Platform Power - Sangeet Paul Choudary

PLATFORM
POWER
Secrets of billion-dollar internet startups
Sangeet Paul Choudary
Based on the blog Platform Thinking (http://platformed.info)
2013 Sangeet Paul Choudary

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For all queries, please email, sanguit@gmail.com
Introduction
Credits: Fran Simo Creative Commons
As internet startups, we often believe that we are in the business
Airbnb enables hosts and travelers to interact and engage in
of building technology. The essays in this book set out to debunk
commerce.
that view.
Several monikers and catch-phrases have been used to
characterize trends in recent times. Web2.0, Crowdsourcing,
Collaborative Consumption, Sharing Economy, App Economy,
Gamification are some of the terms that come to mind. Observed
closely, there are three common threads that underlie all of these
trends:
1) The focus on the user as someone who does work
Instagram enables photo creators to show off and discuss their

creations with photo viewers.
These are all examples of platform business models connecting
producer and consumer roles and allowing them to interact with
each other.
The essays in this book aim at explaining the importance of these
models, why these models are emerging at this point in time and
why they will be the dominant model for business in a networked
2) The notion of value created in an external ecosystem of users
world.
3) The idea that this value is created when users interact as
Welcome to the platformed world! Heres your guide and I hope
producers and consumers
you enjoy the view!
These factors underlie the importance of platform business

models in business today. And internet startups are leading the
way.
Sangeet Paul Choudary
Very briefly, platform business models enable creation and

exchange of value between users, with the firm (startup) acting as
an infrastructure enabling users to interact.
Wikipedia enables creators to create a knowledge base and
consumers to consume that information.
Section 1
Platform
Business
Models
Credits: Petr Jan Juraka Creative Commons
Chapter 1
The Building Blocks of Platforms

KEY QUESTIONS
We typically think of companies competing over products the proverbial build
1. What is a Platform?
a better mousetrap. But in todays networked age, competition is increasingly
2. Why are we seeing the emergence of

platforms?
3. How do I go about building a platform?
over platforms. Build a better platform, and you will have a decided advantage
over the competition.
In construction, a platform is something that lifts you up and on which others can
stand. The same is true in business. By building a
digital platform, other businesses can easily
connect their business with yours, build products
and services on top of it, and co-create value.
This ability to plug-and-play is a defining
characteristic ofPlatform Thinking.
By building a digital platform,

other businesses can easily
connect their business with
yours, build products and
services on top of it, and cocreate value. TWEET
Consider the market for smartphones. Nokia and

Blackberry today are a shadow of their former
glory. Their technology and products lag Apple and the Android ecosystem. But
the triumph of Apple and Android is not from features and functions. It is from the
app store on which external developers create value. Microsoft has gotten
excellent reviews for the technology in its new phones, but it is the ability to create
a successful platform that will determine its ultimate success.
Source: Platform Thinking
The use of platform thinking extends beyond the tech sector.
pull. Where traditional ecosystems push, these new platforms
Retailers are shifting from distribution channels selling products,
pull. Platforms also rely on the power of network effects as
to engagement platforms co-creating value. Online retailers like
they attract more users, they become more valuable to those
eBay, Etsy, and Amazon led the way, and now traditional retailers
users. And theres a growing academic literature that explores the
are following.
unique quality of value creation on what are called multi-sided
Nike is shifting from products to platforms. Building on the
platforms.
success of its Digital Sport products, Nike recently launched
In our view, the success of a platform strategy is determined by
its Nike+ Accelerator to help companies build on the Nike+
three factors:
platform. Nikes announcement reflects platform thinking. We are
Connection: how easily others can plug into the
looking for people who want to create

companies that build upon the success of
The rise of platforms is being driven by
[Nike+] to make the world more active.
three transformative technologies: cloud,

social, and mobile. TWEET
platform to share and transact

Gravity: how well the platform attracts
participants, both producers and consumers
The rise of platforms is being driven by three

transformative technologies: cloud, social, and mobile. The cloud
Flow: how well the platform fosters the exchange and co-
enables a global infrastructure for production, allowing anyone to
creation of value
create content and applications for a global audience. Social

networks connect people globally and maintain their identity
online. Mobile allows connection to this global infrastructure
anytime, anywhere. The result is a globally accessible network of
entrepreneurs, workers, and consumers who are available to
Successful platforms achieve these goals with three building

blocks:
create businesses, contribute content, and purchase goods and
The Magnetcreates pull that attracts participants to the platform
services.
with a kind of social gravity. For transaction platforms, both
Readers will recognize a number of intellectual foundations to

platform thinking. These range fromGeoffrey Moores
ecosystems to John Hagel and John Seely Browns focus on
producers and consumers must be present to achieve critical

mass. Apple needed to attract both developers and users.
Similarly, eBay needed both buyers and sellers. Platform builders
must pay attention to the design of incentives, reputation
In the future, we will see more and more companies shifting from
systems, and pricing models. They must also leverage social
products to platforms. Even those in the extermination business
media to harness the network effect for rapid growth.
may worry less about building better mousetraps, and more on
The Toolbox creates connection by making it easy for others to

plug into the platform. This infrastructure enables interactions
between participants. For example, Apple provides developers
with the OS and underlying code libraries; YouTube provides
hosting infrastructure to creators; Wikipedia provides writers with
the tools to collaborate on an article; and JC Penney provides
stores to its boutique partners.
building mousecatching platforms. For example, imagine a smart

mousetrap with sensors that wirelessly communicate to a cloudbased MouseCatcher service. Homeowners and exterminators
could monitor the status of the trap on their smartphones,
receiving a text message when it
is out of bait or needs checking.
Smart trapsalready exist. But the
shift from products to platforms
The Matchmaker fosters the flow of value by making

connections between producers and consumers. Data is at the
heart of successful matchmaking, and distinguishes platforms
would focus on building the
Platforms bring participants

in, create the conditions for
value creation and match
participants to each other.
TWEET
service (the Trapp Store?) that

enables anyone with a smart trap
from other business models. The Matchmaker captures rich data
to connect and communicate.
about the participants and leverages that data to facilitate
Every business today is faced with the fundamental question that
connections between producers and consumers. For example,

Google matches the supply and demand of online content, while
marketplaces like eBay match buyers to relevant products.
Not all platforms place the same emphasis on all three building
underlies Platform Thinking: How do I enable others to create

value? Building a better mousetrap still might not have the world
beat a path to your door. But the right platform might just do the
trick.
blocks. Amazon Web Services has focused on building the

Toolbox. Meanwhile, eBay and AirBnB have focused more on the
Magnet and Matchmaker role. Facebook has focused on the
Note: This article was co-authored with Mark Bonchek.
Toolbox and Magnet, and is actively building its Matchmaker

ability.
Chapter 2
Overview of Business Models: Pipes vs. Platforms

KEY QUESTIONS
1. What is a Platform business model?
2. How is it different from traditional business
models?
3. How are internet businesses different from
traditional businesses?
4. Why do most internet businesses fail?
There are two broad business models: pipes and platforms. You could be running
your startup the wrong way if youre building a platform, but using pipe strategies.
More on that soon, but first a few definitions.
PIPES
Pipes have been around us for quite some time now. Theyve been the dominant
model of business. Firms create stuff, push them out and sell them to customers.
Value is produced upstream and consumed
downstream. There is a linear flow, much like water
flowing through a pipe.
We see pipes everywhere. Every consumer good
The world is moving from

Pipes to Platforms, from
linear to networked
business models. TWEET
that we use essentially comes to us via a pipe. All

of manufacturing runs on a pipe model. Television and Radio are pipes spewing
out content at us. Our education system is a pipe where teachers push out their
knowledge to children. Prior to the internet, much of the services industry ran on
the pipe model as well.
This model was brought over to the internet as well. Blogs run on
a pipe model. An ecommerce store like Zappos works as a pipe
as well. Single-user SAAS runs on
pipe model where the software is
created by the business and
delivered on a pay-as-you-use
model to the consumer.
Internet businesses are

fundamentally different
because they are nonlinear. Users replace
consumers. Ecosystems
create value. TWEET
BUSINESS MODEL FAILURE

So why is the distinction important?
Platforms are a fundamentally different business model. If you go
about building a platform the way you would build a pipe, you are
probably setting yourself up for failure.
Weve been building pipes for the last few centuries and we often
tend to bring over that execution model to building platforms. The
media industry is struggling to come to terms with the fact that
PLATFORMS
the model has shifted. Traditional retail, a pipe, is being disrupted
Had the internet not come up, we would never have seen the
by the rise of marketplaces and in-store technology, which work
importance of platform business models. Unlike pipes, platforms
on the platform model.
do not just create and push stuff out. They allow users to create
and consume value. At the technology layer, external developers
can extend platform functionality using APIs. At the business
PIPE THINKING VS. PLATFORM THINKING
layer, users (producers) can create value on the platform for other
users (consumers) to consume. This is a massive shift from any
form of business we have ever known in our industrial hangover.
TV Channels work on a Pipe model but YouTube works on a
Platform model. Encyclopaedia Britannica worked on a Pipe
model but Wikipedia has flipped it and built value on a Platform
model. Our classrooms still work on a Pipe model but Udemy and
Skillshare are turning on the Platform model for education.
So how do you avoid this as an entrepreneur?

Heres a quick summary of the ways that these two models of
building businesses are different from each other.
USER ACQUISITION
User acquisition is fairly straightforward for pipes. You get users
in and convert them to transact. Much like driving footfalls into a
retail store and converting them, online stores also focus on

getting users in and converting them.
Pipe Thinking: Optimize conversion funnels to grow.
Many platforms launch and follow pipe-tactics like the above.

Getting users in, and trying to convert them to certain actions.
Platform Thinking: Build network effects before you optimize
However, platforms often have no value when the first few users
conversions.
come in. They suffer from a chicken and egg problem, which I talk
extensively about on this blog. Users (as producers) typically

produce value for other users (consumers). Producers upload
photos on Flickr and product listings on eBay, which consumers
consume. Hence, without producers there is no value for
PRODUCT DESIGN AND MANAGEMENT

Creating a pipe is very different from creating a platform.
consumers and without consumers, there is no value for
Creating a pipe requires us to build with the consumer in mind.
producers.
An online travel agent like Kayak.com is a pipe that allows users

to consume airline tickets. All features are built with a view to
Platforms have two key challenges:
enable consumers to find and consume airline tickets.
1. Solving the chicken and egg problem to get both producers

and consumers on board
and consumers in mind. Building YouTube, Dribbble or AirBnB

requires us to build tools for producers (e.g. video hosting on
2. Ensuring that producers produce, and create value

Without solving for these two challenges, driving site traffic or
app downloads will not help
are actually building

platforms but use Pipe
Thinking for user acquisition.
YouTube) as well as for consumers (e.g. video viewing, voting

etc.). Keeping two separate lenses helps us build out the right
features.
with user acquisition.

Startups often fail when they
In contrast, a platform requires us to build with both producers
Platforms dont just optimize

conversion funnels to grow. They
build and deliver value through
network effects. TWEET
The use cases for pipes are usually well established. The use
cases for platforms, sometimes, emerge through usage. E.g.
Twitter developed many use cases over time. It started off as
something which allowed you to express yourself within the
constraints of 140 characters (hardly useful?), moved to a
platform for sharing and consuming news and content and
AirBnB, SitterCity, Etsy), one or both sides pays the platform a
ultimately created an entirely new model for consuming trending
transaction cut. When producers create content to engage
topics. Users often take platforms in surprisingly new directions.
consumers (YouTube), the platform may monetize consumer
Theres only so much that customer development helps your with.
attention (through advertising). In some cases, platforms may

license API usage.
Platform economics isnt quite as straightforward either. At least
Pipe Thinking: Our users interact

with software we create. Our
product is valuable of itself.
Platform Thinking: Our users
interact with each other, using
one side is usually subsidized to participate on the platform.

