Fast Track to Success? Or a Minefield for Entrepreneurs?
The word platform is bandied about enough to make encountering it unavoidable. So, for the purposes of conveying my thoughts and opinions on them I’m going to start with a definition. For the rest of this article I’ll use platform as it’s meant to be defined in a business context as opposed to software or anything else. So, platform here means “a business model that focuses on helping to facilitate interactions across a large number of participants.“
Now that we’ve gotten that out of the way, I want to talk about the presence of platforms in our market economy and what they mean for entrepreneurs, including the advantages, but at greater length I’m going to talk about the inherent dangers and a brief history of examples of platforms behaving in a way detrimental to entrepreneurial endeavors.
The Biggest Players in the World of Platforms
Some of the most ubiquitous platforms are Amazon, Google, and Facebook. They do, after all, possess nearly universal use among consumers as well as strong brand equity. As such they function not only as traditional businesses selling products and services to customers directly, but also as intermediaries between end users, (or customers-yes, you using a Google search makes you a customer) and other businesses.
There are obvious advantages to businesses having a presence on these platforms. You can expect to get far greater exposure for your brand and product(s). This translates into more customers much faster than going it alone, all other things being equal. There are other, tangential value adds entrepreneurs can expect from leveraging these platforms. These include such as all sorts of analytics to measure the popularity of your online presence, the return on investment of your advertising spend, inclusion in the partner network and much, much more.
These advantages are so powerful they end up becoming nearly omnipresent. This reduces the businesses dependent on them to a singular voice in the cacophony of startups and eCommerce sites. Like every technological innovation, it becomes imperative to incorporate them. Entrepreneurs and legacy companies must to merely not be at such a drastic disadvantage by not having them. Getting a Google Ads account is the 2021 version of having a telephone in the office.
That having been said, these platforms are notoriously predatory. Many smaller, and not so small, entrepreneurial enterprises suffer from being on the weaker end of a power asymmetry they were led to believe was a partnership. Don’t take my word for it, there are plenty of examples.
Case Study #1: Amazon as a Platform
Amazon’s existence, like so many legendary behemoths of industry, began rather humbly. Jeff Bezos, equipped with $250,000 from his parents and a “regret minimization framework” meant to stave off regret from not investing in the dot-com boom emerging in the 90’s sooner (crazy what hindsight has to tell us about how justified such regret was) started an online bookstore. He named it Amazon because it sounded exotic, was the name of the largest river in the world, and he wanted his company to be the biggest bookstore in the world, and it started with the letter “a”. After narrowing down a list of what he thought was worth selling, he settled on books because they were cheap. Also, there were plenty of titles in print, and people love literature.
So, yeah, Jeff Bezos was no Archimedes and there was no great eureka moment during any of his sojourns to the bathtub where a precise moment of otherworldly insight that all of his business accomplishments could be traced back to occurred.
Since then Amazon has grown from a book company into an everything company. Groceries, prescription drugs, cloud computing, advertising and a whole lot more are all available in one place. At its heart though, Amazon remains a retailer. At least, that’s what most people identify it as.
How Did Amazon Become the Most Colossal of Platforms?
Many reasons are identified about how Amazon grew to be so colossal so fast. But what Bezos himself cites as the single most important factor in Amazon’s success is customer obsession. And a key part of providing a great shopping experience for customers was selection. A large part of the products available on Amazon are from third party companies using Amazon as a platform. Expanding customer selection by offering third party products and services was an imperative at Amazon from the get-go.
You can listen to Amazon Consumer Business CEO Jeff Wilke explain where this fits into Bezos’ “Virtuous Cycle” in the video below. Start at the :55 mark.
I know a lot of this isn’t news to anyone, but I’m going somewhere with this. And that somewhere is behind the smoke and mirrors of the big happy Amazon family of companies all so joyously united to make a scrupulous profit providing value to customers.
You would expect Amazon to be hyper competitive with other retailers selling products it sells or wants to. That competitive drive is one of the great things about market economies. Competition forces companies to find the lowest prices to win customers. They are forced to continue to strive to outdo each other, resulting in better product and service offerings. All of this is generally speaking of course.
But where the trouble comes, particularly for entrepreneurs who want to leverage Amazon’s reach, is when they compete with the third parties they so graciously grant platform access to.
Who Suffers Because of Predatory Platforms? The Little Guy, of Course.
One company, Pirate Trading LLC, made camera tripods and was selling $3.5M worth per year on Amazon. This was about a decade ago. According to the owner of Pirate, Dalen Thomas, Amazon soon began selling its own tripods. Thomas discovered mimicked his tripod’s components and design after ordering one.
To make matters worse, after reverse engineering Pirate’s Ravelli-brand tripods, Amazon undercut him on price. They utilized their much greater economies of scale and diverse revenue streams to subsidize losses. They then began repeatedly banning Thomas from selling tripods that competed with the ones offered through Amazon Essentials. Amazon neglected to ban the tripods from Pirate that didn’t compete with its own for a time. Eventually however, all Ravelli-brand products were banned in 2015. The ban was eventually lifted, but the damage was done, and Mr. Thomas found the experience of selling through Amazon to not be worth it, instead pivoting to real estate investing.
