“Platform hype” and why the world needs more decentralization
How the platform economy can create a better future for emerging economies, but only if it is “done right”
I will be at the United Nations in New York this week attending a meeting on how to create a better and more sustainable future for emerging economies. We will focus on identifying the business environment that can produce sustainable economic growth for everyone.
I will talk about “platforms.”
I genuinely believe that a big part of the answer for a better future for everyone in emerging markets is for more businesses and organizations to structure themselves and operate as platforms, to “partner” with platforms, or to become a part of one or more platforms.
By platforms, I simply mean any organization that uses digital technologies to create connections between two or more groups of users. Obvious examples are Amazon (connecting buyers and sellers of goods), Facebook (connecting family and friends), or Uber (connecting service providers and users).
Now I know that defending platforms is far from fashionable right now.
The “platform hype” of a few years ago has waned significantly. And this is hardly surprising. After all, the platforms I just mentioned (Amazon, Facebook, Uber), as well as others (e.g., Google), have experienced a lot of negative publicity recently.
But platforms are here to stay, and I believe that if “done right” platforms can still add enormous value, especially for emerging economies.
Let me explain.
The rapid global proliferation of digital technologies — most obviously smartphones, the Internet, algorithms, and cloud computing — means that platforms are being established everywhere.
I have written about this before. The emergence of successful platforms in Africa (YEGOMOTO and SafeMotos in Rwanda) and South East Asia (GO-JEK in Indonesia) illustrate the universal adaptability of this business model.
Sure, they often start as “simple” ride-sharing companies, but they can quickly evolve into “super-apps” that offer so many more social and economic benefits.
To illustrate this rise, GO-JEK “only” needed three years to go from 100,000 orders a day (in 2015) to 100+ million orders across 18+ services in 2018.
Such examples show how less developed economies might deploy platforms as a means of “leapfrogging” an earlier (industrial) phase of economic development and “jump” directly into the digital age.
But the real value of platforms is that they transfer power away from old (and often corrupt) centralized incumbents. At their best, platforms have the potential to re-distribute power and create more open, more “decentralized” societies.
Consider the following examples:
- Uber (at least initially) took control over personalized transportation away from taxi companies (and the local authorities that license taxis) and re-distributed it to the drivers and riders.
- Spotify took control over music distribution away from record companies and attempts to re-distribute it to musicians.
- Fintech platforms (like PayPal-owned online payment service Venmo) took control over transfers and payments away from incumbent banks and re-distributed it to buyers and sellers, i.e., everyone.
Whenever I visit emerging economies, it strikes me that over the last decade or so platforms have made significant improvements to the lives of so many people.
Platform technologies and automation have lowered the market entry levels for suppliers and consumers of products and services. The increased connectivity, choice, convenience, collaboration, and co-creation have arguably led to more financial inclusion, gender equality, and better-quality jobs.
By re-distributing power in this way, they have created new opportunities in communities and regions that have previously struggled with under-performing centralized institutions.
Equally, however, it is hard to ignore the problems experienced by platforms.
There are too many recent examples of well-known platforms “forgetting” the importance of improving people’s lives by re-distributing power. Platforms as successful as Amazon, Facebook and Uber have all made serious mistakes.
Cybersecurity breaches and data leaks are a daily occurrence. Some platforms have abused their market power. Some have failed to engage with key stakeholders, changing the rules of the game without consulting others. Some have compromised the privacy of platform users.
I think there are a number of reasons why platforms tend to become more centralized and more “corporate,” and experience these kinds of difficulties. Understanding these risks is the key to avoiding them. And never forget, sustained decentralization is difficult.
- Platforms often start with a simple, idealistic proposition (“let’s bring users together”). But over time, they add more and more features, making their technological infrastructure more complex, e.g., with an increasing number of microservices and APIs. More developers and more automation are needed to accurately deal with the increased technology complexity. This require more investments (more of which later) and a more centralized organization with more control and governance mechanisms.
- Also, at the outset, a platform will attract smaller players, such as micro-enterprises as partners. But as the platform becomes more successful, larger and more prominent players enter the scene, quickly dominating the platform. This is one of the often-heard “complaints” about Spotify. Mainly established artists will be visible and discovered, making Spotify very similar to the (centralized) “old music industry.”
- When platforms become more prominent they need and attract more investors and investment. This transforms the incentives of platform owners. Short-term performance becomes critical. To improve the financial performance or save costs, platforms change the rules of the game from one day to the other (without consulting the users of the platform).
- Decentralization can quickly become difficult (impossible?) when you have profit-seeking investors involved and managers under a legal obligation to deliver profits. Once investors are involved the delicate balance between the different actors within the platform ecosystem can be negatively affected.
- Very successful platforms attract more competition. To eliminate the threat of perceived rivals, platforms feel the need to protect and reinforce their (monopoly) position, resulting in unethical (or worse) behavior.
As platforms expand in size, they struggle to maintain their initial promise and platforms that were once disruptive have lost much of their initial appeal (think Facebook or Uber). These platforms usually become more “selective” about who can join the ecosystem and less open to protect their “brand.”
As a solution to these problems, governmental interference is often suggested, particularly the breakup of tech monopolies. I see this type of “top-down,” regulatory solution a lot.
But I tend to agree with Satya Nadella (CEO of Microsoft) when he states that “developers will be at the center of solving the world’s most pressing challenges.”
The more I think about it, the more I believe that technology will offer the best (and perhaps only) solution to the challenges and risks described above.
Here I think about distributed ledger technologies (DLT), such as blockchain, and smart contracts.
For sure, DLT, blockchain, and smart contracts currently still have significant technical and operational shortcomings. There is arguably still a lack of decentralization. For instance, Bitcoin’s proof of work protocol has led to “mining pools” because of economies of scale and unbalanced reward structures. Also, the anonymity in blockchain organizations means that they are prone to “Sybil attacks” and “51% attacks.”
There are many examples in which the anonymity (and autonomy) has led to hacks. Remember that in a truly decentralized system, any mistakes (stolen/lost passwords, programming bugs, etc.) would be permanent and irrevocable.
Still, we must encourage more organizations — business, government, investors, charities — to experiment with distributed ledger technologies and smart contracts. We must look beyond the “crypto-hype”.
And this will be my main message at the United Nations. We need more experiments in the development of blockchain technology, smart contracts, and cryptocurrencies to address the current shortcomings of platforms. The more initiatives and experiments, the sooner we will see real mainstream applications that will help us solve some of the most pressing global challenges.
Because one thing is clear:
Decentralized technologies and automation are the next steps in the on-going evolution of platforms.
And, to be genuinely decentralized and trusted, such platforms will need to be “owned” and controlled by the communities.
Such a change in how our most important businesses and other institutions organize themselves really would make the world a better place and help unlock the full potential of the platform model.