Software is no longer about
human-computer interaction.
Its about human-human
interaction using
computers. TWEET
Producers may even be incentivized to participate. For pipes, a

simple formula helps understand monetization:
Customer Acquisition Cost (CAC) < Life TIme Value (LTV)
software we create. Our product
This formula works extremely well for ecommerce shops or
has no value unless users use it.
subscription plays. On platforms, more of a systems view is

needed to balance out subsidies and prices, and determine the
traction needed on either side for the business model to work.
MONETIZATION
Monetization for a pipe, again, is straightforward. You calculate all

the costs of running a unit through a pipe all the way to the end
consumer and you ensure that Price = Cost + Desired Margin.
This is an over-simplification of the intricate art of pricing, but it
captures the fact that the customer is typically the one
P i p e T h i n k i n g : We c h a rg e
Internet monetization: Find
a way to make money
without killing the network
effect. TWEET
consumers for value we create.

Platform Thinking: Weve got to
figure who creates value and who
consuming value created by the business.
we charge for that.
On a platform business, monetization isnt quite as
straightforward. When producers and consumers transact (e.g.

10
BUT PLATFORM THINKING APPLIES TO ALL INTERNET
We are moving from linear to networked business models, from
BUSINESSES
dumb pipes to intelligent platforms. All businesses will need to
If the internet hadnt happened, we would still be in a world

dominated by pipes. The internet, being a participatory network,
move to this new model at some point, or risk being disrupted by

platforms that do.
is a platform itself and allows any business, building on top of it,

to leverage these platform properties.
Every business on the internet has some Platform properties.
We are moving from linear to networked business

models, from dumb pipes to intelligent platforms. Build
a platform today, or get disrupted. TWEET
I did mention earlier that blogs, ecommerce stores and singleuser SAAS work on pipe models. However, by virtue of the fact
that they are internet-enabled, even they have elements that
make them platform-like.
Blogs allow comments and
discussions. The main interaction involves the blogger pushing

content to the reader, but secondary interactions (like comments)
lend a blog some of the characteristics of platforms. Readers cocreate value.
Ecommerce sites have reviews created by users, again an
intelligent platform model.
THE END OF PIPES

In the future, every company will be a tech company. We already
see this change around us as companies move to restructure
their business models in a way that uses data to create value.
11
Chapter 3
Platform Thinking for business in a Networked World

KEY QUESTIONS
Business is about solving customer problems. Its been claimed that business is
1. How are todays internet businesses

different from the ones that we had in the
nineties?
primarily about beating the competition or about maximizing shareholder returns
2. How are platform business models different

from other internet business models?
approach that businesses take to solving these problems, three broad patterns
but if the successes (and failures) of the past decade are anything to go by, the
primary goal of business is solving customer problems. If you think about the
emerge.
THE STUFF APPROACH

The approach of the industrial age to solving customer problems has been to
create more stuff. If theres a customer problem out there, you set up factories and
build some stuff. And once consumers have got their needs satisfied but youve
still got all this excess production capacity, you put in some marketing and
convince consumers that they want more stuff. The default model for solving
business problems has been the stuff approach. If youre dealing with goods,
youre churning out more goods while if youre a services-based company, youre
putting more people on the job. The approach to scaling a solution has been
creating more.
Most problems do not need to be solved by throwing stuff at them. Most problems
are, actually, information problems. In reality, most problems are currently solved
12
inefficiently because of a lack of information needed to make a
creating more stuff. That sounds paradoxical but that is exactly
decision. Weve been solving problems by creating more stuff
what Twitter does to news. The media industry has a limited
largely because we didnt optimize distribution and access to the
number of journalists. Twitter enables anyone out there to
stuff that already existed.
become a source of news without having to become a journalist.

YouTube increases the inventory of content without setting up
new media houses. eLance allows companies to get work done
THE OPTIMIZATION APPROACH
without having to hire people to do the job.
Enter algorithms. You have stuff out there which is sub-optimally
The stuff approach creates
distributed. Heres a two-step approach to solving the problem:
s u p p l y, t h e p l a t f o r m
a p p ro a c h u n c o v e r s n e w
1. Aggregate all the information on the stuff out there
sources of supply. The goal in
2. Leverage algorithms to optimally match the right stuff with a

consumers desire
this case is not only to
Platform businesses create new

sources of value, instead of simply
redistributing existing value.
TWEET
optimize but also to redefine

the input (inventory) that you are optimizing.
Google built one of the fastest growing companies of all time

applying the optimization approach to the worlds information
problem. Most internet businesses create value through
IN ESSENCE
optimization. Computer science, as a field of study, is itself based

Every consumer problem out there can be solved in one of three
on solving optimization problems.
ways:
The stuff approach: How can we create more stuff whenever the
THE PLATFORM APPROACH
problem crops up?
Platform Thinking adds one more step to the optimization
The optimization approach: How can we better distribute the
approach. Instead of merely aggregating information on stuff out
stuff already created to minimize waste?
there (Step 1 above), it enables creation of more inventory without

13
The platform approach: How can we redefine stuff and find new
The stuff approach (GM, Toyota): Create more cars. The greater
ways of solving the same problem?
the number of people with this problem, the more cars you need
to create.
The optimization approach (Avis, Cab Aggregators): There are
THE ACCOMMODATION PROBLEM
many taxi operators but consumers arent aware of all the
Problem: Im traveling to city X and I need to end myself some
choices. Lets create a search engine and help them figure the
accommodation.
best route to their destination and the modes of public transport

that will take them there.
The stuff approach (Sheraton): Create more stuff. Build more

hotels, set up more BnBs. If there are fewer rooms than tourists,
The platform approach
buy some land, put up a hotel and create more rooms.
(Lyft, ZipCar, ZipRide): Lets

redefine the problem space.
The optimization approach (Kayak): There are a lot of hotels out
What if we drastically
there but travelers do not necessarily have all the information to
expand the number of cars
make the choice they want to. Lets aggregate this inventory and
available to choose from for
create a reliable search engine. Lets build review sites to help
commuting from point A to
make the right decision.
point B?
The platform approach (AirBnB): How can we redefine travelers
Airbnb, Zipcar and Apple

proposed new solutions to existing
problems by enabling an
ecosystem of new producers and
service providers. TWEET
accommodation? How about enabling anyone with a spare room

and mattress to run their own BnB?
THE COMPUTING PROBLEM
Problem: I need a mobile phone with all the bells and whistles but
every mobile phone has a different feature set and I cant figure
THE TRANSPORTATION PROBLEM
the best one for myself.
Problem: I need to figure out a reliable and safe way of getting
The stuff approach (Nokia): Create more phones and more
from point A to point B whenever I want to.
models. Conduct your market research, figure out what

14
consumers want, bucket them into groups and design new
CHALLENGES
models for these groups.

The optimization approach (Comparison
shopping): There are a lot of phones out there.
Why dont you enter your parameters and we
will spew out the best phone models that
The platform approach is new. Much of this problem

New platforms need to solve
chicken and egg problems, ensure
quality and combat regulatory
challenges. Its not pretty! TWEET
satisfy your needs.
solving has come up only in the last five years and

few solutions have demonstrated the kind of success
that the stuff approach and the optimization
approach have. Hence, one might be tempted to
dismiss this as a fad.
The platform approach (Apple): Lets rethink the phone. We cant
While execution challenges continue to exist, they are, by all
build everything. What if we just built out the tools that others
means, solvable.
could use to build apps that consumers could then use to extend
the functionality of their phone?
Inventory: When you redefine inventory as AirBnB or oDesk
encouraging users to create the inventory. This often leads to a
does, you need to ensure you have a clear strategy for

chicken and egg problem as producers wont create inventory
THE NEWS PROBLEM
unless theres a ready market of consumers and consumers wont
Problem: I need to know about whats happening around the

world.
participate without inventory to consume.

Quality: When an entirely new set of producers gets created,
The stuff approach (NY Times): Put more journalists on the job,
quality control can be a problem. Platforms need to have robust
churn out more content and get the news out to more channels.
quality control mechanisms to separate the good from the bad.
The optimization approach (Google News): Rank news stories
External forces: We need new regulations for these new models.
and serve readers with the matches closest to what theyre
ber has already had problems with regulations. We need to
looking for.
solve for trust in the virtual world. Airbnb has already come under
The platform approach (Twitter): Redefine the journalist.
the scanner on this count.
Everyone can create and distribute news now.

15
Chapter 4
A Design Framework for Networked Businesses

KEY QUESTIONS
Every business is an engine. It needs to do a certain set of things repeatedly to
1. How do you scale processes beyond your

company?
create value. If you havent figured out that set of repeated operations, you
2. How do you leverage your user/developer

ecosystem to create value?
Ford needs to repeatedly assemble cars, Google needs to repeatedly run its
probably havent created a scalable business yet.
crawler, Facebook needs to repeatedly get users to interact with other users.
THE BUSINESS ENGINE AND REPEATABLE OPERATIONS

Every business goes through three stages:
Creating the engine: Early stage, figuring out the
set of repeatable operations it needs to do to
create value.
Oiling the engine: Rapid testing and iterating to
refine and optimize the repeatable operations
Running a business
engine: Build the engine
(design), oil it (optimize) and
step on the gas (scale).
TWEET
Stepping on the gas: Scaling by repeating the

repeatable operations
16
THREE APPROACHES TO BUILDING A BUSINESS
So this is the formula for building a business. You figure out how
A brief recap of the three approaches to problem solving
you are creating value. You identify a set of operations that

repeatedly create value. You figure out a way to efficiently
conduct these operations repeatedly.
There are three broad ways that businesses conduct these
operations repeatedly and get things done:
Get users to do the work
problem crops up?

The optimization approach: How can we better distribute the
stuff already created to minimize waste?
The platform approach: How can we redefine stuff and find
Get employees to do the work

Get algorithms to do the work
The stuff approach: How can we create more stuff whenever the
Three sources of value

creation in a business:
Employees, Algorithms
and Users. Which ones do
you rely on? TWEET
new ways of solving the same problem?
Essentially, the three approaches to building a business now are:

The stuff approach: Get employees to do the work
Lets think through the problem of navigating the web for the
most relevant information for the day. Three companies try to
The optimization approach: Get algorithms to do the work
solve this in three very different ways:
The platform approach: Get users to do the work
Yahoo: A bunch of editors decide the best content for the day
Google News: Algorithms decide the top news of the day
Depending on which approach you take, the way you build your
Twitter: Users tweets and retweets decide the top news of the
day.
company could vary significantly.

