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
Get both sides on board
60,000.000
YouTube needed content creators and content
viewers
50,000.000
Block and tackle
40,000.000
30,000.000
YouTube tried multiple strategies to increase
uploading and viewing of videos
20,000.000
Ignite
YOUTUBE
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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Slow growth from February to December 2005
when YouTube shows an inflection point
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 the customer doesn’t join and
eventually leaves
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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
Figure 1. Catalytic Ignition and Critical Mass
In this example the
critical mass points
are between C’ and
C”.
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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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 their 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 Dominate and Survive With Colliding Platform
Ecosystems
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THIS SECTION NEEDS MORE WORK.
43
1. OFFENSIVE STRATEGIES
1. CREATING BARRIERS TO ENTRY
2. FEATURE COMPETITION
3. PRICING
2. DEFENSIVE STRATEGIES
FIND WEAKNESS (SQUARE)
PRICING
SIDEWAYS ENTRY (QIHOO VS TENCENT)
Platform Competition
“How To” When There Are Positive Feedback and Scale Effects
44
Success Factors
Positive feedback effects and scale can propel catalysts to dominant
positions
Windows has had more than a 90% share of PC operating systems
since the late 1980s
Offensive
Implications
First mover advantages create value in being first to ignite and
achieving rapid positive feedback effects and deters others
Captures sources of liquidity and creates expectations of invincibility
that deter investment by complementary businesses
Defensive
Implications
Most platform industries have multiple successful firms
Differentiation on either/both sides key to countering positive
feedback/scale effects.
Amex leapfrogged first igniter Diners Club by moving high-end
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Asymmetric Competition
Introduction
45
Asymmetric
Competition
Occurs when a
Platform
Competes with:
A platform THAT has made a different money/subsidy choice than a
competitor
(e.g. media properties that charge both sides vs. those that only charge
advertisers)
A platform THAT has an additional non-intersecting side that enables
it to price an intersecting side lower
(Google prices Android OS at zero because it expects ad income; Microsoft
prices Windows Mobile OS positively because it lacks offsetting income
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Asymmetric Competition
Response
46
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 an new side that rival lacks but than can provide
similar offsetting revenue
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More Material and Case Studies
47
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
49
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
51
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
52
Evans and Schmalensee, Catalyst Code: The Secrets of the World’s Most
Dynamic Companies. Harvard Business School Press, 2007.
Evans, Hagiu and Schmalensee, Invisible Engines: How Software Platforms Drive
Innovation and Transform Industries. MIT Press, 2006
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!
53
DAVID S. EVANS
Market Platform Dynamics | Founder
david.evans@marketplatforms.com
Mobile: +1 617 320 8933
Skype: david.s.evans
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