Platforms State of the Union

I’ve recently been thinking about the structure of companies such as Amazon and Shopify that compete with legacy players not directly but via their platform. Instead of reconstructing the value chain (in this case: wholesale suppliers, marketing, physical stores), these companies essentially allow the free market of sellers on their platform to collectively pick away at the competition (eg: Walmart, Macy’s). As we see tech continuing to mature, I believe this model will become more prevalent as a mechanism for companies to scale and remain defensible

Today the average Amazon seller is equipped with superpowers that were exclusive to a big retail brand like Macy’s 10 years ago — nationwide reach, warehousing & fulfillment and established trust with millions of consumers. As the infrastructure provider, Amazon is incentivized to make these merchants more competitive with legacy retailers so they can collect hefty toll in the process. This creates a virtuous cycle for the seller whose business reaps the rewards from Amazon’s infrastructure gains which then increases their dependence to the Amazon platform. We’ve already seen this dynamic unfold with AWS enabling a generation of startups to compete with large corporate IT companies and we’re continuing to see this with Amazon’s franchise delivery network competing with UPS. Amazon is indicative of the goal state for most platforms — to aggregate customers and facilitate transactions for its merchants while franchising or stripping away the pieces susceptible to operational or market risk. This way the long-term success of the platform is fully diversified against changing tides in the external world as long as their infrastructure remains in use

This playbook isn’t entirely new — in a lot of ways McDonalds operates like a platform with its franchise program for aspiring business owners. McDonalds offers the infrastructure layer comprising of real estate, supply chain, owner/employee training and brand in exchange for a service fee based on some percentage of all sales. This allows business owners buying into the McDonalds platform to significantly mitigate risk compared to a traditional restaurant and increase their likelihood of success. The advantage for McDonalds as a platform is that it is protected from the potential failures of each individual location since it wins (and loses) on the aggregate. As long as it can maintain brand and trust that continues to attract customers to its locations its position as a toll collector will remain relatively stable

Additionally my working theory is that platforms have the side advantage of being less susceptible to regulatory scrutiny — since it is technically the sellers on the platform that are outperforming market competitors (eg: Walmart) it’s harder to accuse the platform of monopolistic practice. Platforms here are not direct competitors rather they are competitors by ecosystem. As they continue to mature, they will strive to preserve their ecosystem by increasing dependency to the platform. A comment I saw on an internet forum recently particularly rings true here — platforms like Amazon and Shopify must be understood not as retailers or logistics companies but more like the British Empire


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