multi-Sided Platforms Include Many Massive
Global Businesses
7
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Catalysts Create Real Value
Providing a Platform Where Customers Can Meet and Transact
8
Platforms can create tremendous value by eliminating pain points in
exchange
To ignite, platforms must solve extremely difficult coordination problem
But if do, they can generate tremendous profits through positive
feedback effects
Sustaining those profits requires treacherous navigation in an n-dimensional
universe of colliding platforms like Google Search (3-sided), Facebook’s Social
Network (4-sided) and Microsoft Windows (3-sided)
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Catalysts, Platforms and Two-Sided Markets
Defining Terms
9
(Economic) Catalysts are intermediaries that create value by
brining two or more types of agents (businesses or people)
together.
(Multi-sided) Platforms are the virtual or physical places that
catalysts create to enable multiple types of agents to find and
transact with each other and thereby create and exchange
value.
Economists sometimes call these platforms Two-sided Markets a
term that was introduced in the pioneering work by French
economists Jean-Charles Rochet and Jean Tirole.
A customer type is sometimes call a platform “side”.
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The Catalyst Curriculum
10
Catalyst
Panorama
How Platform Businesses Dominate the Economics Landscape
Catalyst
Defined
The New Economics of Two-Sided Markets
Catalyst
Construction
How to Use the Catalyst Toolkit to Build a Profitable Platform
Business
Catalyst
Ignition
How to Start a Platform Business and Obtain Explosive Growth
Catalyst
Competition
How to Compete When there are Colliding Platform Ecosystems
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CATALYST CODE:
HOW TO IGNITE A PLATFORM BUSINESS AND RULE A
PLATFORM-CENTRIC ECOSYSTEM
David S. Evans
Founder | Market Platform Dynamics
Visiting Professor | University College London
Lecturer | University of Chicago
20 April 2012
Catalyst Course 2012
12
Catalyst Defined:
The New Economics of Two-Sided Markets
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What Catalysts Do
Add Value by Reducing Transaction Costs
13
Catalysts
• enable two or more
types of customers,
who could engage
in mutually
valuable exchange,
• to find each other
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to transact,
• and to thereby create
and exchange value.
eBay Reduced Transaction Costs
14
People Who Wanted to Sell Pez Dispensers Find and Trade
with People Who Wanted to Buy Pez Dispensers
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How Catalysts Do It
15
Catalysts provide a physical or virtual platform that enables different types of
agents to find each other and transact
Transact
Search
Platform
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Match
eBay
A Platform for Agents to Search, Match, and Transact
16
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Catalyst Value Creation
17
Catalysts create
value by reducing
pain points or
what economists
call “transactions
costs”.
Catalysts reduce
transactions costs
by making it
easier for
different types of
agents to get
together and
exchange value.
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As a result agents
can engage in
mutually
advantageous
exchange that
creates value.
That exchange
and the resulting
value creation
would have been
more inefficient—
or perhaps even
impossible—
without the
catalyst.
An eBay Example
The Miracle of Value Exchange and Wealth Creation
18
Buyer values pez dispenser at $2.00
Seller values pez dispenser at -$.50
(cost of having junk around)
They enter into a
trade at $1.00
Buyer gets $1.00 of value
(a pez dispenser worth $2.00
minus $1.00 purchase price
Total Value of
$2.50 created
out of thin air!!!!
Seller gets $1.50 of value
($1.00 plus gets rid of junk
which costs $.50)
A 2003 study found that eBay created $7 billion of extra value just for buyers.
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Common Features of Catalysts
19
Positive
Network Effects
Type A customers value platform more if there are more Type B
customers and vice versa.
Pez seller gets more value if more buyers; buyer gets better
selection and deal if more sellers
Critical Mass
Need to be enough customers on both side to create value for either.
If few buyers and sellers of Pez dispensers little incentive to join
platform.
Money/Subsidy
Side
Platforms often give one side a “break” and make their profits for
the other side.
Sellers pay commission plus merchant discount for PayPal. Buyers
pay nothing.