A platform thinking approach to building a business involves
These three approaches correspond exactly with the three

models for problem solving, mentioned in the previous chapter.
figuring out ways by which an external ecosystem of developers

and users can be leveraged to create value. The iPhone app store
does this, YouTube does this, and so does Wikipedia.
17
The algorithms are easily replicable but the ecosystems arent.
UNDERSTANDING REPEATABLE OPERATIONS

Its important to note that we are talking about repeatable
operations. Writing code is not a repeatable operation. It is a onetime infrastructural activity, similar to building out the assembly
line or setting up the factory. The operations that the code
automates (e.g. login management) are the repeatable operations.
Hence, building a business where the ecosystem scales the value

creating operations is quite different from building a technologyonly company.
PLATFORM THINKING AND SCALE CONSIDERATIONS
Scale is achieved by making repeatable processes more efficient
(faster/cheaper) and effective (accurate).
WHY ECOSYSTEMS, NOT ALGORITHMS, ARE YOUR
One of the ways to infuse platform thinking into your business is
COMPETITIVE ADVANTAGE
to look at a problem that is being solved manually, and
Most problems that could be fully automated are already
repeatedly, and see if it can be solved by external users instead.
automated today. The next level of scale will come not by
Facebook realized that it would have to translate its interface for
automating alone (and letting algorithms alone do the work) but
every new foreign language. The norm was to do it with an in-
by leveraging an ecosystem ( and letting algorithms synchronize
house or outsourced translation team. Facebook chose to
disparate actions).
crowdsource it, building not just a more scalable model, but in
There are very few companies that compete purely on the
many cases, better translations as well.
strength of algorithms. Google is a
This is also demonstrated in the evolution of an online
rare example of a company whose
community. Quora started off with employees asking questions
competitive advantage lies in a set

of very complex algorithms that it
fiercely protects. Facebook, Twitter,
YouTube etc. compete not on the
strength of their algorithms but on
the strength of their ecosystems.
You dont build

technology, you enable
interactions. Algorithms
are easily replicable,
Ecosystems arent.
TWEET
and answering them. Over time, it transitioned both these

activities from the employees to the users.
The problem that comes with this, of course, is that you let out
control and with that you need to build in checks and balances to
ensure that no one is gaming the system.Quora and Reddit offer
18
good examples of bringing in these checks and balances and

scaling them along with the community.
THE THREE QUESTIONS FRAMEWORK

What are the repeated chunks of work in my business?
The first part involves identifying the activities that need to be
repeated to scale and expand the business.
Who is doing the work today?
Secondly, is the work being done manually or algorithmically? If
so, can we bring in greater efficiencies (speed) or effectiveness
(accuracy) by leveraging an ecosystem?
How can we get someone else to do that work?
Finally, users, like employees, need incentives. Fitting in the right
organic and inorganic incentives forms an important part of
relying on an external ecosystem to build value.
Key to scale: If employees are doing something today, get

users and algorithms to do it in the future. TWEET
19
Section 2
Network
Effects
Credits: Christian Bachellier on Flickr Creative Commons
Chapter 5
Demystifying Network Effects and Virality

KEY QUESTIONS
Network Effects and Virality are often confused in the online world, possibly
1. What is the difference between network

effects and virality?
because the two often occur together and, in such cases, end up reinforcing each
2. How can products have one without the

other?
Network effects and Virality are, however, completely different. There are many
other.
products which have network effects but are not viral. Conversely, many viral
products do not have network effects.
QUICK DEFINITIONS
A product with network effects gets more valuable as more users use it. Network
effects are achieved only after a certain critical mass is reached but can prove to
be a very strong source of value and competitive advantage beyond that point.
A viral product is one whose rate of adoption increases with adoption. Within a
certain limit, the product grows faster as more users adopt it.
Network effects and virality are very different phenomena.

Learn how to control them separately to build great products.
TWEET
21
SAME SAME BUT DIFFERENT

Both network effects and virality tend to magnify value and
growth respectively as more users use the product. This is
probably why the two concepts are often confused. However, as
elaborated above, the two actually mean very different things.
In fact there are many products that exhibit virality without
exhibiting network effects. A case in point being email and crossplatform communication products.A key feature here is that they
are either interoperable across networks (Hotmail) or leverage an
underlying network for both the viral transmission as well as
delivery of the value proposition. In the case of SurveyMonkey,
EventBrite etc., that underlying network may be mail, a social
network or even a blog.
There are many others that exhibit network effects without
exhibiting virality. Products with indirect network effects such as
marketplaces may not grow virally. In such cases, network effects
are a result of aggregation of the two sides and while each side
can be brought on virally through some incentive, its very difficult
to leverage the indirect network effect to get users on one side to
come on through invitations or interactions from the other side.
22
Chapter 6
Building Products with Network Effects

KEY QUESTIONS
The proverbial chicken and egg problem of building a new social product is well
1. How do you build social products?
understood among tech startups, and its been commonplace to follow two
2. How have the rules of building social

products changed over time?
3. Why was Instagram a threat to Facebook?
4. How can you compete with Facebook in
todays world?
contrasting mechanisms for getting traction.

Traditionally, startups have solved this problem by racing to connect users with
each other, essentially providing them the pipes to interact with each other. Twitter,
Facebook and LinkedIn have grown big with this connection-first model.
However, a new breed of networks is gaining ground with the content-first model.
They provide users with tools to create a corpus of content, and then enable
conversations around that content. Behance, Pinterest, Instagram, Dribble,
Scoop.It have all gained traction by building a corpus of content before building a
social network.
The two contrasting approaches are summarized in the table below:
23
Social networks like Bebo, Facebook and Twitter used this

playbook to create their respective networks leveraging addressbook integrations and other hacks to rapidly build a large number
of network connections.
The importance of building connections, in this model, cannot be
emphasized enough. In fact, the growth teams at Facebook,
Twitter and LinkedInspecifically aim for X connections for a user
within Y days of sign-upto activate the user.
Since a critical mass of connections is required before users
The rules of building a social product are changing. Its important
to understand this shift to build social products that can
effectively gain traction on the internet today.The connection-first
model is no longer as effective as it used to be. As the social web
experience value, the key to building a successful network is

minimizing the friction in creating connections. Contact-list
integration helped social networks like Facebook and LinkedIn
gain initial traction through the removal of sign-up friction.
grows, and a larger number of social products compete for our
In spite of growth hacks like contact-list integration, there is
attention, we are seeing a dramatic shift towards the content-first
always a lead time in getting users on board and reaching critical
model. If youre still getting users to send out Facebook invites,
mass. This is the gap where it becomes very difficult to
youre adding to the noise, instead of standing out and getting
demonstrate value in using the product.
noticed.
THE CONNECTIONS-FIRST SOCIAL PRODUCT
Frictionless sign-up + Virality = Network Effects? Or not!
Traditionally, the playbook for building network effects has been
Startups often believe that removing friction in sign-up and
the following: Get users on board, connect them to each other
creating some form of viral acquisition are the two key elements
and have them create content and conversations.
to reaching critical mass. In fact, with the rise of Facebook

Connect and the social graph, a large number of social products
have sprung up on the promise of frictionless sign-up and viral
24
growth. However, users on the internet have limited time and

attention. As more startups leverage the social graph and flood
users with invitations to join their networks, users have started to
develop invite fatigue.
THE CONTENT-FIRST SOCIAL PRODUCT

Todays social startups dont start off as networks. They start off
as standalone apps. These products enable users to create a
corpus of content first. They then connect the users with each
Clearly, frictionless sign-up and virality are not the one-stop

solutions we were hoping they would be.
other as a consequence of sharing that content.

Instagram started out as a photo-taking tool and built itself out
into a social network subsequently. The initial focus was entirely
on the creation of content and the connections were formed over
T h e s e c r e t t o n e t w o r k v a l u e
Startups often fail to appreciate the gap between technology and
value proposition. For products like Evernote, technology serves
the entire value proposition. However, for social products, the
time leveraging other social networks. It is unlikely that Facebook

would have considered Instagram a direct competitor in its early
days, largely owing to its model of deferring network creation.
value proposition is a combination of technology and the content

that users create on top of it. YouTubes value lies in its hosting
and streaming capability, but more importantly in its vast
repository of videos.
The secret to creating a social
product that demonstrates
immediate value is to enable
content before creating the
network.
H o w t o c r e a t e a n e t w o r k i n s t e a l t h m o d e
Instagram started off as a standalone tool. In doing so, the
product providessingle-user utility to the user even when other
How to create a social

startup that works: Enable
content creation before
connecting users. Think
users arent around on the network. There are two aspects to
Instagram. TWEET
ultimately form the core of the network. The core of Instagram is
building single-user utility:

1. The single-user utility should allow creation of content that will
pictures. Discussions are centered around pictures. Hence, the
Content created on the network is the new source of competitive
single-user tool needs to allow creation of pictures. This is an
advantage. The videos on YouTube, the pictures on Instagram,
extension of the OpenTable model, where a restaurant first
the answers on Quora are the primary source of value for users
manages its real-time seating inventory on a single-user tool,
and the key driver of competitive advantage for these platforms.
before that very inventory is exposed to consumers on a network,
25
to allow them to reserve tables. Curation-as-creation products
5. Open out the network once a critical mass of linkages have
like ScoopIt and Storify also use this model to curate content
been built.
which will serve as the core for network interactions.

2. The product should deliver greater value when users share their
content with their friends. The product builds out the network at
the backend as more content is shared. Hence, the social
network gets created, effectively solving the chicken and egg
problem. A new breed of curation-as-creation startups (Scoop.It,
Paper.Li etc.) is gaining traction on
T h e r i s e o f t h e c o n t e n t p o r t f o l i o
Instagram demonstrates how a network is created around a
portfolio of user-generated content. Behance and Dribbble have
followed similar strategies by providing a portfolio for hosting
designs, before adding value through the creation of a peer-
a similar model.
Building network effects?

1. Start with standalone
review community. Initially, Pinterest appealed to the designer
The new playbook for creating
single-user value. 2. Make

it better with friends.
built out the network. Early adopters found enough value in the
social products is essentially the

following:
TWEET
community as a tool to bookmark their favorite designs, before it

ability to store designs and pictures, to use the product before the
network became active.
1. Have a vision for creating the network but do not start

executing on network creation
T h e n e w s u c c e s s f a c t o r s
2. Enable a single-user tool that creates content that is core to
Frictionless sign-up and virality are important but they are no
social interactions
longer the key to building social products. The following are key
3. Share this content on external networks (social networks,

email, blogosphere)
Removal of barriers to the creation of content: Startups like
4. Capture interactions around the content to build network

linkages at the backend
to building content-first social products:
Instagram, which succeeded in simplifying the creation

processand in enabling users to spread the word, succeeded in
eventually building the connections between users.
26
Growing the creator base, not just the user base: Since value for
T h e n e w g r o w t h h a c k s
the overall networks is scaled by scaling content creation, the
In the connections-first model, the one hack that minimized
platform needs to focus on incentivizing and increasing the
friction in building connections was the contact list integration. In
percentage of users who create content.
the content-first model, the hack that minimizes friction in
Strong curation models: Content-first social products scale well

only when there is a strong curation model in place to separate
the signal from the noise. Without strong curation, greater content
can actually lead to a poorer user experience leading to reverse
network effects.
Incentives: The platform needs to encourage users to build out
the connections. This works best when the platform encourages
an innate motivation (self-expression or self-promotion) in the
user to spread the word about her content. In doing so, the users
build the necessary connections that set up the network.
creating content is the creation widget. Creation widgets have

grown in popularity in recent times, spreading across the internet
in the form of browser add-ons and one-click buttons. Several
curation-as-creation startups like Pinterest and Scoop.it have
used widgets to enable users to create content easily.
T h e f u t u r e
This new model of building networks allows a social product to
gain traction while value is being created by users. Once enough
content is created, the users are connected and the network
builds out. Social products that win will focus on enabling users
to create content first and generate conversations around it. The
creation of the actual social network will be a final step, as a
Building social platforms?
consequence.
1. Focus on creators.
Internet startups are moving from a Connection-first
2. Make creation easier.
to a Content-first model. Are you? TWEET
3. Design incentives.
4. Invest in curation.
TWEET
27
Chapter 7
The new rules of the Network Effect

KEY QUESTIONS
If there is one altar at which Silicon Valley worships, it is the shrine of the holy
1. How easy is it to achieve critical mass and

build network effects in the post-Facebook
era?
network effect. Its mystical powers pluck lone startups from obscurity and elevate
2. What are the new rules of competitive

advantage on todays networks?
and PayPal, have each soared to multi-billion-dollar valuations on the supreme
them to fame and fortune. The list of anointed ones includes nearly every
technology success story of the past 15 years. Apple, Facebook, Microsoft, eBay,
power of the network effect.
But today, the power of the network effect is fading, at least in its current
incarnation. Traditionally defined as a system where each new user on the network
increases the value of the service for all others, a network effect often creates a
winner-takes-all dynamic, ordaining one dominant company above the rest.
Moreover, these companies often wield monopoly-like powers over their
industries.
IN THE BEGINNING
Once, all a company needed to do to leverage the network effect was facilitate
communication between a critical number of customers. If enough people used a
particular system to exchange information, a leader would emerge and become
the de facto platform. Companies who could either form a marketplace or facilitate
28
the flow of information between parties became tremendously
However, the cost of providing access to the network has fallen
powerful as central hubs of data transfer.
precipitously. The days of customers buying expensive hardware
In fact, the first network effects platform was Bell Telephone,
to use a network are gone as is the correlating lock-in effect.
which established a government-sanctioned monopoly nearly 100

years ago. Since then, successful network effects businesses
have sung from essentially the same hymnal.
CONVERTS
First, establish a medium of communication by building the
In addition to access costs falling to zero, another key component
required infrastructure or inventing a new technology. For

example, lay down telephone wires from coast to coast. Then,
of what once kept users locked into a network has vanished.

