Essentially, apart from aggregating and organizing producers and consumers – which is largely a mechanism to organize value chain actors – what is the unique product that the platform is creating which gives it the right to sit at the centre of the ecosystem?
If you think of it, distributors and brokers also aggregate producers and consumers. Yet they don’t command the right to sit at the centre of the ecosystem (except through the control of asymmetric information or relationships).
The ‘product’ creates the difference between a distributor and a platform.
What is a platform uniquely creating in the middle which gives it the right to sit at the center of the ecosystem?
Let’s unpack this with a few examples.
If you can accurately identify and explain the product in your platform, you will have a much better handle of your right to play as a platform business.
What does Spotify really ‘produce’?
You might say that Spotify’s product is the music streaming service. But that’s really just a proprietary distribution technology in a product value chain.
You might argue that the products are the songs. But that’s not what Spotify is really producing. The labels own the songs, the artists create them. The songs are inputs into the ‘production’ process.
What exactly is the ‘product’ in Spotify’s platform?
Spotify’s ‘product’ is the playlist.
Playlists are central to Spotify’s strategy within the music ecosystem.
Songs, which were traditionally bundled into albums, were unbundled by the internet and then went through three phases of
free distribution through file-sharing services like Kazaa and Napster, pay-per-tune distribution through iTunes, and fixed-fee unlimited catalog distribution through Spotify. This unbundled song distribution changed for the first time with Spotify’s playlists.
Playlists provide the locus of rebundling where songs – unbundled from albums and artists – are rebundled into theme-based playlists .
As WIRED points out :
Playlist placements are highly coveted, both for how they rack up the streams and the way they expose music to new listeners.
Indeed, playlists have become so important that being left off can flop even megastar releases (as Katy Perry discovered after Spotify blackballed her for giving rival Apple Music a temporary exclusive, reminiscent of Amazon cutting off publishers who wouldn’t give it big enough discounts).
Playlists are the core product driving discovery of new artists. They are critical for Spotify to gain a right to sit in the middle of the music value chain and not be merely a digital distributor for the top 3 music labels.
What Spotify ‘sells’ to advertisers and brands is influence and targeting through playlists .
The “Sponsored Playlist” program allows brands to sponsor a Spotify-curated playlist for 1 week. Using the metadata of playlists, Spotify also launched “Branded Moments,” a program which leverages the real-time insights playlists offer into activities that listeners are engaged in. E.g. a fitness brand targeting a playlist labeled Workout. The playlist – the central locus of rebundling in the music streaming business – is Spotify’s core product.
Spotify takes songs/tracks as ‘inputs’, rebundles them into playlists as ‘product’, and sends them down its proprietary streaming ‘distribution’ channel.
And all of this helps Spotify gain power back from the labels.
Without the playlist, Spotify is merely a glorified distributor in the music value chain. A scaled out one, no doubt, but at the end of it all, just a glorified distributor dependant on the whims and fancies of a highly concentrated supplier base constituting three music labels.
The playlist is the ‘product’ that gives Spotify the right to be a platform.
The ‘product’ in Airbnb’s platform What’s the ‘product’ in Airbnb’s platform?
In high-risk markets like short-term accommodation, trust is unbundled and dispersed across market transactions. Establishing trust requires peer-to-peer tools without central mediation. This may involve
individual negotiations, reputation-building (and subsequently relationship building) over time, or reliance on friends-of-friends recommendations (a form of transitive trust where A trusts B and B trusts C so A trusts C). Platforms step in to rebundle trust, which is otherwise embedded in these personal relationships.
In doing so, the platform creates its core product – a mechanism for imputing trust into market transactions.
Instead of relying on fragmented, individual trust-building processes, the platform ‘produces’ a centralized market-wide ‘product’ for establishing and verifying trust.
Airbnb’s ‘product’ – the real value driver for which it can charge a premium on market activity – is its reputation system .
The reputation system is built off explicit inputs like user ratings and implicit signals like cancellation rates after check-in. It manifests explicitly in the form of a five star rating on the interface and implicitly in the exposure/ranking that a listing gets in search results.
The reputation system is the product created at the point of rebundling.
Users pay a premium for the assurance and reliability provided by this ‘product’. Users can engage in transactions with a higher degree of certainty, knowing that trust is not scattered but centralized and managed through the platform’s infrastructure.
What exactly are we talking about here?
The ‘product’ within a platform is created at the point of rebundling.
As digital technologies drive organizations and markets towards unbundling, platforms create value not just through mere integration and aggregation…
…but through rebundling .
This is why vertical marketplaces repeatedly attack Ebay and Craigslist. Horizontal marketplaces win through mere integration and aggregation but they remain vulnerable to attack from a player that doesn’t just aggregate vertical inventory but also creates a superior vertical ‘product’ to organize that market.
What creates a compelling ‘product’ on your platform?
A platform’s goal is to create an efficient market by reducing transaction costs. The ‘product’ in your platform is the unique innovation you provide to solve that problem.
A platform business is not just an open organizational infrastructure but a space where rebundling creates new value . The platforms that win are best able to create relevant products at the point of rebundling.
In fact, let’s clarify this with a few more examples.