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CATALYST CODE:
HOW TO IGNITE A PLATFORM BUSINESS AND RULE A
PLATFORM-CENTRIC ECOSYSTEM
David S. Evans
Founder | Market Platform Dynamics
Visiting Professor | University College London
Lecturer | University of Chicago
20 April 2012
Catalyst Course 2012
21
Catalyst Construction:
How to Use the Catalyst Tool Kit to Build a Successful
Platform
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The Catalyst Tool Kit
22
Transaction Engine
Platform Concept
Prices
Search and Matching
Engines
Platform Design
Product Offerings
Governance Rules
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Three Key Questions
Platform Concept for Solving Pain Points
23
1. What’s the set
of problems that
need to be solved
for economic
agents?
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2. What’s the most
efficient solution
for solving those
problems?
3. Does the
solution create
enough value for
customers and
platform?
OpenTable Platform Design
Solving Pain Points in Restaurant Reservations
24
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Pricing Is The Key
Gets Customer Sides on Board and in Right Proportion
25
Need to get both sides on board
Think selling advertising with no readers
Need to get right proportions
Think nightclubs with few women
Relative pricing (“the price structure”) is key
In practice many platforms have “subsidy” side
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Rules of Thumb for Pricing Structure
26
Higher price
(“Money side”)
Economic theory shows that optimal
prices may be < than MC, 0, and
possibly <0.
Below-cost pricing common, in fact.
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Lower price
(“Subsidy side”)
Software Platforms a Good Example of Pricing
Illustrates Variety of Pricing Structures
27
PLATFORM
USERS
DEVELOPER
COMMENT
Windows
Pays
Subsidized
App developers get API
access for free and cheap or
free tools
Sony PlayStation
Subsidized
Pays
Users get consoles for no
more than cost and game
developers pay commissions
iPhone OS
Pays
Free for free apps Users pay for phones and
Paid for paid
developers pay commissions
apps
on sales through App Store
(but not from other revenue
sources)
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Platform Offerings
28
Offerings to
Create Value
for Each Side
More offerings create more value and work like price
(iPhone features)
More distinct offerings bring in more customers
(sections in newspapers)
Offerings to
Promote
Interactions
and
Transactions
Search and matching
(eHarmony)
Information
(depth of book data for exchanges)
Transactions
(Google AdWords)
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Design for Positive Network Externalities
Platform Design/Rules Promote Positive Externalities
29
Sorting Devices
to Get Right
Customers
“Exclusionary vibe”
(JDate discourages Gentiles)
“Exclusionary amenity”
(Upscale anchor stores discourage low-end shoppers)
Search
Diversion
Design rules encourage one type of agent to meet another type of
agent who really values them but may not seek out by themselves
Shopping malls with anchor stores at either end
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Design to Mitigate Negative Externalities
Reducing Bad Behavior that Reduces Platform Value
30
Rules
Prohibitions on actions that could harm other agents
(usually those on other side of match/transaction)
eBay has detailed rules for buyer and seller behavior
No misleading ads (sellers) and no multiple auctions for same good (buyers)
Detection and
Monitoring
Systems to determine if rules are being broken
Facebook has hundreds of employees looking for bad pictures and
bad language
Enforcement
Platforms have and use “Bouncers Rights” to exclude violators
Google manually reduces ranks of websites that violate rules for 90
days and sometimes delists
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CATALYST CODE:
HOW TO IGNITE A PLATFORM BUSINESS AND RULE A
PLATFORM-CENTRIC ECOSYSTEM
David S. Evans
Founder | Market Platform Dynamics
Visiting Professor | University College London
Lecturer | University of Chicago
20 April 2012
Catalyst Course 2012
32
Catalyst Ignition:
How to Ignite a Platform Business and Obtain Explosive
Growth
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YouTube Ignited in Late 2005
33
TABLE 1 -- YOUTUBE UNIQUE VISITORS ('000)
70,000.000
60,000.000
50,000.000
40,000.000
YOUTUBE
30,000.000
20,000.000
10,000.000
0.000
05 05 l 05 05 05 t 05 05 05 06 06 06 06 06 06 l 06 06 06 t 06 06 06 07 07 07 07 07 07 l 07 07 07 t 07 07 07 08 08
r r
r r
ay jun ju ug ep oc ov ec jan feb a ap ay jun ju ug ep oc ov ec jan feb a ap ay jun ju ug ep oc ov ec jan feb
n d
n d
n d
a s
a s
a s
m
m
m
m
m
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Platforms Need Critical Mass to Ignite
34
Critical mass
Critical mass refers to the minimal set of customers on each side
that is large enough to attract more customers and result in
sustainable positive feedback
Critical mass depends on scale and balance
Probability of customers from two sets getting together and
exchanging value increases with the number of customers on each
side
Platforms implode if they can’t reach critical mass
If there aren’t enough customers on the other side the probability
of advantageous exchange falls and customers don’t join and the
early adopters who have eventually leave
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Successful Platform Launch Depends on Critical Mass
35
Critical mass corresponds to a combination of scale and balance that
is minimally sufficient to ignite the platform
1200
1000
800
600
400
200
Each point reflects a combination of scale (how many customers)
and balance (proportion of customer types)
0
0
200
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400
600
800
1000
Platform Ignition Requirements
Reaching One of Possibly Many Combinations of Scale and
Balance Based Critical Mass Points
36
Catalytic Ignition and Critical Mass
Ignition
D*- Long-run equilibrium
C`
Points of critical mass
Movements at starting to achieve
critical mass
C*
C``
O
Side B
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In this example the
critical mass points
are between C’ and
C”.