Once, porting contacts onto a new network, like switching instant
provide access to the network to improve the ease of information
messaging services from Yahoo! to AIM, was a non-trivial task.
transfer say, by selling fax machines. Finally, race to grow the
Today however, customers use their Facebook, Twitter or Google
user base before competing services do. If you get bigger faster
than your competitors, voil! Youre inside the pearly gates.
profiles to join a new service in seconds. A burgeoning network,

take Instagram or Pinterest, can leverage the single sign-on
enabled by the social graph to reach
critical mass faster than ever before.
RAPTURE
Users not only port their personal

information but bring their
Thats the plan at least. But today, things

are not quite so simple. For one, in the
connections as well. In the age of the
investment in hardware. These upfront
The network effect

isnt enough. You
need additional
switching costs.
costs locked users into the network and
TWEET
old days, consumers paid to access the

network through their upfront
social web, the convenience of the

social graph has largely toppled the
The source of
competitive advantage
on networks is moving
from user connections
to stored value.
TWEET
lock-in that once kept users bound to

one network over another.
once they were in, they were in for good,

thus erecting barriers to entry for would-be competitors.
29
popularity lately. Trust is an important component of this new
TENDING THE FLOCK

Without the upfront investment in physical hardware and users
newfound ability to port personal information and contacts, how
is a company to retain its users? Is the network effects ability to
lock-in users dead? Hardly.
breed of network effects business. As a result, reputation built on

the platform directly contributes to greater value for all users.
Building reputation on a platform requires consistent delivery of
highly rated services and may also involve qualifying for some
minimum criteria set forth by the platform. Hence, once a service
The power to leverage the network effect now resides in stored
provider builds reputation on a platform, it prevents her from
value. Unlike network access costs, stored value is investment
migrating to a competing platform.
that comes in small increments with repeated use, increasing the

importance of the service the more a user engages with it.
Usage Data: Users store value in the form of data, either by

actively collecting information, such as in the case of Dropbox or
Reddit, or passively as their usage improves the service by
offering more relevant information, such as is the case with
STORED VALUE
Quora, which delivers a personalized news feed based on usage.
Stored value comes in four forms, and companies leverage these

tiny investments to build lock-in to their service and retain users.
The more a user consumes information through the platform, the

more intelligent the algorithm becomes in recommending
pertinent content to the user. In both cases, the data set built by
Creative content (e.g. Pinterest, Facebook, Instagram): Users
or for the user delivers greater value with increased usage,
invest increating a portfolio of creative content, which forms the
something that wont directly be available on a competing
basis of their interactions on the platform. The quality and
platform.
quantity of the content results in more interactions with other

users, which, in turn, provides greater value to the content
creator.
Influence(e.g. Twitter, YouTube channel subscriptions):Networks

that utilize a one-sided follow model create an influence dynamic.
Unlike importing contacts or friending people, collecting
Reputation (e.g. TaskRabbit, AirBnB, StackOverflow): Although
followers is largely outside the direct control of the user. With the
marketplaces for physical goods, such as eBay, have been
exception of sketchy tactics banned by the Twitter terms of
around for some time, services marketplaces have grown in
service, accruing more Twitter followers can only be done by
30
tweeting content others find interesting enough to share. As the

users follower count grows, so does the stored value in the
network and the incentive to stay actively engaged.
Four types of stored value on social networks:
creative content, reputation, usage data and influence.
TWEET
KEYS TO THE KINGDOM

Creating a network effect is not what it used to be. Today, stored
value created by the users reinforces the power of the network
effect to retain users and grow market share. This dynamic makes
creating user habits all the more important as investments of
stored value only occur through successive passes through the
user experience.
With the portability of the social graph and the fall of upfront
costs to join a network, companies must leverage new ways of
acquiring and retaining users. Business models that leverage a
network effect plus stored value, hold the keys to the kingdom.
Note: This article was co-authored with Nir Eyal, who blogs at
www.nirandfar.com
31
Section 3
Reverse
Network
Effects
Credits: NASA Goddard Photo and Video on Flickr Creative Commons
Chapter 8
The biggest threat facing todays social networks

KEY QUESTIONS
Network effects are the holy grail for Internet startups looking for venture-scale
1. How do social networks become less

useful with scale?
returns. On a platform with network effects, the value to a user increases as more
2. What are the key sources of value on social

networks? How do they break down with
scale?
users use it. Facebook, Twitter, LinkedIn, YouTube, Skype and many others benefit
from this dynamic.
But as online networks grow to a size never seen before, many question their
sustainability and believe that they are becoming too large to be useful.
To explore the future of online networks, its important to note how network effects
correlate with value and the factors that make these network effects work in
reverse.
NETWORK EFFECTS AND VALUE

There is a strong correlation between scale and value in businesses with network
effects.Greater scale leads to greater value for users, which in turn attracts other
users and further increases scale. This rich-becomes-richer dynamic allows
networks to scale rapidly once network effects set in.
There are three sources of value created on networks: Connection, Content and
Clout.
33
Connection: Networks allow users to discover and/or connect
On most networks, value for users is created through more than
with other users. As more users join the network, there is greater
one of these three sources. Facebook, for example, started with a
value for every individual user. Skype and WhatsApp become
value proposition centered
more useful as a users connections increase. Match.com and
a ro u n d c o n n e c t i o n , b u t t h e
LinkedIn become more useful as more users come on board.
introduction of the news feed has
Content:Users discover and consume content created by other

users on the network.As more users come on board, the corpus
of content scales, leading to greater value for the user base.
Content platforms like YouTube, Flickr and Quora, as well as
marketplaces like AirBnB and Etsy becomes more useful as the
made content a central driver of

value. In recent times, the addition
of the subscribers feature has
Three sources of value in

online network products:
Connection, Content and
Clout. TWEET
added clout for some Facebook

users as well.
number of creators and the volume of content increase.

Clout: Some networks have power users, who enjoy influence
and clout on the network. Follower counts (Twitter), leaderboards
(Foursquare) and reputation platforms (Yahoo Answers) are used
to separate power users from the rest. On networks like Twitter,
WHY NETWORK EFFECTS WORK IN REVERSE

One would expect that the bigger the network, the more value
users derive from it.
the larger the network, the larger is the following that a power
However, as networks scale, the value for users may drop for
user can develop.
several reasons:
Across these three drivers, a network with greater scale provides
Connection: New users joining the online community may lower
greater value in the form of:
the quality of interactions and increase noise/spam through

unsolicited connection requests.
1. More prospectiveconnectionsfor the user
Content: The network may fail to manage the abundance of
2. A larger corpus of potentially relevantcontent
content created on it and may fail to scale the curation of content
3. Access to a larger base of potential followers (greaterclout), for
created and the personalization of the content served to users.
power users
34
Clout: The network may get inadvertently biased towards early
have tried to solve this problem bycurating the men that enter the
users and promote them over users who join later.
system, in a manner similar to restricted access at a singles bar.
Just as network effects create a rich-becomes-richer cycle
LinkedIn creates friction by preventing users from communicating
leading to rapid growth of the network,
with distant connections. This ensures that users do not receive
reverse network effects can work in the
unsolicited messages. This also allows LinkedIn to offer
opposite direction, leading to users

quitting the network in droves.
Friendster, MySpace and Orkut bear
Reverse Network
Effects: Networks get
noisy as they scale.
testimony to the destructive power that
TWEET
frictionless access (OpenMail) as a premium value proposition.

ChatRoulette, in contrast, anonymously connects users over a
video chat without needing to login. This lack of friction led to
ChatRoulettes stellar growth but also led to reverse network
reverse network effects wield.
effects as anonymous naked hairy men took to the network, thus

increasing noise and driving genuine users away from it.
Dating sites, as well as social networks like Orkut, have imploded
REVERSE NETWORK EFFECTS: CONNECTION

Connection-first networks (dating websites like Match.com and
networking communities like LinkedIn) build value by connecting
in a similar manner after reaching scale, owing to noise created

by fake profiles.
In general, networks of connection scale well when they create
people.
These networks may suffer from reverse network effects as they
appropriate barriers to access on the network.
scale if new users joining the network lower the value for existing
users. To prevent this, an appropriate level of friction needs to be
created, either at the point of access or when users try to connect
with other users.
REVERSE NETWORK EFFECTS: CONTENT

On content networks like YouTube or Flickr, a larger network is
On dating sites, women often complain of online stalking, as the

community grows, and abandon the site. Sites like CupidCurated
likely to have more content creators, leading to more content for

the user to consume. Networks like Facebook and Twitter, in
35
addition to being networks of connections, are also networks of
many worry that less sophisticated users, entering the system,
content.
may increase noise leading to a rapid depletion of value for
Most networks of content havelow friction in content creationto

encourage activity from users and reach critical mass faster. To
ensure that the content is relevant and valuable, the network
needs strong content curation and personalization of the user
experience.
existing users. It remains to be seen whether its curation can

scale as the network opens up to a broader user base.
Personalization
Content networks need a personalized consumption experience
for users, that serves them relevant content.
Reverse network effects set in if the content curation systems

dont scale well. As more producers create more content, the
An example is the news feed on Facebook or Quora or the

recommendation system on YouTube.
relevance of the content served to consumers on the

network shouldnt decrease.
Strength of curation and
Inability to maintain relevance of the consumption
Curation
personalization algorithms
determine a networks
ability to scale relevance.
experience, with scale, may create reverse network
Content networks create a curation mechanism
TWEET
through a combination of moderation, algorithms

and community-driven tools (voting, rating, reporting
etc. ).Voting on YouTube, flagging a post on Facebook and rating
on Yelp are examples of curation tools.
effects.
The user experience on Facebook is centered
around the News Feed.
However, Facebooks
frictionless sharing and cluttered news feed may lead to lower

relevance for users as the network scales. Several factors
contribute to this:
Curation mechanisms often break down as the volume of content

increases. When curation algorithms and moderation processes
do not scale, noise on the system increases. This leads to reverse
network effects and users abandoning the system.
1) When a user adds friends indiscriminately, her news feed

becomes cluttered with irrelevant posts.
2) Noise is further increased whenmarketers and app developers
Quora has a very strong curation mechanism in place and
get access to the news feed.
benefits from a tech-savvy early user base. As Quora scales,

36
3) When networks like Facebook and Twitter implement
Users who join later find it more difficult to develop a following
monetization models like Promoted Posts/Tweets, the signal to
and may stop using the network. These networks need a
noise ratio suffers further as promoted content is less relevant
mechanism to ensure new users have equal access and exposure
than organic content.
to the community to develop network clout.500px, for example,
Networks of content are constantly faced

with the risk of reverse network effects
as they scale. The poor signal-to-noise
ratio in the news feed, not the size of the
overall network, is Facebooks weakest
differentiates Top creations from Upcoming creations to expose

Monetization that
alienates users can
potentially kill
network effects.
TWEET
link as the network scales.
recent activity (often from undiscovered users) to the community.

