[MUSIC] I'm very excited to talk to you in this module about a new category of business models, platform mediated business networks. These are especially relevant to digital goods that we talked about in the earlier module. At the heart of these business models is the concept of network effects. Network effects are also known as demand-side economies of skill. And they are a very important phenomenon in the information economy. It is argued that while the all industrial economy is driven by economies of skill, the new information economy is driven by economies of networks. And in this module we are going to talk about a category of business models. Platform mediated business networks that leverage demand side economies of scale and are ubiquitous to the world of digital goods. Platform modules characterize physical goods as well. But in this particular module we will explore them in them in the context of digital goods. We will begin with examining the basic structure and components of platform mediated business networks. We will then discuss some of the distinctive challenges that these business models face. And how platform models speak to these challenges to deliver business value. These discussions will then help us explore the nature of competition amongst these business models which believe me is dynamic and very interesting and some of the strategies that have been successful in the face of such competition. Let me begin by laying out the basic structure of a platform media to business network to you. I'm going to do this in the context of a company that many of you are familiar with, monster.com. Think about what are the two distinct user groups that affiliate with Monster. On one hand you have job seekers who are looking for jobs across diverse organizations. On the other hand, you have job recruiters who are looking to the platform to hire individuals for open positions in their firms and institutions. What are the advantages, to you, the job seekers of affiliating with the Monster, access to a broad network of job recruiters, low job search cost, right? You can use a variety of platform features to identify a set of jobs that best aligns with your needs. And it's free. What are the advantages to you the job recruiters? Well, recruiters can include more info than in print ads, the online ads include sort and search functions that reduce your candidate search cost much like they reduce search cost for the candidates themselves. You receive responses a few minutes within posting the ad and the online ads are less expensive, priced at one-third the cost of the print ads or less. Therefore, Monster has two distinct user groups who require very different functionalities from it and use it to interact with each other. Now let me ask you, what does Monster do in all of this? Well, they provide the platform that is the technology required for these two groups of people to interact with each other. They also established the rules of engagement on this platform. How many days can a job posting be active? Procedures for dispute resolution between groups and a whole host of other protocol. Therefore, Monster provides the technology and rules of engagement for the two user groups, job seekers and job recruiters to interact with each other. Finally, let me ask you. Do you the job seekers have a preference for the number of recruiters who affiliate with the Monster platform? Yes. The value of Monster increases to you, the job seeker with the number of recruiters who affiliate with it. Similarly, do you the job recruiters have a preference for the number of seekers who affiliate with the platform? Yes, the value of Monster increases to you the recruiter with the number of job seekers who affiliate with it. And this is the basic structure of a platform mediated business network. Let me now recap the basic elements of two-sided platform mediated business networks. The very first element of the network is two distinct user groups who require very different functionalities from the network and use it to interact with each other. In the case of Monster, these were the job seekers and the job recruiters. Keep in mind that the two user groups must require distinct functionalities from the platform for the platform to be a two-sided business network. For example, consider credit card networks with customers and merchants as two sides. What do the customers require? They need a unique account, they need a card, they need access to customer service, a monthly bill. Very different from merchants who require from the credit card company, terminals for authorizing transactions, procedures for submitting charges, and receiving payments, and so on. Similarly as we discussed in the case of monster, on one side, its users are firms that have job openings and are looking for hires, on the other side, its users are individuals who have skills and are looking for jobs. These are all two sided networks. On the other hand, think about a phone network with callers and receivers. Is this a two-sided network? No, because the roles of callers and receivers are interchangeable and converge to the single need to communicate with one another. Similarly Facebook originated as a one-sided network with users who were looking to socialize with one another. However it evolved to being a two-sided network with users on one side and advertisers on the other. So the first important component, two distinct user groups on either side of the network. The second important component in a platform mediated business network is the platform itself that facilitates the interactions between the two groups. The platform company provides the technology and rules required to bring together the two distinct user groups. For instance, we said Monster provides the technology that is the website as well as rules of engagement such as dispute resolution procedures, listing policies and other elements of engagement protocol. So, all of these technological components and the rules together comprise the platform. Finally, the most important concept in platform mediated networks is that of network effects. What network effects means, is that the value of the network and the platform to any given user depends on the number of other users with whom they can interact. In the classic economic example, the first fax machine sold was useless until someone purchased the second fax machine. The subsequent arrival of