C* is the point that
would lead to optimal
platform launch.
Points to the NW of
the vector 0-C’ and to
the SW of vector 0C” would result result
in platform implosion.
B2Bs Died Because They Didn’t Get to Critical Mass
No Model to Get the Right Scale and Proportion of Suppliers
37
Points Show Supplier (X) and Buyer (Y) Combinations
for B2B Exchanges (Illustrative Example)
250
200
Critical mass points that could lead to ignition
150
100
Most B2Bs ended up with
Too few suppliers and
imploded
50
0
0
200
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400
600
800
1000
1200
Platform Ignition Has a Stopwatch
38
Limited Time for
Reaching Critical
Mass
Early adopters have limited patience
Diffusion must be rapid enough for momentum
Competitors, new technology, and market changes can dose ignition
Critical Time
Period Depends
on Type of
Platform
More time if sides can be sequenced
(e.g. build up advertisers then gets readers)
Less time if sides much show up simultaneously
(dating clubs, exchanges, payments systems)
Evans’s Law of
Ignition Timing
Platforms that can’t be sequenced have two years or they’re toast
Completely unscientific law but can’t think of many that were
successful with longer fuse and lots died who didn’t ignite in that time
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Platform Failures: Video Sharing Sites That Imploded
(13 Largest as of February 2008)
39
Video Sharing Company
Feb 04
May-04
Aug-04
Nov-04
Feb-05
May-05
Aug-05
YOUTUBE.COM
MSN Video
5,830
5,003
8,211
9,760
10,921
9,971
14,762
Internet Broadcasting, Internet
Broadcasting Systems
CSTV: College Sports TV
3,747
5,277
Nov-05
Feb-06
May-06
3,654
3,086
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
900
4,230
12,669
19,089
25,471
34,413
41,035
44,894
53,521
63,921
11,738
12,453
16,350
15,414
13,250
15,769
14,488
14,987
13,606
13,543
11,620
9,257
9,573
9,393
10,329
12,302
10,709
12,658
12,742
10,898
7,383
5,504
4,724
5,797
7,373
5,433
4,370
5,943
8,318
4,804
21,141
22,059
19,802
20,855
23,571
6,467
3,982
Yahoo! Video
EBAUMSWORLD.COM
Aug-06
2,947
3,166
3,926
4,365
4,394
5,047
4,453
5,316
5,069
4,280
3,363
3,408
4,894
5,224
3,489
490
759
1,927
2,087
2,970
5,589
5,480
6,208
7,518
6,840
3,391
5,241
5,758
4,349
5,092
DAILYMOTION.COM
436
691
1,298
1,952
3,196
2,751
3,729
3,747
VEOH.COM
207
667
293
784
1,857
3,537
3,457
3,196
3,065
1,213
2,057
1,534
2,233
2,576
1,847
2,374
1,870
2,101
1,815
2,106
HEAVY.COM
ATOMFILMS.COM
732
329
1,359
1,845
1,132
1,371
1,154
1,178
1,257
NICK.COM TurboNick
IFILM.COM
2,522
2,757
2,731
BRIGHTCOVE.COM
2,873
2,241
2,467
2,876
2,846
3,594
3,275
2,979
3,443
3,484
2,124
2,272
1,753
1,115
181
334
2,016
1,418
1,578
1,641
2,736
No separate data available on Google Video which also imploded.
