​Building Blocks Thesis: A New Way to Organize Ecosystem Interactions

 

Platforms are, essentially, new organizing mechanisms to organize ecosystem interactions.

Over the past decade, we’ve seen a certain format of organization – aggregation of market activity e.g. through marketplaces, social networks etc – as the dominant mechanism of organization in the platform economy.

All that is about to change!

We’re already seeing a shift towards an alternate organizing mechanism with the rise of Web3. Over the past several years, multiple efforts to set up public digital infrastructures and national digital stacks have further demonstrated alternate models of organization.

We’re on the cusp of a shift!

But this shift is larger than merely a shift from private to public, or a shift from closed to open, or a shift from centralized to decentralized, or a shift from Web2 to Web3.

We believe there’s a much larger thesis to this shift. We call it the Building Blocks Thesis.

This essay is the first in a three-part volume explaining the core ideas underpinning the Building Blocks thesis (Fully illustrated deep-dive launching on May 24, 2022).

Let’s get started!

 

 

The rise of the platform economy

Over the course of the past two decades, three simultaneous forces have ushered in a new era of scale.

First, global connectivity – enabled by mobile penetration and social technologies – have driven the creation of a global network of connected producers and consumers, allowing businesses to create new markets of value exchange.

Second, the adoption of the cloud as a global ‘compute’ infrastructure enables process interoperability across the value chain (e.g. through API-based connectivity) and provides the ability to leverage external innovation by allowing third parties to innovate on a company’s resources.

Finally, the explosion of data production, spurred by global adoption of social technologies and sensors, combined with improvements in our ability to process and interpret data, enable businesses to serve markets at scale while informing all market participants and making market interactions more efficient.

Today, these three forces – collectively powering the platform economy – enable businesses to leverage open innovation and aggregate markets of exchange.

Components vs complements

The platform economy has fundamentally transformed value creation.

Through most of the twentieth century, businesses scaled through vertical integration, integrating multiple activities across supply, production, and distribution.

With growing connectivity, cloud adoption, and data production, firms can now leverage resources outside their organizational boundaries to create and deliver solutions. Openness allows firms to scale both solution creation and usage.

There are two ways to architect open business models.

1. Openness in solution design: First, openness in solution design, by allowing a larger ecosystem to create solution components, has led to the rise of open innovation, best exemplified in the rise of open source communities like Linux and crowdsourcing initiatives like Innocentive. These solution components, created in an open ecosystem, are then bundled into a solution provided by the firm. For instance, a software business leveraging open source software leverages open solution components to create and sell proprietary products.

1. Openness in solution usage: Second, openness in solution usage allows a larger ecosystem to create complements that drive solution usage, and has led to the rise of market aggregation platforms, which aggregate demand at scale and attract providers of solution complements to serve this demand. For instance, listings on Etsy and photos on Instagram are examples of complements that make the underlying platform more attractive.

This difference between solution components and solution complements is critical. Solution components are utilized by the solution creator to build the solution. Solution complements are used in conjunction with the solution by the end user, making the solution more attractive.

For instance, Amazon’s shopping cart functionality is a solution component to its marketplace while listings from third party vendors are complements that make the marketplace more attractive for use.

As a result of openness, firms no longer create value just through vertical integration. Increasingly, firms leverage the power of open innovation and market aggregation to create value through open business models.

This shift has played out over the course of the past three decades. First, the rise of open source software, and subsequently, crowdsourcing through the web enabled firms to leverage open innovation. Next, near-zero marginal costs of serving users (powered by the internet) enabled firms (starting with the BigTech, but increasingly all consumer businesses) to leverage market aggregation. Third, digitization across the value chain and adoption of APIs further accelerated this shift across both production and consumption.

This shift is shown in the diagram below.