each new fax machine increased the value of each existing machine and the willingness to pay for the product by the consumer. We noted in the case of Monster that firms would be more likely to join this platform if there are more users on the other side because it gives them access to one bigger pool of likely hires. At the same time more individuals are likely to join the platform if they recognize that the platform will give them access to a large number of firms, and therefore more job openings. The value of the platform increases with the number of users, distinct users who affiliate with that platform. That is at the heart of network effects. That is the definition of network effects. Network effects in a two-sided platform mediated business network are of four types. In a two-sided network, members of each group exhibit a preference regarding the number of users in the other group. These are called cross-side network effects. And each groups members may also have preferences regarding the number of users in their own group. And these are called same-side network effects. That is, your preference as a job seeker for the number of recruiters on the other side is a cross-side network effect. Your preference as a job seeker for the number of seekers on your side Is the same side network effect. Network effects would cross as well as same side, maybe positive or negative. In two-sided networks, cross-side effects are usually positive but can be negative, for example with consumer reactions to advertising. You may have a negative preference in the sense you may have, you may have a dis-utility from having a number of advertisers on the other side of the platform in which case the cross side network effect is negative. Same side network effects may be either positive. The benefit that you get from swapping video games with more players or it could be negative. The desire to exclude rivals from an online business to business marketplace or even a platform like Monster. For instance, you may not want too many job seekers applying for the same job. Therefore the greater the number of users on your side of the platform, applying for a given job, the same side network effect maybe characterized as negative. Now let's try to understand a company that has come to symbolize the platform model of competition, Google. Through this entire module I'm going to be using the example of Google to illustrate the key concepts of platform media to business networks. Occasionally I'll draw on examples of other technology product companies like Ebay or PayPal. But for the most part I'm going to keep the eye on Google. Let's talk about the platform model at Google. What are the two distinct user groups that Google brings together? On one side, we have users. Most of us that are one side of Google's platform. What do you value Google for? While users value the Google platform because it provides relevant and valuable information across the vast world of the Internet. It's become a verb in our lives. What's the other side of the Google platform? The other side of the Google platform are the advertisers. What's the value to advertisers? Advertisers value the Google platform because it gives to them a global audience of potential buyers who will likely to click on the ads, visit their virtual stores and buy their products or services. But is Google just another advertising agency? What other benefits do advertisers see in the Google platform beyond access to a global audience? Well for one, we talked about how digital marketing platforms resolve the trade off between reach and richness relative to the physical world. There is no direct marketing platform that does it better than Google. Google gives you access to a vast range of potential consumers, while also providing you the ability to foster very rich interactions with these customers. How is that? For a moment, wear your marketing or product manager hat. As an advertiser what information would you like to have? Would it help if you could measure the ROI on your individual ads? Would it help if you could have greater control over your campaign? Would it help if you paid not for just the display of the ad as you would in television but for only when a user clicks on your ad and views its content and better yet buys the product or service. Was this valuable to you? Of course it is. These value added features make the Google platform more beneficial for the advertiser and are the reason why more than 50% of the current advertising money has migrated to the Internet and Google has been the huge beneficiary. The company's advertising revenue accounted for nearly 97% of its profits in 2012. Now Google's advertising has two components. An AdWords model that is keyword based and an AdSense model that is display advertising. That is Google may choose to display an ad either as tag to a keyword which a user is searching for or on one of their partner sites whose content is related to the landing page of the advertiser. To that extent, Google may be viewed as two two-sided network as shown in this slide. If you haven't thought about this already, let me put this out to you as well. Google is atypical in that the users don't directly interact with the advertisers. So it's not your typical two-sided market. However, the argument that has been used in some antitrust cases is that Google is indeed a two-sided platform model because for searches with high commercial intent, that is where the user is looking to purchase or buy a product or service. Paid ads have a click through rate of 65% and greater relative to that of 34% for organic unpaid results. This per a WordStream study that was conducted recently. So there is a latent intent on part of the users to engage with the advertisers. To that extent we can consider Google as a two sided platform mediated business network. Now that we have an understanding of the basic structure of platform mediated networks, let's move on to discuss strategic challenges with these business models. Firms in platform-mediated networks face distinctive management challenges. Traditional rules such as value-based pricing may fail. Traditional barriers through entry may no longer hold. Viewing established markets and emerging industries as platform-mediated business networks brings into focus new rules for product design pricing and competitor's strategy. We'll explore these in the next session. [MUSIC]
