The Rise of the Platform Economy
The application of big data, new algorithms, and cloud computing will change the nature of work and the structure of the economy. But the exact nature of that change will be determined by the social, political, and business choices we make.
A digital platform economy is emerging. Companies such as Amazon, Etsy, Facebook, Google, Salesforce, and Uber are creating online structures that enable a wide range of human activities. This opens the way for radical changes in how we work, socialize, create value in the economy, and compete for the resulting profits. Their effects are distinct and identifiable, though certainly not the only part of the rapidly reorganizing global economy. As the work by Michael Cusumano, Annabelle Gawer, and Peter Evans has shown, these digital platforms are multisided digital frameworks that shape the terms on which participants interact with one another. The initial powerful information technology (IT) transformation of services emerged with the Internet and was, in part, a strategy response to intense price-based competition among producers of relatively similar products. IT-enabled services transformation, as our colleagues Stuart Feldman, Kenji Kushida, Jonathan Murray, and Niels Christian Nielsen have argued in other venues, was based on the application of an array of computable algorithms to myriad activities, from consumption and leisure to services and manufacturing. The movement of these algorithms to the cloud, where they can be easily accessed, created the infrastructure on which, and out of which, entire platform-based markets and ecosystems operate. Platforms and the cloud, an essential part of what has been called the “third globalization,” reconfigure globalization itself.
These digital platforms are diverse in function and structure. Google and Facebook are digital platforms that offer search and social media, but they also provide an infrastructure on which other platforms are built. Amazon is a marketplace, as are Etsy and eBay. Amazon Web Services provides infrastructure and tools with which others can build yet more platforms. Airbnb and Uber use these newly available cloud tools to force deep changes in a variety of incumbent businesses. Together they are provoking reorganization of a wide variety of markets, work arrangements, and ultimately value creation and capture.
This digitally based new economy has been given a variety of names derived from some of its perceived attributes. How we label this transformation matters because the labels influence how we study, use, and regulate these digital platforms. Its boosters have called it the Creative Economy or the Sharing Economy, whereas those less convinced of its beneficence have dubbed it the Gig Economy, the Precariat, or the 1099 Economy, focusing on its impact on workers and how they are compensated. And there are wide variations within these labels. Consider the Shared Economy. Examples include Uber and Airbnb, which are very distant from the visions of Wikipedia, with its communal construction of knowledge; from Napster, which shared music regardless of whether it was legal; or from open source software creations such as Linux and Apache. Despite the attractive label and the entrepreneurial successes, Uber, Airbnb, and Facebook are not based on “sharing”; rather, they monetize human effort and consumer assets. Indeed, the advantage of platform-based companies often rests on an arbitrage between the practices adopted by platform firms and the rules by which established companies operate, which are intended to protect customers, communities, workers, and markets. Lyft and Airbnb are entrepreneurial initiatives that facilitate the conversion of consumption goods such as automobiles and apartments into goods that are monetized. This “sharing” has a more than passing resemblance to the putting-out economy that existed before factories, when companies would ship materials to people to assemble items such as shoes, clothing, or firearms in their homes. In the current manifestation of putting out, the platform operator has unprecedented control over the compensation for and organization of work, while still claiming to be only an intermediary. On the other hand, the rapidly growing mobile phone app stores and user-generated content platforms such as YouTube and Instagram are structured as digital consignment industries, borrowing from the way artists sell their work through galleries.
We are in the midst of a reorganization of our economy in which the platform owners are seemingly developing power that may be even more formidable than was that of the factory owners in the early industrial revolution.
We prefer the term “platform economy,” or “digital platform economy,” a more neutral term that encompasses a growing number of digitally enabled activities in business, politics, and social interaction. If the industrial revolution was organized around the factory, today’s changes are organized around these digital platforms, loosely defined. Indeed, we are in the midst of a reorganization of our economy in which the platform owners are seemingly developing power that may be even more formidable than was that of the factory owners in the early industrial revolution. The proliferation of labels is simply a reflection of the recognition that platforms are already having powerful consequences for society, markets, and firms, and that we are unclear about their dynamics and directions. Whatever we call the transformation, the consequences are dramatic.