Reverse network effects often cause a large and thriving network
to implode. As a network scales, its ability to maintain a high
signal-to-noise ratio is the leading indicator of its usefulness.
Networks can, in fact, scale very well and prevent reverse
network effects from setting in if they have:
1. Appropriate level of friction in network access and usage, that
REVERSE NETWORK EFFECTS: CLOUT
prevents abuse
Networks of clout have a system of differentiating power users

from the rest. Twitter, Quora and Quibb have baked in clout
through the one-sided follower model. Active users vie for greater
2. A strong curation system that scales well with the size of the
network
glory while using the network.
3. A highly relevant and personalized user experience
Networks of clout tend to be biased against users joining in late.
4. A democratic model for users to build influence
Clout is a consequence of content that the user creates and early

users get more time to create content and develop a following.
This is, ironically, aggravated by focusing on a high signal-to-
In a world where networks are reaching unprecedented scale, a

keen focus on maintaining a high signal-to-noise ratio will enable
them to remain valuable as they grow.
noise ratio. Twitter recommends super users to prospective

followers as these users are likely to create better content. Hence,
the platform itself helps separate the power users from the rest.
To prevent Reverse Network Effects: curate access and production,

encourage democracy and ensure relevance of personalization. TWEET
37
Chapter 9
How online networks lose value with scale

KEY QUESTIONS
Reverse Network Effects may sometimes set in with scale i.e. online networks may
1. Under what conditions do online platforms

lose value with scale?
become less useful as they scale. I do not imply that all online platforms lose value
as they grow. However, in the absence of robust curation, online platforms may
lose value as they grow.
2. Why is bog not always beautiful for online

platforms?
Under what conditions do online platforms lose value as they scale?

Since the participants on an online platform create value, an online platform loses
value with scale when the participants it allows in OR the information/value that
they create are not curated appropriately. Poor curation leads to greater noise
which makes the platform less useful.
Lets look at a few factors that increase noise and drive down the value of online
platforms as they scale.
38
#1 LESS SOPHISTICATED PARTICIPANTS ENTERING THE
with The Naked Hairy Men Problem. As the network grew, un-
SYSTEM DILUTE VALUE
policed, an increasing number of naked hairy men joined in
Every online platform is as valuable as the participants it

connects. Quora, a popular Q&A site found rapid adoption in
Silicon Valley as it connected highly successful early tech
adopters, who were experts in their field. Quoras strong curation
leading to an exodus of other users. As legitimate users fled, the

relative noise on the platform increased further leading to a
feedback loop that saw the site lose traction at nearly the
skyrocketing pace that it had gained it.
mechanism also ensures that the best answers get showcased
Solution: There are two solutions: Either choose who gets access
invariably.
to the platform (Curation of access) or scale the ability of the
The Quora community has created a

deep repository of knowledge, thanks to
these experts. However, as Quora scales,
many worry that less sophisticated users,
entering the system, may increase noise
leading to a rapid depletion of value for
system to curate content as the system grows larger (Curation of

Less sophisticated
participants on an
online community
dilute value. Remedy:
Curate access.
TWEET
existing users.
contributions). The former is easier to implement. Quibb, in fact,

has built a very high signal community through manual curation.
Dating sites like CupidCurated do this too, by curating the men
who get access to the site. Platforms like Quora, which do not
curate access need extremely sophisticated curation of
contributions to scale well and not set the reverse feedback loop
in motion.
This starts a reverse feedback loop because current experts start

abandoning the system owing to the poor quality, which leads to
further loss of quality, which in turn leads to other experts leaving.
If a loop like that is set into motion, the quality of interactions and
of the content created can witness an exponential drop.
#2 INCREASE IN ABUSE WITH SCALE

Wikipedia demonstrates that any online platform is open to
abuse. Incorrect Wikipedia articles demonstrate the vulnerability
Weve seen this reverse feedback loop work out in the case of
of a user-created platform as much as the voume of the correct
ChatRoulette, a network of video chatters that connects you with
ones demonstrate the strength.
anyone across the world at random. Since ChatRoulette had

absolutely no checks and balances to screen users, it ended up
The problem of incorrect articles (noise) increases as networks

scale as policing these platforms becomes more complicated
39
with scale. In a world of community-created knowledge, who gets
As a system scales, this over-personalization can lead to a
access to the community ultimately impacts the knowledge that
constant firehose of information that is catered to what we
is created.
already believe in, not what we need. This can prevent those
seeking a solution, from being served a solution that is radically
Solution: Few systems have succeeded

in scaling quality. Wikipedia is a rare
example. Monitoring and user privileges
were scaled slowly at Wikipedia. This
ensures that moderators have a track
Reverse Network
Effects: Monitoring
activity on networks
increasingly difficult
with scale. TWEET
record of desirable behavior. However,
different (and effective) and may over-serve obvious solutions.

Solution: The solution is technological and requires constant
tweaking of the algorithms that match information to participants,
to prevent the formation of an echo chamber.
few have replicated Wikipedias success

which shows how difficult it is to scale such systems.
#4 A CLOSED COMMUNITY CAN DEVELOP A HIVE MIND
Another problem that stems from
#3 - ONLINE COMMUNITIES TEND TO BECOME ECHO

CHAMBERS OVER TIME
reinforcement is the Hive mind. If

certain forms of behavior are
encouraged on a platform during the
Communities risk
becoming echo
chambers or developing
hive minds. Solution lies
When exposed to a lot of information, we are likely to read what
early days and certain others are
in technology but also in
we agree with. Online systems use filters to personalize the
discouraged, it runs the risk of leading
editorial. TWEET
information served to each participant. These filters are often
to a Hive mind as the network scales
created based on the participants past behavior. Over time, this
where certain behaviors get reinforced
personalization can lead to inadvertent reinforcement of what we
and established as the desirable behaviors. Reddit is an online
already believe in.
network, whose community is often criticized for having a Hive
YouTube, for example, serves us videos based on what weve
mind.
viewed in the past. Facebooks news feed works on similar
This can lead to an online community getting too inward and
parameters.
insular (and, hence, of lower overall value) and failing to

incorporate the value that diverse participants bring.
40
Solution: Curation of online behavior is very important during the
greater authority and curation power on power users. Hence,
early days of the community. Under-curation can lead to noise
curation at the point of access may be required for some
and over-curation can lead to selection bias, leading to a hive
systems.
mind. Curation needs to be appropriately balanced.
#5 LOWER QUALITY THROUGH INADVERTENT

ACCEPTANCE
On the internet, value is often conferred by community. E.g. The
best answer to a question on Quora is decided by the community
through upvotes and downvotes. Value is dynamic and constantly
evolving, best exemplified by a Wikipedia article which is in
constant flux.
#6 CHALLENGE OF CONFERRING AUTHORITY

Consider an online platform that enables sharing of knowledge
globally and helps those looking for an answer to connect with
those who have the answer. The best contributions dont always
come from existing experts, neither do the existing experts
understand the context of needs in remote areas. Hence, microexperts are needed to deal with the long tail of problems.
For all its advantages, this dynamic and community-shaped

creation of value is also open to inadvertent acceptance. If
enough number of participants accept something as true, it
becomes the new truth, even if it isnt. The answer that bubbles
to the top and the latest version of an article are all decided by
the community, and are a function of the quality of the
community.
The creation of new niche experts,

requires a curation model that effectively
separates the best from the rest. Creation
of experts, traditionally, has been done on
the basis of achievements or affiliations
with certain trusted bodies. Creating that
Building reputation
systems is key to
scaling online
communities and
platforms. TWEET
trust on an online platform is extremely
Solution: This problem is avoided by curating the community

through policing who joins the network. Some dating sites curate
the men joining the network to mitigate the common problem of
women being stalked. Also, platforms like Wikipedia confer
important if one is to create new experts.

This curation of micro-experts is non-trivial. Not only are they
more in number than any team of traditional experts, they need to
be curated by the community for the model to be scalable.
41
Quora, for example, creates new experts, largely relying on
However, as a network scales, trust and authority systems
community voting.
become more difficult to scale as well. It becomes much more
As the network scales, it often finds it increasingly difficult to
difficult to identify the corner cases.
identify new experts as community sentiment tends to be biased
The systems that survive are the ones that scale. For every Reddit
towards early participants. Early users on Quora and Twitter tend
and Quora out there, there are a thousand attempts that gained
to have orders of magnitude higher followers than those who
traction but failed to scale because they failed at curation.
joined in late, not only because they had more time, but also
because:
Follower count follows a rich-becomes- richer dynamic and those
with higher counts attract even more followers
#8 THE LONG TAIL ABUSE

For all its efforts at scaling, Wikipedia successfully controls the
The communitys power to curate depends on two aspects:

1. Quality of community members
quality of only the top 20% articles that lead to 80% views. As
any platform scales, curation methods tend to work very
effectively for the Head but not for the long tail of user
contributions. This runs the risk of long tail abuse. While it can be
2. Strength of curation tools
argued that the majority doesnt get affected by such abuse, the
minority that does get affected increases as the network scales
#7 SCALING TRUST AND AUTHORITY MANAGEMENT
and as the curation problem itself gets exacerbated.
SYSTEMS MORE CHALLENGING WITH SCALE

Every platform has its own way of building authority and/or trust.
In summary, appropriate quality controls are required to control
Ebay and AirBnB do it through ratings, Wikipedia through edit
production and appropriate filters are required to control
wars, Quora through votes. A network needs a fool-proof model
consumption. And both these components need to scale as the
for building participant authority to ensure that the right opinions
network scales.
are served for consumption.

42
Section 4
Building User
Ecosystems
Credits: Petr Jan Juraka Creative Commons
Chapter 10
Users vs. Customers

KEY QUESTIONS
If youve been around the internet startup world for long enough, youve probably
1. How is the role of the consumer changing?
engaged in the user-customer debate at least once. Whos the user? Whos the
2. What is the difference between users,

customers and consumers?
3. How do you build your product for enabling
interactions between producers and
consumers?
customer? Who should we be focusing on?

In this essay, Id like to talk about the User-Customer debate since that lies at the
very heart of how we think about the design of internet businesses.
If we put on the Platform Thinking lens, we essentially do away with the usercustomer debate and replace it with a more fundamental view of how your
business functions. Heres how:
Most internet businesses can be viewed as a platform on which value is created
and consumed. E.g. YouTube.com is a platform on which video uploaders create
value and viewers consume value. With that in mind, lets move on
WHOS THE USER?

