Competition among
Multi-Sided Platforms
David S. Evans
LECG and University College London
7 June 2007
2nd Lear Conference on the
Economics of Competition Law
Rome, Italy
2
Multi-Sided Platforms:
Powerbrokers In The Global Economy
3
Today’s Discussion
1
What Is A Multi-Sided Platform?
2
When Do Multi-Sided Platforms Compete?
3
The Nature Of Competition
4
Search-Based Advertising
5
The Digital Music Business
6
The Catalyst Age
What Is A Multi-Sided
Platform?
5
The Birth Of The Charge Card
 Merchants paid 7% fee
 Cardholders paid small fee roughly
equal to the value of the float
 Profits entirely from the merchant side
6
Catalytic Reaction For Charge Cards
Card system signed up merchants to accept and consumers
to use cards: a three-party system
14 restaurants and 200
consumers to start
330 restaurants and 42,000
consumers one year later
7
What Makes A Platform Multi-Sided
►
Reduces transactions costs between two or more groups of
economic agents
►
Significant indirect network effects between groups
►
Uses pricing, design, and openness to optimize positive
feedback effects
When Do Multi-Sided
Platforms Compete?
9
How Many Multi-Sided Platforms Compete
Cause
Effect on Size/Concentration
Indirect network effects
+
+
–
–
–
Scale economies
Congestion
Platform differentiation
Multi-homing
10
Core Functions Of Multi-Sided Platforms
Matchmakers
Audience builders
Cost minimizers
Objective
To facilitate transactions
Objective
To assemble eyeballs
Objective
To increase efficiency
eBay
Paris Match
Palm OS
Yahoo! Personals
Google
Windows
Marché Bastille
Condé Nast
Symbian
MySpace.com
TiVo
Sony PlayStation
Manheim Auto
Auction
Reed Elsevier
Xbox
Odaiba
Wall Street Journal
SAP enterprise software
NASDAQ
BBC
Linux
The Nature
Of Competition
12
Competition When The Number Of Sides Vary
Single-Sided
Side A
Platform
0
Side B
Symmetric Two-Sided
Side A
0
Platform
1
Side B
Side A
Three-Sided
0
Platform
2
+
Side B
Side A
0
Platform
3
+
Side B
Side C
0
+
Search-Based
Advertising
14
The Search-Based Advertising Business
70%
60%
70%
58.0%
60%
50%
50%
40%
40%
30%
68.0%
28.0%
30%
26.0%
20%
20%
10%
5.0%
0%
10%
4.0%
0%
Google
Yahoo
MSN
Share of Searches
Google
Yahoo
MSN
Share of Search-based
Advertising Revenue
15
Search Pages
16
How Bidding Works
Revenue Per Search (RPS) = Price per click * Clicks per search
Price goes up with scale because a platform with more
advertisers:
 has greater likelihood of having advertisers who value
a search highly
 has more competition among advertisers for valuable searches
 clicks go up with scale—platform has the right ads to deliver to
searchers
The Digital
Music Business
18
iTunes-iPod Business Model
Music Publishers
(Protected music)
iTunes
iPod
Consumers
Unprotected Music
CDs
MP3s
19
Growth In iPod And iTunes
Number of iPods shipped (millions)
Number of iTunes sold (millions)
120
3,000
iPods
100
2,500
iTunes
80
2,000
60
1,500
40
1,000
20
500
0
03 r-03 l-03 t-03 -04 r-04 l-04 t-04 -05 r-05 l-05 t-05 -06 r-06 l-06 t-06 -07 r-07
n
n
n
n
n
p J u Oc
p J u Oc
p J u Oc
p
p
J u Oc J a
A
A
A
A
A
Ja
Ja
Ja
Ja
Source: Apple Corporation, Form 10K and Annual Reports, various years.
0
The Catalyst Age
21
Three Factors Will Lead To More Catalysts
1
The web is a convenient meeting place
2
It is easy and cheap to communicate
3
Software platforms power many catalysts
22
The Catalyst Age And Competition Policy
►
More dominant firms in sectors as multi-sided platforms form
and grow
►
More dominant firms as high-tech, multi-sided platforms
displace low-tech
►
More consolidations as multi-sided platforms seek demand
and cost-scale economies made possible by technology
23
Thank you!
david_evans@lecg.com
www.lecgcp.com
Catalyst Code:
The Strategies Behind The World’s
Most Dynamic Companies
David S. Evans and
Richard Schmalensee
Harvard Business School Press,
May 2007
www.catalystcode.com
Invisible Engines:
How Software Platforms Drive
Innovation and Transform Industries
David S. Evans, Andrei Hagiu and
Richard Schmalensee
MIT Press, 2007