Modern Monopolies: The Platform Business Model
Platform businesses, which connect producers of goods and services with consumers of those goods and services, are growing steadily, according to WisdomTree's recent interview with Alex Moazed, founder and CEO of platform consulting firm Applico.
One driver of this "modern monopoly's" success is its unique business model that benefits both producers and consumers. In this business model, the cycle of producers and consumers reinforces itself. Increases in the number of producers drives increases in the numbers of consumers, which then encourages more producers to join the platform.
Thanks to their ability to serve both sides of a transaction and to quickly build a base of consumers and producers, successful platforms enjoy high profit margins and a significant market share. Platform businesses want to and work to achieve consistent growth.
Not every business that has elements of a platform model is a true platform business. For example, according to Moazed, software-as-a-service (SaaS) businesses do not qualify as platform businesses because they do not connect app developers with app purchasers.
One challenge that Moazed addresses in the podcast is the difficulty of creating a critical mass of producers and consumers to drive the desired growth of the business.
Platform businesses adopt creative solutions to this challenge. For example, Uber hired drivers as employees until there was enough interest to create the platform business model Uber desired.
Spotify is moving into podcasts, where there exists a large network of producers and consumers to drive a platform model. On perhaps the other side of the spectrum is Netflix, which uses a more linear approach to purchase and distribute content to users.
As anti-trust activity increases, Moazed believes that there is little risk that successful platform businesses will be broken up. Instead, he believes that protective measures will be put in place for suppliers, who are often vulnerable in this business model (Take, for example, Amazon's 30% fee levied against third-party sellers). These protections will actually be good for suppliers and even for the platform as a whole.
All in all, platform businesses are in their early stages. Even so, platform businesses have grown on pace with Moazed's predictions. They now account for 4 percent of S&P 500 companies, and are scaling almost a decade ahead of Moazed's predictions. As a result, they present a valuable investment opportunity with great possibility for continued growth and strong returns on investment. WisdomTree’s Modern Tech Platforms ETF (PLAT) is an example of an investment fund that covers this area. Contact us for more information on thematic investing.