Quite simply, the user is anyone who uses the product. Now that doesnt help us
too much, so lets break that down a little.
A user may perform one of two roles:
44
Producer:Someone who creates supply or responds to demand.
consumers of interactions and status updates, thought leaders
If you think of YouTube, whenever a user adds a video, hes acting
are curated producers and recruiters are producers of job listings
in a Producer role, creating supply. A person answering a
and consumers of relevant user profiles.
question on Quora is a producer, responding to demand.

Consumer:Someone who creates demand or consumes supply.
A video viewer is a consumer on Youtube. A question asker on
Quora (as well as others viewing the question and answers) is
playing a consumer role.
This brings us to the third party in the debate
WHOS THE CUSTOMER?

As in the offline world, the customer is someone who pays. The
Note that these are roles, not user segments. If you think of eBay,
customer may not be part of the central demand-supply equation.
the sellers are the producers and the buyers are the consumers
The sole defining criterion for a customer is that the customer
so we have two fairly distinct segments.
pays money to the business.
But on Twitter, every time you tweet, you
Dont just call them
are in a producer role, and if you start
users. Isolate
producer and
consumer roles and
build for each.
reading your tweet stream the next

second, youve moved to consumer
mode.
TWEET
Splitting the term user into these two

roles helps us understand the exact motivations and actions for
the user while using the product.Understanding the motivations
and actions helps us design tools that enable the users to
perform these actions instead of loading the product with
features.
The customer may be:

1) The producer: e.g. Vimeo. Video up loaders can pay for
premium features.
2) The consumer: e.g. New York Times. Readers pay to access
news
3) Someone else: e.g. Facebook. The advertiser is the customer
Again, multiple parties may be customers. On LinkedIn, we have
users (who play both consumer and producer roles) as customers
as well as advertisers and recruiters.
Most products have more than one producer or consumer role.

E.g. On LinkedIn, professionals using LinkedIn are producers and
To summarize:
45
1. Every internet business has three distinct types of roles:
Customer: Technically, both hosts and travelers are customers
Producer, Consumer and Customer
since they forgo a cut of the transaction
2. There may be multiple roles of each type on every business
3. Producers create supply or respond to demand
Yelp
4. Consumers create demand or consume supply
Producer: Yelp (creates listings), Review Writers
5. Customers pay
Consumer: Consumers in the city, Review Readers
Customer: Merchants that advertise
A few quick examples:
The New York Times
Zappos.com
Producer: The New York Times
Producer: Zappos.com itself is the producer; sourcing shoes and
Consumer: Readers
creating supply.
Customer: Readers, Advertisers
Consumer: Users browsing and buying on the storefront.

Customer: The segment of consumers actually buying shoes.
AirBnB
Producer: Hosts, Review Writers
Consumer: Travelers, Review Readers
46
Chapter 11
Building User Contribution Systems

KEY QUESTIONS
A platform without creators is a ghost town and there is little incentive for
1. How do you create a crowdsourcing

strategy?
consumers to use it. Replicating the technology of YouTube is a considerably
2. What are the principles for building and

nurturing an online community?
The creators are active partners in creating (and delivering) the value proposition of
3. How do you create the incentives for users

to contribute?
smaller challenge compared to replicating its community of video creators.
the platform. Hence, any startup building a creativity platform should:

1. Understand the motivations of the creators
2. Create enabling technology that caters to those motivations
3. Have a clear strategy to maximize the number of creators on the platforms.
The following 6 questions can help a platform think through these issues and
enable it to successfully create a platform that finds traction.
ARE YOU PROVIDING TOOLS OR CHANNELS? OR BOTH?

Creativity platforms may provide content creators the tools to enable them to be
creative, or they could supply the channels to market their creations to an
audience. Or both.
47
Tools: Platforms may provide creative and/or infrastructural
HOW ARE YOU MAKING THE CREATIVE PROCESS EASIER
tools. Vimeo gives anyone the ability to host an HD video online
THAN EXISTING OPTIONS?
and deliver a video quality superior to all

competitors. Instagram enables users to create beautiful photos
without being a PhotoShop expert.
There is no dearth of choice on the internet. Competing platforms

are a click away. In such a scenario, platforms that allow easy
creation and allow users with lower skills to create high quality
Channels:In some cases, creativity platforms may provide pipes
creations often achieve higher traction. The number of people
to a specific desired audience. Dribbble allows users to upload
who tweet is orders of magnitude higher than the number of
their creations and provides them access to the right professional
people who blog.
community.
One of the contributing factors is the fact that Twitter provides
Tools+Channels:One way to build a lasting platform is to supply
pipes in addition to tools. However, the more important factor is
both. That is what enabled Instagram, a late follower, to
the lower skill and investment required to tweet, as compared to
disruptHipstamatic, a far superior product.
writing a blog post. In a similar way, Instagram lowered the skills
Hipstamatic allowed users to apply filters
require to create beautiful pictures, a factor that led to its
such photos. Facebook Photos, in a
Provide producers
with production tools
and market access as
incentive. Think
similar way, disrupted Flickr to become
Instagram. TWEET
to pictures (initially) but Instagram

created a thriving community around
the largest storehouse of photos on the
widespread adoption.
IS THERE A ROBUST CURATION MODEL TO SEPARATE THE

BEST FROM THE REST?
internet. Facebook provided access to an

audience and their news feed while Flickr only provided hosting.
Curation is critical when youre providing a democratic platform.

The platform should have a robust model to separate the
At the end of the day, if a tree falls in a forest and no one is
bathroom singers from the Grammy winners. There are typically
around to hear it, does it make a sound?
three broad models of curation and a scalable platform usually
has a combination of all three:
48
1. Algorithmic Curation: The internet is fundamentally about
IS THERE A CLEAR, DEMOCRATIC, EQUAL-ACCESS PATH
automation. The key ingredient of a scalable model of curation is
TO THE TOP?
algorithmic detection of good versus bad, based on certain rules.

There is, however, a potential for false positives with algorithmic
curation which might lead to good creations being rejected.
Algorithmic curation should, hence, be scaled carefully and
should learn and optimize with social and editorial inputs.
Before launching a platform, you should understand the

motivations that drive creators to contribute. A common theme
across all platforms is visibility, self-expression and/or
recognition. Since platforms have a model of curation to separate
the signal from the noise and since the creations that make it to
2. Social Curation: You may call it the Digg model but its the
the top of the heap get consumed much more than those that
model of choice on all platforms today. The community is
dont, creators should be given a clear equal-access path to the
provided with tools (voting, rating, flagging etc.) to provide an
top of the heap.
input regarding the quality of the creation and the aggregation of

these inputs is used to sort and rank creations and determine
their relevance.
Just as every website publisher invests in SEO to score high on

Googles curation, creators need an understanding of what it
takes to rank high on a platform. If the mechanism of ranking high
3. Editorial Curation: While tech entrepreneurs would want
and gaining visibility is unclear, creators may not be interested in
everything to be automated, manual curation has a place on
participating on the platform. We feature the most voted
every platform, especially in the early days. Editorial curation
creations on the front page is a clear proposition as it specifies
helps to understand patterns that can
how the best are separated from the rest.
then be automated and scaled. In some

cases, editorial curation can even be
IS THERE AN INCENTIVE BEYOND SELF-EXPRESSION?
there arent enough creators on the
Three models for

curation: Social,
Algorithmic and
platform. This is important because
Editorial. TWEET
Art for arts sake isnt always good enough. While self-expression
used to kick start the platform when
creators power the value proposition for
and the ability to gain an online following and build a personal
such platforms. The platform has little or
brand are great incentives for creators, having additional
no value without the creations.

49
incentives can provide a competitive advantage for the platform
example, did this through a series of
vs. competition.
competitions for creators.
Lets look at designers and photographers. Different platforms
But once a critical mass of creators is on
have provided different incentives for these people:
board, a second cycle needs to be
Threadless:Provides community recognition and curation + The

ability to possibly monetize creations if voted to the top.
500px:Provides community recognition and curation + The ability
to host an online portfolio.
started. Creators attract consumers and

it is much more efficient for the platform
Building an online
community? Have a
clear path to convert
consumers to
creators. TWEET
to convert these consumers into new

creators. A platform, hence, needs to have
a clear plan for converting consumers to creators to have a
sustainable value proposition.
Dribbble:Provides community recognition and curation + Access

to highly relevant job offers.
DO YOU HAVE A PLAN TO CONVERT CONSUMERS TO

CREATORS?
User generated content has come a long way on the internet. At
one point, the 90-9-1 rule was often quoted to explain the low
levels of contribution in online communities but, of late, platforms
have greater percentages of contributors, especially owing to the
rise of the smartphones which allow a greater number of users to
create anytime and anywhere.
However, the success of a platform still hinges on its ability to
maximize the percentage of creators. Hence, in its initial days, a
platform needs to focus on attracting creators. YouTube, for
50
Chapter 12
Organic incentives for User-Producers

KEY QUESTIONS
Why would a user talk about your product? Often, its because your product is
1. How do you create organic incentives for

participation and virality?
really cool and helped them do something that they would never have imagined
2. How do you design your product for

organic virality?
possible. But users dont want to be talking about your product all the time. A
great way to ensure users keep spreading the word around without even explicitly
having to talk about your product is by having your platform enable them to
market THEMSELVES.
It goes without saying that people would much rather talk about themselves than
about, well, an online product. Just ensure that theyre using your service to talk
about themselves. Self-expression is an innate human desire and the internet
provides a global audience to the expressive. Any service that allows users to A)
express their creativity and B) spread the news about it in the easiest possible
manner is likely to find quick adoption among users.
HELP USERS CREATE AND MARKET SOMETHING REALLY COOL

This psychology may seem obvious in the case of, say,Youtube, which really got
big when users started creating and putting up their video and getting the word
around.DrawSomethingis another service that grew virally by making it easy for
its users to get creative. Instagram allowed users to instantly produce cool
51
pictures using a (thus far) crappy camera

and distribute them. In all these cases,
virality was baked into the value proposition
of the service. There was no need to
artificial incentives to be layered on top of
this to promote virality.
WHEN USERS MARKET THEMSELVES, YOUR PRODUCT

Best viral trick
ever: Enable users
to express and
promote
themselves.
TWEET
GETS FREE MARKETING

According to Ben Rattray, founder of Change.org, Change.Orgs
adoption took off, largely thank to a woman sitting in an internet
cafe in Cape Town, South Africa who wanted the attention of the
world on something she was passionate about. She started a
petition against corrective rape seeking government action. The
campaign amassed 170K signatures from users in 160 countries,
HELP USERS CREATE WHILE CURATING
widespread media coverage, and an offline protest in
A service may not allow a user to be creative in new ways but
Johannesburg which eventually led to the National Task Force
may still enable her to project a certain persona. Twitters
investigating the issue. Not only did it garner much needed
continuedusage, by a lot of follower-intensive tweeters, is largely
support against an unwholesome practice, a single campaign
driven by the tweeters desire to act as a multicaster for news that
from a non-celebrity catapulted the platform to global adoption.
they would want to associate themselves with. Many curation-ascreation tools likePaper.liandScoop.itgrow on a similar model.
To some extent, even Grouponsvirality was partly attributable to
this model (apart from the incentives and deal tipping of course)
as some users like to be aware of the best deal and like to pass it
on to their friends.
THE FLIP SIDE A SOCIAL NETWORKING STORY

