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Five Platform Competition Trends to Watch in 2022
What the academic research can tell us about platforms in 2022
Many platform companies (e.g., Amazon, Meta, Apple, and Google) are thriving and so is the academic research on platform competition. According to platformpapers, there are now 460 research articles published on platform competition across the fields of economics, marketing, management, and information systems. Notably, 60 of these articles were published in 2021. These research studies aim to better understand how firms such as Amazon, Kickstarter, Apple, Uber, Taobao, and Nintendo, as well as many others, compete and manage their ecosystems.
With recent developments in many platform-related areas—regulatory pressures to curb platforms’ dominance, the metaverse, blockchain technologies, platforms making record-breaking acquisitions, just to name a few—2022 is shaping up to be an interesting year for platform competition … and for the researchers trying to make sense of it all. Drawing on some of the latest—and greatest—academic research on platform competition, below I identify five major trends to watch in 2022.
1. The ongoing push for dominance … and regulation
We are living in a ‘platform economy’ and the modus operandi of firms operating in it can be best described as ‘platform capitalism.’ Many of the world’s most valuable firms measured by market capitalization operate platform business models. And from the looks of it, these platforms will get bigger before they get smaller. Whether it’s Amazon expanding its logistics network, Microsoft buying games publisher Activision Blizzard, or Facebook rebranding into Meta and making an aggressive push for early leadership in the metaverse, dominance is the name of the game. From the firm’s perspective there are clear benefits to market dominance (also see 4. Network effects, but not like you know them), but dominance also attracts scrutiny from antitrust agencies. For these platforms, it’s not so much a question of if, but rather when (and how) they will get regulated.
Recent economic theory has argued that acquisitions on one side of a platform (e.g., Facebook buying WhatsApp and Instagram) can create value for users on the other side of a platform (e.g., Facebook’s end users). Empirical research on platforms providing pet-sitting services adds nuance by arguing that value creation is attenuated when merging platforms are sufficiently differentiated and when users have heterogeneous preferences. One alternative to government intervention through regulation is self-regulation. Research on the sharing economy finds that a reduction in Airbnb listings following platform self-regulations led to a reduction in crime (i.e., assault, robbery, and burglary) in affected areas. Platform self-regulation either at the firm level or through the formation of industry-wide coalitions (e.g., the video game industry’s Entertainment Software Rating Board) may yield strong results when paired with credible threats of government regulation.
2. Platforms’ increasingly visible hand of curation
The days of platforms plainly facilitating a marketplace where buyers and sellers can transact are long gone. Not only is the supply of content, apps, and other products on successful platforms ever-increasing (there are now more than 2.2 million apps available on the iOS App Store), so is the importance of these markets to platform companies’ bottom line. For example, Apple’s earnings from apps in 2019 has been estimated at $15-18.3 billion. The share of revenues from apps relative to Apple’s overall earnings is also growing, given that hardware sales are slowing down due to saturation. More so than ever, platforms are trying to steer consumers in their selection of products, as the number of options can be overwhelming and platforms often have skin in the game.
Selective promotions of complements including apps, songs, and other products, can be a powerful tool for platforms to shape the overall value of their ecosystems. Selective promotions can take on many different forms, including Spotify’s curated playlists, Google’s Play Awards, and Kiva’s Social Performance Badges. Through such selective promotions, platforms can exercise their power by highlighting products or product categories that showcase the platform’s distinctive features or where the platform benefits disproportionately, for example, because it has favorable contractual terms in place or because the platform is itself a seller of products. The research has shown that platforms are indeed biased in their recommendation of products, and that selective promotions can influence the type and number of products launching onto the platform in subsequent periods.
3. Complementors strike back
In response to platforms’ tightening grip, complementors—the firms and individuals that rely on platforms for selling their products—are fighting back. Power dynamics between platforms and complementors are typically lopsided. Markets dominated by large platforms offer few alternatives for complementors, and complementors often are small entrepreneurs that depend on platforms for their businesses. Recently, however, complementors have started to band together to increase their bargaining power. One example is the Coalition for App Fairness, which has various well-known companies as members, including Epic Games, Match Group, and Spotify. Each of these companies individually have brought lawsuits against Apple, demanding better terms on the iOS App Store. Both the European Union and the Federal Trade Commission have started investigations into platforms’ conduct towards complementors, alleging that platforms are abusing their power.
Two common strategies complementors use to reduce their dependence on platforms include disintermediation and competing at the platform level. In settings where complementors repeatedly interact with the same customers, such as freelance marketplaces and sharing economy platforms, complementors can avoid paying the platform fees by conducting their business off the platform. Especially complementors that have a strong reputation may decide to disintermediate. Another strategy to reduce an existing platform’s power is for complementors to build their own platforms. Epic Games is pursuing this strategy with its Epic Games Store and so is Nike with SNKRS. While such a strategy requires significant resources and upfront investments, it may pay off in the long run.
4. Network effects, but not like you know them
Without buyers and sellers, many platforms are just an empty shell. Early-stage platforms face a ‘chicken-and-egg’ problem, or what has recently been coined the ‘cold start’ problem. Once a platform succeeds in attracting users at scale, however, this often triggers a self-reinforcing dynamic with even more users joining. A large part of any platform’s value proposition is captured by its user base, which can make it extremely difficult for new platforms to compete with a dominant platform in the presence of network effects. That said, network effects are no magic bullet. Some platforms with large user bases are struggling to defend their market positions and to make profits because network effects are local rather than global (Uber, anyone?), others are finding that network effects do not carry over from one period to the next, and the role of AI seems ambiguous yet important.
Research in the video games industry found that freemium games can generate strong network effects by incorporating social features such as online multiplayer modes. Other research found that gaming platforms can reduce their reliance on network effects by including standalone features such as PlayStation’s DVD player. The success of these strategies depends on external factors such as the size of the overall market. Research in the bike-sharing industry surprisingly found that the entry of a second platform competitor leads to an expansion of the overall market, therefore benefitting the incumbent platform. Even other research has argued that a firm’s accumulation of user-generated data can result in strong ‘data network effects’ through machine learning and artificial intelligence.
5. Decentralized platforms stake their claim
Blockchain technologies and the associated cryptocurrencies are increasingly entering the domain of traditional platform markets. Axie Infinity introduced the ‘play-to-earn’ business model to the video games industry and it showcases how publishers can use blockchain technology to facilitate transferability of virtual items across games and into the metaverse. Online sneaker and streetwear resell platform StockX will soon allow consumers to invest in Vault NFTs, non-fungible tokens that are tied to physical products traded on, and held by, the platform. In both cases, the blockchain is making these platforms more decentralized and, arguably, more democratic. Given the scrutiny platforms are facing, allegations about anticompetitive behavior, and complementors’ discontent over these issues, could this spell the end of the centralized governance model as we know it?
Academic research on blockchain-based platform business models is still scant. On average, the central role of the platform company does seem to diminish in the context of blockchain platforms. Whether a more centralized or decentralized governance mode is best for a platform’s success likely will depend on various factors, including the benefits conferred by reduced user opportunism and uncertainty, versus costs related to coordination and complexity. Conceptually, the pros and cons of a decentralized governance mode facilitated by the blockchain appear to map on to the concept of platform openness: Platforms that are more open tend to grow more quickly and garner the support of different types of complementors, but they also struggle to provide direction and capture value. Unsurprisingly, perhaps, the optimal level of (de-)centralization is somewhere in the middle.
In the coming months, I will invite authors from these and other studies to contribute to the blog by reflecting on their research and placing it into a broader economic and societal context.