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Foundations of an Ignition Strategy
Determining Relative Prices and Value Propositions
40
Who’s Needed Most and Why?
What value is
being provided to
each side?
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What alternatives
does each side
have and what is
demand elasticity?
How much is each
side valued by the
other side?
MPD’s Strategic Framework for IgnitionTM
These are methods
that platforms have
used successfully in
solving coordination
problems and
reaching critical
mass.
The appropriate
method depends on
the economic
situation of the
particular platform.
Business Model
Getting to Ignition
Sequential entry
Get one side on board first, then use it to get the other side on board.
SImultaneous entry
The platform is opened up right away with both sides on board, usually done when
there is an obvious problem to be solved and it is simply making both sides aware
of the business proposition that gets both sides to show up at the same time.
Static precommittment
strategy
Make credible commitment to each side that the other side will show up
Dynamic
precommittment
strategy
Have both sides in play by approaching one side and getting them to agree to
show up if there is evidence that the other side is on board. Then, go to the other
side and promise that the side they are most interested in is on board.
Xbox
Basic zigzag
Incremental growth. Engage in a variety of strategies to get one side and then the
other to join the platform over a space of time
YouTube
Marquee strategy
Secure a small number of really influential players on one side or both.
Zig zag with self
supply
Launch platform by initially providing one side yourself.
Partner with another
platform
Partner with a platform that has the most critical side of your platform already on
board.
Android
Developer strategy
Create APIs and give a let developers access the platform to create value for the
platform’s customers
PayPalX
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Whose Done It
OpenTable
Facebook
Diners Club
Mall of America
Palm Pilot
42
Catalyst Competition:
How to Survive, Compete and Disrupt in a MultiDimensional Ecosystem
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The Winner-Take-All Myth in Platform Markets
Most platforms operate in competitive ecosystems
43
Long-lived platform
monopolies are rare
• Many successful
platforms face
direct competition
Positive feedback
effects don’t insure
a single winner
• They limit the
number of
successful firms but
multiple platforms
survive by
appealing to
different types of
customers on both
sides
Positive feedback
effects work in
reverse
• They drive rapid
growth but
competition can
lead to a death
spiral when they
work in reverse
Only the Smart Worrywarts Survive
The MySpace “Monopoly”
Leaders often seem entrenched until they aren’t
44
Facebook
MySpace
Friendster
2011 Social Network Analysis Report, http://www.ignitesocialmedia.com
“MySpace is far and away the
de facto standard for social
networking and is highly
entrenched in the youth culture of
today.”
IMEDIACONNECTION, 2006
“We see MySpace as the new
MTV, with one crucial difference:
the users are the stars.”
MASHABLE, 2006
The long-lived Windows dominance on PCs is the exception to the rule that
platform markets usually aren’t winner take all.
Symmetric vs. Asymmetric Competition
Multi-dimensional nature of platforms results in new concepts of competition
45
Symmetric Competition
Asymmetric Competition
• Competitors have same
number of sides and
types of users
• Competitors have similar
pricing structures
including decisions on
money vs. subsidy side
• Rival has extra side(s);
both have same side but
one has a different one
• Rival has one side in
common but one side
different
• Rival has radically
different pricing
structure
Examples of Asymmetric Competition
46
Enveloping Platform
Intersecting Platforms
Rival has extra side
Rival has different side
• Microsoft has 2-sided
user/developer
software platform
• Google had 2-sided
search/advertising
platform plus 2-sided
user/developer
software platform
• Google could
provide free
software, Microsoft
couldn’t because that
was rev source.
• Tencent provides IM
for users, sells
advertising
• Qihoo provides antivirus software for
users, sells
advertising
• They compete for
users by providing
different products to
attract users but both
looking to sell
advertising
Different Pricing
• Google provides
free software to
users, Microsoft
doesn’t
• nytimes.com charges
viewers, cnn.com
doesn’t
• Developers don’t pay
to develop PC
games, but do to
develop console
games
Overtaking the Leader When Competing on the Same Sides
Entrants have several strategies for displacing or at least competing with the leader
47
Differentiate by serving
subsets of users on each
side better
• Square entered by identifying
tiny merchants and cash users
Feature competition that
increases value platform
participants can
exchange—better search,
matching, and exchange
• New financial exchanges
succeeded through more
efficient computerized trading
mechanisms
• Munsey Magazine in late 19th
Identify better pricing
century dropped prices
structures that create
dramatically to users thereby
stronger positive feedback
dramatically increasing
effects
demand for advertising.