So heres the problem with acting as a virtual showcase for users.
To allow users to create and market something, the creation
process should be incredibly simple. The simpler the creation and
As sharing increases, creation in the form of curation and re-
marketing, the better potential for user-driven virality. BUT on the
sharing is vastly shifting the balance and transforming consumers
flip side, the easier it is for users to contribute, the more noise
into contributors on a UGC network.
there is in the system. And noise, can eventually undo the

platform.
52
One of the reasons MySpace found rapid adoption was a

technical glitch that allowed users to insert HTML code into their
profile page and change its look and feel. Users loved it because
of the ability to express themselves. Teeny Boppers who knew
nothing about coding started exchanging HTML code snippets to
make their profile look cool. MySpace, thrilled by the fact that
users need for self-expression, was being met, decided not to fix
the glitch. Over time, there was too much noise as every profile
page looked different, ad-strewn and unaesthetic. Navigation was
a nightmare. Moreover, since most users didnt understand
HTML, there were a lot of errors and broken pages across the
site.This eventually led to falling engagement on MySpace.
photoshop instead of HTML, which,

being a lot easier, led to fewer broken
pages. Customization of profile pages
gradually became a trend. While it
So how does one design for self expression? A few pointers to

keep in mind.
1. Enable creative actions, target one-click: What are the
modes of showcase-able self-expression on your platform.
Voting is self-expression but isnt showcase-able. For every
creative action, minimize the number of steps. Have at least
one action which is only one-click creation. Typically, sharing is
one-click. Promote such actions.
2. Does it alter the underlying look and feel and consistency
of the platform? You dont want another MySpace. For that
Bebo noted what was going on and

allowed users to customize using
DESIGNING FOR SELF-EXPRESSION
Empower users
within limits. Too
much flexibility
leads to MySpace-
matter, you dont even want all the complications of Android

(developers working on different versions, handsets supporting
different versions). Specify what can be modified and what
cant be touched.
style debacle.
TWEET
3. Provide easy multi-channel distribution: Provide easy
helped in self expression, it altered the
distribution not just on your own platform but also on others.
essential experience of the underlying
Make it one-click.
platform itself and made navigation quite difficult. Eventually,

unsurprisingly, the social network that emerged victorious was
one that allowed few customizations to the basic look and feel
while providing new tools for self-expression.
4. Design one-click (swipe?) sharing for the mobile: Sharing

accounts for a lot of creation on the mobile.
5. Convert consumers to creators: Quora and StackOverflow
use a very simple product hack to convert consumers into
creators at the point of consumption.
53
If you want your users to spread the word, ask yourself Whats in
it for them? Monetary incentives are not scalable. But playing on
the innate human desire to show-off, thats just where your
service may get really, really viral.
Self-expression is at the very core of why you and I spend so
much time creating stuff (tweets, status updates, photos, blog
posts etc.) on the internet. Why would your users be any
different?
54
Chapter 13
Removing barriers to usage

KEY QUESTIONS
Product creators often tend to think of products in terms of features. Im not
1. How do you build intuitive products?
talking about the traditional myth of more features is better that got debunked a
2. How do you create conditions for high user

adoption and usage?
long time back. Product creators still think of features because they try to deliver a
certain functionality. Instead, a product should actually be visualized as an answer
to a pain point. Users dont use products because they need certain features.
Users use products because they have been trying to do something but were
facing a barrier while doing it so far and the product helps lower the barrier.
A pain point can often be stated in the following terms:

I am a <USER DESCRIPTION>
Trying to <DO XYZ>
Forget features,
think value
proposition.
TWEET
But Im unable to do so because of <A BARRIER>
Products that lower (or completely remove) the barrier to getting something done
tend to create entirely new market segments that had never existed earlier.
55
low investment of time and effort. Since everyone has the 140
THE SKILL BARRIER

Lack of skills is one of the biggest barriers to getting something
done. We hire the carpenter, plumber etc. to get stuff sorted
character limit and given how democratic the real time feed is,
there is no humungous effort required to stand out anymore.
owing to the skill barrier. Products that help unskilled users do
Another common theme that disrupts the time/effort barrier is
something they couldnt have done before break the skill barrier
aggregation. Platforms that aggregate multiple providers often
and open up a new segment of users.
provide a compelling value proposition as a one-stop entry point.
WYSIWYG website creators and editors enable creation of

landing pages and websites without the need to know HTML.
WYSIWYG editors help non-coders launch landing pages with
little effort and create a new market in the process.
In the early days of the web, Yahoo provided value as the home
page of the web. As the web grew and portal-based navigation
grew clumsier, Google emerged as the one-stop solution to
accessing anything on the web. Meta search engines (e.g.
Adioso) act as the one-stop entry point and allow a user to search
Instagram lowers the skill barrier required to create arty pictures
across multiple providers, thus drastically reducing the time to get
that earlier required photoshop prowess.
her job done.
In all such cases, the lower barriers lead to greater adoption than
would have come through direct competition. A me-too
Photoshop competitor, even if it was free, would never have
gained the adoption that Instagram did.
THE MONEY BARRIER

Online services are increasingly trying Freemium offering a basic
level for free to the more amateur producers with limited needs.
These tools were only available for a fee earlier. Having them
available for free creates an entirely new market. Users from the
THE TIME/EFFORT BARRIER
existing market also deflect towards a free alternative. Over time,

People are strapped for time. A value proposition based around
some of them migrate to a paid tier. While lower price has never
time savings or lower effort is an attractive one. Bloggers needed
been a sustainable competitive advantage, completely free has
to invest time and effort to write posts that would stand out.
the potential to disrupt an existing market.
Twitter brings down that barrier and allows publishing with very
56
Unbundling is another way the internet brings down the money
Most media businesses (publishing, performing arts etc.) are
barrier. Music was traditionally sold as albums. Users would have
industries with gatekeepers determining which producers get
to buy an entire album even though they liked only 1-2 songs in it.
market access. Platforms like Amazon Kindle Publishing,
iTunes disrupted this market by allowing per-song billing. In doing
YouTube, CDBaby disrupted these industries to varying degrees
so, it made the market a lot more efficient and consumers who
by allowing producers direct access to a market of consumers
would ordinarily not have purchased an entire album to get a
tho whom they could market themselves.
particular song also ended up buying the song.
This applies equally well to marketplaces. The long tail of sellers

on online marketplaces wouldnt have existed in the real world as
they wouldnt have had access to the niche market that would be
THE RESOURCE BARRIER
interested in their product. eBay created a large segment of
Lets take an example closer home. Entrepreneurship has
sellers which never existed previously by lowering he access
become mainstream like never before. There are several reasons
barrier.
that contribute to this phenomenon but one of the most important
The investment community (angel investors, VCs etc.) is not
is the drastic reduction in the resources required to get a

company up and running. One of the many contributors to this
change is the rise of Amazon Web Services which lowered the
resources and upfront investment required to get your service up
and running. While a startup would have had to get a minimum
level of infrastructure upfront earlier, it can now dip into Amazons
necessarily an equal-access community and the right

connections and introductions can open many doors that would
otherwise not have existed. Kickstarter seeks to democratize
access to investment by allowing anyone to set up a project,
state funding requirements and raise money online.
vast resources on-demand.
These examples repeatedly demonstrate the fact that lowering

barriers to get something done creates new markets for the
THE ACCESS BARRIER
product. Competition on the internet is no longer about fighting
Platforms often disrupt gatekeepers by allowing producers direct

access to potential consumers.
tooth and nail over price or features as was the case with
traditional businesses. In todays age, competition is about
57
offering a value proposition that is offered by no one else and

creating an entirely new market of consumers who had a latent
need but no readily available solution to solve that need.
Companies that do this effectively win.
To achieve hyper-adoption and high usage, bring down friction in

usage. Lower barriers of skill, time, resources, money and access.
TWEET
58
Section 5
Metrics
Credits: Luca Zappa Creative Commons
Chapter 14
A framework for metrics: Pipes vs. Platforms

KEY QUESTIONS
Successful businesses are often not distracted by a hundred different metrics but
1. How are concepts of business efficiency

and scaling changing in a world of
platforms?
laser focused on one metric that is the best predictor of scale. How does a
2. What metrics should one plan for in a world

of platforms?
business identify such a metric?

Most businesses are on a relentless pursuit of scale. Most of business education is
built around creating and understanding patterns in business scale. There is,
however, a shift in the concept of scale in business today and not all companies
seem to embrace it appropriately.
PIPE SCALE: THE TRADITIONAL DEFINITION OF SCALE

Lets think about Pipes. The key inputs for business, traditionally, have been land,
capital stock and labor. The business scales whenever one or more of these
parameters scale. You hire more people, you get more resources and better
machinery and the business scales. However, there is a cost associated with
scaling each of these 3 variables. As a result, the primary focus while scaling is
optimization. Optimization involves creating repeatable processes which can be
cost-effectively repeated over and over again to grow the business. The two key
aspects of scaling are:
A) Repeatability
60
B) Cost-effectiveness
they directly contribute to scale much like MBAs did in traditional

businesses.
A lot of business education is focused on

strategies for optimization of these
Not every internet startup is all about Platform Scale. E.g. an

commerce company like Zappos has Pipe Scale on the supply
the labor variable to create scale. A
Two key aspects of

scaling:
Repeatability and
Cost-effectiveness.
manufacturing business has to optimize
TWEET
room and churning out stories. On the other hand, marketplaces
processes. An IT outsourcing shop, for

example, optimizes processes surrounding
side and Platform Scale on the demand side. The same applies to
any online media company which still has reporters sitting in a
processes involving all three variables (e.g.
and platforms like ebay, Facebook and AirBnB have Platform
procurement, production, distribution).
Scale on both sides.
Google was probably the first business that achieved Platform
PLATFORM SCALE: THE NEW DEFINITION OF SCALE

Lets look at Platforms now. This is where the internet comes in.
The internet, by definition, brings with itself unlimited scale.
Moreover, since networked businesses tend to deal more with
bits than atoms, the inputs to business are no longer the 3
variables above. The new inputs to business are data and talent
Scale on both the demand AND the supply side. The users are on
self-serve and so are the advertisers. This is why it is, even today,
one of the most successful internet businesses ever.
On the contrary,Groupon has Platform Scale on the demand side
but Pipe Scale on the supply side. It maintains an ever growing
sales force to manage the merchant side of the business.
Amazon is one of those rare internet companies that did a
(intellectual capital, both internal and external).

Scale in a networked business is no longer dependent on
processes within the business, its driven by network processes.
fabulous job of mastering both Pipe Scale (on the supply side) as
well as Platform Scale (on the demand side).
By network processes, I mean interactions that users on the

network have with the product. The business scales by scaling
these interactions. Hence, the new counterpart of process
optimization is actually interaction design and this is partly why
SO WHAT METRICS SHOULD YOUR BUSINESS USE?

