The Four Pillars of the Platform Delusion The Platform Delusion most often manifests itself subtly, as an unspoken assumption underlying confident assertions regarding the direction of the economy or the imagined invincibility of a particular enterprise. Regardless of exact terminology-"the platform economy," "the platform revolution," and "the platform effect" have emerged as common terms-the central fallacy relies on a consistent mythology and the confident expectation of world domination by a select few megaplatforms. This conventional wisdom rests overwhelmingly on four core pillars of belief. Each of these is demonstrably false. The Core Tenets of the Platform Delusion 1. Platforms Are a Revolutionary New Business Model. 2. Digital Platforms Are Structurally Superior to Analog Platforms.

3. All Platforms Exhibit Powerful Network Effects. 4. Network Effects Lead Inexorably to Winner-Take-All Markets. Platforms Are a Revolutionary New Business Model It is true that business school professors only started writing in earnest about platform business models after 2000. But it is a terrible mistake to date a social or economic phenomenon only from the moment that academics decided to take note. Well before the internet was even conceived, much less commercialized, the average consumer interacted with platform businesses on a daily basis. The definition of a "platform" business is straightforward.

Although they take many forms, what platforms have in common is that their core value proposition lies in the connections they enable and enhance. "They bring together individuals and organizations," a recent review of platform businesses and research summarized, "so they can innovate or interact in ways not otherwise possible." The persistent confusion regarding what constitutes a platform business, despite the relatively simple definition, is mostly due to unhelpful market incentives. As is often the case, when a moniker emerges that affords a premium valuation, all manner of enterprises twist themselves in knots to claim a credible association with the term. So, for instance, it should not be surprising that a fast-food salad chain would promote itself as a "food platform." The company, Sweetgreen, has even attracted a distinguished Harvard Business School professor to the board to lend legitimacy to the pitch. That said, the diversity of connections made possible by the internet has spawned a mind-boggling array of legitimate platform businesses, often with very different business models. Sometimes the platform''s source of value comes from a financial transaction by matching a buyer and a seller in a marketplace, sometimes it comes from facilitating innovation through the addition of functionality and content to a shared environment like a gaming platform, and sometimes it comes just from the interaction itself, as in the case of a social network.

This explosion of new platforms has led to a strange amnesia regarding the ubiquity of platform businesses long before the dawn of the digital age. Some of the platform businesses that predated the internet were primarily electronic, like credit cards. Introduced by Diners Club in 1950 and pervasive by the 1970s after the establishment of American Express, Visa and Mastercard, credit cards serve as a platform on which merchants and customers can transact. By the end of 2020, Visa was worth almost half a trillion dollars, with Mastercard not far behind. Other long-established platform businesses are physical, like the iconic malls that connect retailers with shoppers throughout the country. The Southdale Center in Edina, Minnesota, generally identified as the first modern shopping mall, opened in 1956 and still operates today. Movie theaters similarly are platform businesses. Exhibitors negotiate with studios to get the best films on the best terms and market the experience to local moviegoers.

The ability to get the best films is in part a function of the credibility of their claim to be able to attract the biggest possible audience, and their ability to fill the theater will be in part a function of the films they secure. This chicken-and-egg dynamic inherent in platform businesses has not fundamentally changed with the internet. Operators face the same basic business issues-who and how to charge, encouraging platform loyalty, and "traffic" monetization strategies, for instance-in seeking to build and maintain successful multisided platforms. What is surprising is that it took so long for it to occur to anyone to study the structure and economics of platform businesses. Nobel Prize-winning economist Jean Tirole is the coauthor of an article from 2003 which, if not the absolute first to examine the phenomenon, is most widely cited and appears to have launched the avalanche of research and publications that have followed. Interestingly, given the supposed connection between the "discovery" of platforms and the availability of the internet, the seminal article was not published in a US journal despite that the most notable digital platforms of scale were developed here. The authors of this groundbreaking article seem slightly bemused that the topic had previously attracted such "scant attention" despite decades of research focused on network economics and chicken-and-egg problems. What''s more, although some internet businesses are discussed, most of the examples used in their analysis (including video games, credit cards, and operating systems) substantially predate the internet and in many cases (like discount coupon books, shopping malls, and real estate brokers) are decidedly low-tech.

This has not dissuaded the media or other academics from characterizing Tiroles'' intellectual contribution as somehow applying uniquely or differently to "Internet-era companies." The conviction that platforms are something new and different seems only to have intensified in recent years. The term "platform" has entered the vernacular with a vengeance, as a review of search terms over the past decade reveals. Whether this coincides with a corresponding increase in understanding of the distinguishing characteristics of platform businesses seems questionable at best. Digital Platforms Are Structurally Superior to Analog Platforms Even if platforms are not a new concept, the internet has vastly expanded the range, scope, and size of potential platform businesses. In many cases, these new digital models have proved devastating to long-established franchises. But bigger is not always better, and the ability to upend does not always signal a capability of creating lasting value. The undeniable, sometimes shocking strength of the handful of the largest digital platforms established in recent decades-Google and Facebook in particular-has led to a broader assumption that digital platforms are consistently better businesses than the analog equivalents.

This is an assumption that does not bear up to scrutiny. It has also proven costly to many investors. A comparison of the key business characteristics of one familiar analog platform and its digital equivalent demonstrates the depth of this fallacy. Shopping malls and their digital counterpart, e-commerce websites, represent the simplest of two-sided platforms connecting sellers and buyers. Traditional malls had two major benefits: their vendors were committed to long-term leases and their shoppers'' next best option was many miles away. Before committing to construction, a mall developer will typically secure a handful of anchor tenants and often obtain not only an extended commitment, but a promise not to open any other stores within a certain distance of the mall. The original site-selection process incorporates considerations of demographics, shopping alternatives, and land cost and availability. A key analysis here is to confirm that the subsequent establishment of a competing nearby mall is impractical.

These features ensure that the mall operator is able to secure superior returns for its investors. On the internet, the platform''s relationships with both buyer and seller typically exhibit none of this durability. Alternatives for buyers are only a click away, and sophisticated sellers dynamically optimize their ability to reach customers across competing platforms or directly. There are few levers a digital commerce platform can pull to combat this structural reality. Estimates of e-commerce failure rates are as high as 97 percent. The case of Amazon is complex and the subject of its own chapter. It is worth noting, however, that the most successful operators in the shopping-center sector are wildly more profitable than Amazon''s e-commerce operations. The point isn''t that you would rather invest in a mall operator than Amazon during a pandemic but simply that off-line business models have surprising relative resilience.

It is not a coincidence that, despite the secular trends, right up until the COVID-19 crisis hit, struggling online retailers were increasingly looking to solve their structural woes by opening up mall outlets! A disproportionate number of the earliest dot-com flameouts-names like Pets.com, Kozmo, Boo.com, and Webvan-were e-commerce companies. These elicit some nostalgia for those of us who lived through the first internet boom but likely cause recurring nightmares for some of the biggest names in venture capital who actually backed them. The more recent entries into the category have hardly proven much more resilient, although remarkably this has not seemed to significantly dampen the willingness of public and private investors to aggressively finance the category. The "flash.