Enveloping the Leader by Adding a New Side
Adding another side encircles the incumbent platform and boxes the leader in
48
Major disruptive
innovation involves
bringing another
side to a platform
Provides another
source of value to
existing sides
Enables n+1 sided
platform to lower
prices/increase
value to the nsides of the
incumbent
Android enveloped iPhone initially
because it had the prospect of searchad revenue and therefore could enter
at a low price
Envelopment Strategy
Adding a side can surround a rival platform
49
Developers
Users
Staying in the Lead when Competing on the Same Sides
Incumbents can keep the competitors far away—or at least try
50
Feature competition
• Keep adding and
improving features that
increase the value
platform participants
can share in
Focus on strategies that
make it hard for new
firms to attract
customers
• Make one or more sides
very sticky via platformspecific investments
• Create a side that
requires platformspecific investments
• Example: applications
are sticky and are hard
for entrants to duplicate
quickly
Lock up liquidity
• Make if difficult for
competitors to attract
critical mass by
• Locking up customers on
one or both sides with
long-term contracts or
• Making customers very
sticky
Most of all keep growing on both sides as this increases value of platform
compared to all followers
Staying Ahead When Rivals Go Asymmetric
Asymmetric competition is highly treacherous for incumbents
51
Differentiation
Create value prop so strong that lower price of rival doesn’t matter
(WSJ creates unique value so it can charge subscribers)
Price discrimination—lower price to customers most at risk
Expand
Platform to
Achieve
Symmetry
Integrate into additional side to compete directly
(e.g. Apple into ads, Google into hardware)
Expand
Platform to
Achieve Another
Revenue Stream
Integrate into a new side that rival lacks but than can provide similar
offsetting revenue
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Only the (Smart) Worrywarts Survive
Successful platforms are tough but not impossible to beat
52
Constantly worry
about the
competition; no
matter how successful
you are it is possible
for you to lose your
lead
A rival has
even faster
positive
feedback
loops
You have a
reverse
positive
feedback
loop
Not so clear the
paranoid survive
Lots of rivals
have no
chance of
success and
you shouldn’t
waste effort
The Microsoft
Syndrome:
paranoia
over every
possible
platform
competitor
resulted in
missing major
disruption
Be smart about what
you worry about and
how you react
Realistic
assessment of
who could
overtake you
Focus a lot on
competition
from the n+1
dimensions
CATALYST CODE:
HOW TO IGNITE A PLATFORM BUSINESS AND RULE A
PLATFORM-CENTRIC ECOSYSTEM
David S. Evans
Founder | Market Platform Dynamics
Visiting Professor | University College London
Lecturer | University of Chicago
20 April 2012
Catalyst Course 2012
54
Catalyst Conclusion
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The Catalyst FrameworkTM
© Market Platform Dynamics & Evans & Schmalensee, The Catalyst Code (HBS Press, 2007)
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Concluding Thoughts
56
Catalysts can create tremendous value for
themselves and their customers
•
•
•
•
All about solving pain points between agents
Can have explosive growth through positive feedback
Hard to design because solving many masters
Hard to ignite because coordination makes it difficult to achieve critical
mass
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For More Detail and Background
Catalyst Reading List
57
Evans and Schmalensee, Catalyst Code: The Strategies Behind the World's
Most Dynamic Companies Harvard Business School Press.
Evans, Platform Economics, CPI Press.
Evans, “How Catalysts Ignite: The Economics of Platform-Based Startups,” in
Gawer, Platforms, Markets, and Innovation, Elgar Publishing, 2009.
Evans, Launching New Payments Businesses: The Role of Critical Mass and
Ignition Strategies, PYMNTS.com, 2010.
www.catalystcode.com
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Thank You!
58
DAVID S. EVANS
Market Platform Dynamics | Founder
david.evans@marketplatforms.com
Mobile: +1 617 320 8933
Skype: david.s.evans
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