Platforms and competitive dynamics

The development of platforms and network effects

In the span of two decades, the Internet has changed dramatically. It is no longer just a collection of websites. The arrival of fixed broadband transformed online content, offering the possibility to millions of people to participate in its development in all its forms: blogs, videos, social media networks, contributive websites, sharing, etc. The very-fast-paced progression of smartphones and high-speed mobile networks then contributed towards the emergence of other applications, far removed from the first uses of the Internet. More recently, the seamless integration of network technologies and application technologies in objects opens up a new era of digitalisation, just like the progress achieved in the algorithmic processing of data. 

The networking of information and services produces positive externalities – in the economic sense. In the framework of the information and electronic networks economy, we can identify positive externalities that we call “network effects”. Different in nature though complementary, there are 5 types of network effects: direct network effects, positive feedback effects, indirect network effects, two-sided network effects, and lock-in network effects. These network effects are the first structuring feature of platforms. In order to define a platform, it is necessary for all of these effects to be simultaneously present and that some of them (two-sided effects and indirect effects) are clearly identified as strategic levers by a company that wants to become a platform. 

The ecosystem logics

If a mobile application or a website can trigger network effects, it does not mean they automatically become a platform. To become one entails a voluntary strategy and specific decisions on technological elements and value sharing between members of an ecosystem. An ecosystem-type functioning constitutes the second essential feature to define a platform.

Network effects and competition

If markets characterised by network effects are concentrated in terms of turnover, the competition configuration in which they tend to operate may not necessarily be a monopoly. Competition in these network effect markets usually takes the form of an “oligopoly with competitive fringes”, a configuration present in markets such as food distribution or book editing. 

When carrying out competition analysis, it is important to measure the “intensity” of network effects – in other words their influence in the overall competition structure. These effects are deemed “powerful” or “structuring” when they prevail over all the other factors that regulate competition. The more value creating dimensions a product or service has, the weaker its network effects and the less structurally meaningful they are.

Furthermore, a player that has gained a lead in a network effect market is likely to increase its lead: its offer becomes more and more desirable as it gains new users. However, the position gained is not guaranteed in the long term: if a misstep is made, the network effects can quickly erode and the audience may collapse. Moreover, the costs of migration to an alternative product tend to be lower, due to recent technological developments towards interoperability.

The main threat for the dominant actors in these markets lies in the emergence of innovators that can revolutionise and renew Internet uses. In the digital sector, network effects are usually nothing but a factor in a cumulative dynamic combined to other effects, such as economies of scale, reputational effects, experience effects and learning effects linked to internet uses.