Amazon of course maintains there were no intellectual property infringements when they made their tripods. And no legal judgments about what happened with Ravelli or Pirate Trading have been rendered, but from where Mr. Thomas is standing, it seems he was undercut but his trusted business partner.
But Wait, There’s More!
If you can’t read the WSJ article included above, there are more examples of how and why Amazon is able to grab their third party vendors by the chutzpah included in it. For instance, one vendor of patio furniture from Michigan describes the relationship as “literally being held like a prisoner” because “there’s no place else companies like us can go to sell our products. Amazon uses that against us.” This concern was expressed after the vendor was forced to provide invoices from his manufacturer to prove his products were genuine when Amazon contended they may have been counterfeit.
This is of Course, a Story as Old as Entrepreneurialism Itself
Amazon has yet to experience any real comeuppance for this behavior. But it’s not impossible to think they might if this keeps up. The reason why is because others have employed similarly anti-competitive practices and had to deal with a United States Justice Department interested in doing something about it.
Microsoft’s antitrust woes in the late 90’s serve as a great example of a forerunner to what entrepreneurs relying on Amazon are experiencing now. Now, Microsoft is not the same sort of platform Amazon is. But its openness to third party software, and its only competitor in the personal computing operating system space at the time, Apple, taking a dichotomously opposed approach to providing its OS’s in the 90’s, made Windows pretty much the only place for a lot of third party software vendors to get their products to the public.
And, like any business whose reason for existing is to maximize shareholder value, warm and fuzzy feelings like being a good corporate citizen or considering the negative externalities of their ruthless drive for profit didn’t factor into Microsoft’s decision making.
In the 90’s Microsoft had a practice called “embrace, extend, and extinguish”. This practice described something very akin to what Pirate Trading experienced with Amazon. Microsoft would “embrace” a third party software, letting it run on Windows and increasing in user adoption. Then, they would reverse engineer it and “extend” it with new features. Finally, they would “extinguish” it by hindering its ease of use on Windows.
Case in Point-Case Study # 2: Microsoft as a Platform
Most people think of cavemen wearing loincloths and chasing mammoths for food when the name Netscape is brought up. It’s become something basically coterminous with outdated and dead web browsing, search, and email.
What people don’t realize is that the reason for Netscape’s obsolescence was because of Microsoft, not really any poor planning on Netscape’s behalf. Microsoft’s subjection of Netscape to the “embrace, extend, and extinguish” screed was at the center of the United States v. Microsoft Corp lawsuit in 2001 because of how egregiously anti-competitive it was.
In the early days, Netscape was a very popular web browser among Windows users. Shocking, I know. Understanding the popularity of Netscape and sensing an opportunity, Microsoft decided to make its own web browser, Internet Explorer, which it cloned from Netscape. Included with every Windows license and appearing automatically on your computer desktop, so users would feel compelled to use it to go online.
Additionally, Microsoft intentionally made it difficult to download, install, and use Netscape. They even altered the videos they presented as evidence in their defense during the antitrust trial to make it look far easier to utilize Netscape as an alternative to Internet Explorer than it actually was.
How it All Played Out
Eventually, an agreement was reached between the government and Microsoft to settle the case and some measures were implemented to curb Microsoft’s anti-competitive practices. How effective they were is subject to debate I’m sure, but the damage to Netscape, like Pirate Trading, was done. Netscape has now been relegated to the dustbin of technological irrelevance. In an interestingly ironic twist, so has Internet Explorer, which I guess is a small form of poetic justice.
Now of Course, the Payoff. What Does All This Talk of Platforms Mean for Entrepreneurs?
I hope, by now, like with everything I write about, what I’m getting at isn’t too difficult to decipher. If it isn’t, that means I haven’t done a good job of explaining. So, in the event that’s the case, I will of course add a summation to make my meaning less opaque.
There is an inherent danger in being totally reliant on platforms to conduct your business. I say this without being blind to the irony, because I’m using a platform, WordPress, for this site, but it’s true nevertheless.
Platforms can pull the metaphorical rug out from under you very swiftly when it suits their interests, leaving you with a very sore ass when you hit the hardwood floor. In less figuratively colorful terms, this means your business could suffer as a result of the selfish changes these platforms make to the arrangements they have with third parties.
Predatory Platforms Are Everywhere
It’s not limited to Amazon and Microsoft. I mentioned Facebook and Google earlier, because they have their own antitrust issues with the government for similar practices, which I’ll touch on in another article. Even more seemingly benign companies, like Etsy and Shopify, while not having done anything like what I’ve described, at least that I’m aware of, have a lot of leverage over the entrepreneurs hosting their businesses on these platforms. If there really is a first time for everything, then someone will inevitably experience on these platforms what Netscape and Pirate Trading did with Microsoft and Amazon respectively. I know I said “Ideas are worthless“, or something to that extent, but it turns out sometimes someone will steal just an idea.
I’m not saying don’t ever use platforms. Again, I do it myself. This is just a cautionary tale. I’m simply of the mind it’s in every entrepreneurs best interest to be wary of becoming very dependent on these platforms, and to always be looking for ways to divest enough that they can survive the tumult that comes from the predatory instincts of platform owners.
As always, please feel free to leave a comment. Would especially love to hear from any entrepreneurs who have experience with these platforms; what you like, don’t like, might want to change, your future plans, a list of your deepest darkest fears, so on and so forth. Let’s make the conversation riveting!