Pipelines to platforms to protocols: Reconfiguring value and redesigning markets

Impact of Platforms and Protocols on Value Creation

From the compass to the printing press, steam engine to electric lightbulb, economic history shows that whenever technology disrupts the market forces of production and consumption, value creation will change in step. The level to which individual players benefit from these technological gains is then dictated by the degree of market power they wield.

Over the past decade, my work has focused on the shift from pipelines to platforms as a transformative shift in value creation that shaped the first two decades of the twenty-first century. I believe that the shift from pipelines to platforms, now widely accepted, will shift further with the emergence of protocols as the foundational technology of Web3.

This, I believe, is the real shift of our time – a fundamental redesign in value creation and markets, not just a shift towards decentralization or read/write/own, as many of the Web1 to Web2 to Web3 proponents often claim.

This article explains why this transition matters and is increasingly inevitable.

 

The rise of pipelines

Value creation in the industrial era was dominated by pipelines. Pipelines are the traditional industrial business model, characterised by a linear, unidirectional flow of value from producer to consumer, where value is created by the producer and shipped out to the customer, who then pays for the value. And it was the technology of the industrial era that shaped the pipeline model of value creation throughout much of the 20th Century. First, technologies enabling mass production — assembly lines optimized through factory automation, backed by large-scale, organisation management — allowed us to aggregate production at scale. Together, these gave us the tools of mass production and gave birth to large corporations, particularly during the post-World-War geopolitical shift towards globalisation.

On the consumption side, the rise of mass media — from newspapers to radio and then television — provided the means for influencing consumption at scale, like never before. The rise of cities and suburban populations provided the market conditions for mass consumption to meet mass production through retail, forcing prices down and improving choice and convenience.

Finally, the shift to globalization and international trade, spurred further by standardization technologies, particularly container shipping, led to the creation of global supply chains, connecting mass production with mass consumption globally.

By perfecting the technologies of mass production, mass consumption, and global connectivity, the industrial era perfected its ability to scale value creation through the pipeline model and benefit from supply-side economies of scale.

 

The shift to platforms

Throughout history, technological shifts and market forces have worked together to drive new paradigms for value creation. With the rise of the internet and of digital technologies, this combination of technological changes and market forces drove the shift from pipelines to platforms.

First, the tools of production could now be distributed, rather than centralised. Consider the news industry as an example. To create and distribute news at scale, you had to be a large newspaper company. But then the internet decentralised the tools of publishing and distribution, so that anybody with access to wiki or web authoring tools could produce and disseminate news.

Second, the capture of data at scale — for instance, through social technologies and subsequently through connected devices — combined with improvements in machine learning and artificial intelligence drove the rise of personalized consumption.

As markets shifted from mass production and mass consumption to distributed production and personalized consumption, the internet provided a global connectivity infrastructure to connect the two. Mobile-based connectivity and cloud computing enabled the creation of a new alternative for global value exchange. Cloud hosting connected distributed production to personalized consumption through a global network. Together, these three technologies drove the rise of platforms as the dominant model of value creation. Platforms connected producers and consumers with each other allowing them to create an exchange value and facilitating these interactions at scale. By adding more and more producers to these platforms, there was more choice for consumers, enabling these platforms to benefit from demand-side economies of scale.

Platforms rearchitected value creation away from ‘mass production connected to mass consumption’ to ‘distributed production connected to personalised consumption’. By aggregating fragmented markets, platforms reduced search costs — the costs incurred in counterparty discovery. By standardizing transactions at scale, platforms reduced bargaining costs — the costs incurred in negotiating the terms of exchange. And by acting as central intermediaries with market-wide data capture and visibility, platforms reduced verification and policing costs — the costs incurred in imputing trust to transactions by verifying and policing those transactions.

In achieving the above, platforms created massive value while also gaining inordinate market power. Demand-side economies of scale — manifested through network effects and learning effects — coalesced entire markets around a few dominant platforms.