Heres the one line answer:
designers are so important in networked businesses, because

61
A business should focus on those

metrics which help it create
repetitive processes (Pipe Scale)
3. Utilization efficiency (Inventory turnover)

Focus on metrics which
help create repetitive
or repetitive interactions (Platform
processes or repetitive
interactions. TWEET
Platform Scale: The metrics that determine scale are typically
Scale) that will ultimately build
determinants of engagement and repeat usage. These could be
scale.
one or more of the following:
1. Per interaction engagement (Length of visit etc.)
First, Its important that a business knows which forms of scale it
2. Time between interactions (Time between contributions, time
has on which sides. Second, most metrics fall under three
between visits)
categories:
3. % Interacting (% active users, % of users who produce etc.)
1. Per-unit economics of repeatable process OR interaction
2. Time between repeatable process OR interaction

A business that has Pipe Scale on one side (e.g. supply) and
3. % of inputs successfully being leveraged for repeatable
process OR interaction
Platform Scale on the other side (demand) has to look at both

types of metrics. This is typically the case with an e-commerce
company which looks at improving time to source on the supply
side and time between purchases on the demand side. A social
Pipe Scale: The metrics that determine scale are typically
network like Facebook needs users to interact with each other as
determinants of per-unit efficiency. These could be one or more of
often as possible and hence focuses on %interacting, more
the following:
specifically DAU/MAU.
1. Per-unit efficiency (Cost per input, per-unit production
The governing principle is to understand the processes and
cost,Cost of moving a unit through a channel)

2. Turnaround efficiency (time to source)
interactions which drive scale and focus on the metric that

decides how those processes and interactions can be made
repeatable.
62
Chapter 15
Metrics for Marketplaces

KEY QUESTIONS
Marketplaces are difficult businesses to run. Like all multi-sided platform
1. How do you measure success of an online

marketplace?
businesses, they suffer fromthe classic chicken and egg problem: the technology
2. How do these measures change over the

course of the lifecycle of the marketplace?
has no value unless buyers and sellers are present and you cant get the buyers on
board unless you have sellers and you cant bring in sellers without having buyers.
Hence, building a marketplace is a lot like building two separate companies
simultaneously, each dependent on the other.
There are three factors that determine success for a marketplace business:
LIQUIDITY OR CRITICAL MASS

The lifeline of a marketplace (and any platform business for that matter) is liquidity.
Liquidity is a state where there are a minimum number of producers and
consumers on the marketplace and there is a high expectation of transactions
taking place. This is similar to the critical mass of users that is needed on a social
network for users to find value in the network.Critical massis a state where there
is enough volume of supply and demand, for transactions to start sparking.
The first and most important metric to watch out for is the percentage of listings
that lead to transactions within a certain time period. This serves as a proxy for the
efficiency of the marketplace. Merely increasing the number of buyer and seller
63
sign-ups doesnt serve a purpose unless this metric starts rising.
listing profile visits within the first
The time period would depend on the category. AirBnB listings
page of results is one such metric.
would find transactions sooner than listings on a buy-and-
When listings are served instead, as a
sell real estate marketplace. This could also depend on ticket
feed, the click-through per session
Get critical mass, finetune matching algorithms
sizes within the same category. Fiverr and oDesk are both
can serve as a proxy as well. The best
and create trust
services marketplaces but the turnover on Fiverr is most likely
metric to track matching efficiency
mechanisms. TWEET
higher, owing to the much smaller ticket sizes.
varies with the business model of the
To get to liquidity, the marketplace also needs to solve the
Building marketplaces?
marketplace as well as the category.
chicken and egg problem and get both buyers and sellers on
board. Marketplaces leverage a variety of tactics for
circumventing this problem including building single user
utility,stealing tractionandpiggybacking other platforms.
TRUST: CURATION OF PARTICIPANTS

Building trust is central to marketplaceswhere transactions carry
risk. AirBnB is an example of a player in a high-risk category, that
succeeded because of its ability to curate its participants. AirBnB
MATCHING: CURATION OF PRODUCTS/SERVICES
allows hosts and travelers to review each other and has one of
Users visit a marketplace with a highly transactional intent and

want to find what theyre looking for at the earliest. In this aspect,
transaction businesses are remarkably different from engagement
the highest review rates among marketplaces. It also takes

additional measures to build trust, including having professional
photographers certify a hosts listing.
businesses. A user visiting AirBnB or Yelp has a specific intent in
This was one of the factors that helped AirBnB challenge
mind. Hence, the quality of the search algorithm and the
CraigsList because CraigsList never built a strong curation
intuitiveness of the navigation are critical to delivering value. In
system for participants.
contrast, a user visiting Pinterest often wants to spend some time

and consume content on the platform. Hence, the infinite scroll!
Focus on the trust metric is very important to move from

appealing to an early adopter audience to appealing to a
The efficiency of discovery and matching is critical to a
mainstream audience. While early adopters use new
marketplaces success. Percentage of searches that lead to
marketplaces because of the novelty, opening up to a larger
64
market requires the trust and reputation management systems to

be alive and kicking.
WHATS NOT AS IMPORTANT:

User interface and design are less important with transactional
businesses as compared to engagement businesses.
On a marketplace, the ability to search and transact/interact
should be as intuitive as possible. Beyond that, the look-and-feel
and design are purely hygiene factors. Unlike social networks,
marketplaces are transactional and users typically dont have
long visit lengths engaging with the product. Hence, UI is not as
important a criterion as the other three mentioned above.
In summary, if youre building a marketplace:
1. Focus on liquidity, not just user
growth
2. At critical mass and beyond, closely
track matching efficiency
3. When moving from an early adopter
Three metrics for

marketplaces: Liquidity,
Matching and Trust.
TWEET
to a mainstream audience, ensure that

the trust systems are in place and
functioning well.
65
Section 6
Disruption
Credits: Pierre J. on Flickr Creative Commons
Chapter 16
Patterns in Platform Disruption: AirBnB and YouTube

LOREM IPSUM
Technology startups are disruptive because they are driven by a desire to solve an
1. How do platforms disrupt traditional

industries?
unsolved problem in a unique way and create new value. Most large and
2. How did Airbnb disrupt the travel industry?

3. How did Youtube disrupt TV viewing?
established companies, in contrast, are driven by a desire to defeat competition

and protect their market turf.
Consider the problem of traveller accommodation. A regular hotel chain would go
around studying its competition. It would create a set of features that differentiate
it from competition. Finally, it would try to find ways of drawing customers away
from competition leveraging these features.
AirBnB did none of those things. In fact,AirBnB applied Platform Thinking to solve
the problem of traveller accommodation. It didnt compete on features. Instead, it
created a platform that allowed anyone with a spare room, apartment or island to
start running a B&B with access to a global market of travelers.
PLATFORM COMPETITION
AirBnB serves as an example of how todays tech startups compete with
traditional industry behemoths without appearing to do so, in the first place. When
a platform like AirBnB or YouTube comes in, the established companies tend to
67
dismiss it on the basis of inferior quality. Someone with a
Architecting a strong curation system: To create an environment
mattress in a living room clearly isnt competing with a motel with
of trust between travelers and hosts, AirBnB invested in a strong
room service.
curation mechanism. Other platforms may use curation to confer
This is precisely the reason these startups succeed in operating
authority or a quality rating.
without competition. They solve a problem that larger companies
This isnt specific to AirBnB.
are trying to solve. However, their solution is often not considered
P l a t f o r m s l i k e Yo u T u b e ,
credible by these larger companies.
Wikipedia, KickStarter, oDesk all
Startups are often constrained on finances and resources.Using

a platform approach to disrupt an industry that has traditionally
been dominated by service or product quality allows a startup to
exhibit these characteristics to
Three levers of platform

competition: New sources of
supply, new user behaviors on
demand side, strong curation
varying extent. We discuss this in
system. TWEET
further detail below.
gain traction without attracting the attention of its traditional

competitors.
THE SUPPLY EXPLOSION

AirBnB isnt the only startup using Platform Thinking. Wikipedia
THREE LEVERS OF COMPETITION
created the worlds largest repository of knowledge without
AirBnBs operational success can be traced to a three-pronged

strategy, which forms the basis of competition on most platforms:
relying on experts. YouTube gets orders of magnitude more

eyeballs than any traditional TV channel, largely for a long tail of
videos that would never find their way onto television. oDesk
Creation of new sources of supply: For the first time, anyone with
allows companies to get work done in an open, global
a spare mattress or room could run their own BnB.
marketplace.
Creation of new user behaviors on the demand side: Travelers
There are two aspects that differentiate these platforms from the
would rarely stay at strangers apartments in a new city. AirBnB
industries they seek to disrupt:
brought in a new behavior.
They create new sources of supply that had never existed before:
No one would have imagined an inventory of travel
68
accommodation composed of the houses of people living in the

cities. The idea that a global audience could find amateur home
video (as is often the case on YouTube) appealing would have
been scoffed at. Platform Thinking unlocks new sources of
supply.
The new sources of supply tend to be inferior and less
sophisticated compared to the
existing ones: As the case study
CLOSING THE LOOP CREATION OF NEW USER BEHAVIOR

The first step to disruption involves a supply explosion as we
noted above. The second step involves creation of new user
behavior.
A suggestion to shack up at a strangers apartment in a new city
would have been considered crazy a few years back. AirBnB
created an entirely new user behavior when it aggregated new
Platforms unlock new
inventory. YouTube redefined what we watch, as a result of the

supply explosion. Carpooling.com made car pooling with
quality and targets a price-
sources of supply. Airbnbs

hosts compete with traditional
hotels. YouTube stars
compete with network TV
conscious traveller. The same
channels. TWEET
of AirBnB suggests, the average

listing, initially, doesnt compare
with established hotels in service
strangers acceptable.
CURATION AS A NEW SOURCE OF VALUE
dynamic applies when comparing

YouTube to traditional broadcast.
Changing user behavior is never easy. Getting users to behave in
Over time, the supply on these platforms evolves to compete
new ways is difficult, especially when the associated costs and
directly with mainstream competitors: As the platform finds
risks are high. Staying at a strangers apartments in a new town
greater adoption among consumers, it attracts mainstream
can be risky (and has been in a few cases). Finding interesting
producers as well. As a result, the producer quality improves as
videos amidst a plethora of content on YouTube can be quite
the platform gains consumer traction, something that weve seen
daunting.
both with AirBnB and YouTube as well as with many other

platforms.
Platforms solve this problem through curation, a process by

which they separate the best from the rest. YouTube, Reddit and
Quora have a community voting system that bubbles up the best
content. Wikipedia has collaboration tools that allow super-users
to correct entries and resolve disputes while editing an article.
69
AirBnB has invested heavily in its curation mechanisms because
This is a pattern of disruption that is repeated often across
of the high risks involved. In some
platforms. Any service industry that requires significant
cases, photographers certify
investment to create supply has the potential to be disrupted by a
hosts listings. Moreover, the

platform has a robust review
mechanism that lets each party
A strong curation and trust

mechanism is the key source
of value on a platform.
platform offering lower-level services as long as the platform has
TWEET
Startups dont win because of better technology or features. They
rate the other. In fact, a large
a strong curation model.
win because they use this principle to unlock entirely new
contributor to AirBnBs success
markets and create new user behaviors to compete effectively.
has been the success of the review

mechanism itself.
A strong curation and trust mechanism is the key source of value
provided by the platform owner. It is also the most important
determiner in the use of many such platforms.
CONCLUSION
The most important aspect of platform competition is that
startups do not remain under the hood forever. They eventually do
get around to competing with larger companies. However, they
defer this competition to a point in time where they have the
scale, traction and momentum needed to compete successfully.
Over time, the quality of supply on the platform improves, as
weve noted with AirBnB. The platforms ability to match supply
and demand, and curate the best supply, also improves, as in the
case of YouTube.
70
Chapter 17
How disruptive platforms gain mainstream adoption

KEY QUESTIONS
What got you here wont get you there.Career advice that works equally well in
1. What are the factors that lead to traction of

a new platform among early adopters?
the world of online platforms.
2. What key factor leads to traction of a new

platform with the mainstream audience?
development of network effects. Most platform businesses fail because they never
3. How do disruptive technologies spread?
content, marketplaces without buyers and/or sellers. Platforms are very rewarding
The single factor that separates a successful platform from a failed one is the
develop network effects. Social networks without users, content platforms without
once network effects are built but equally unforgiving without.
Hence, reaching that minimum critical mass, after which users find increasing
value in the platform as it grows, is critical.
A platform business focuses entirely on building this critical mass, not only in its
initial days, but also going forward. The critical mass is an indication of the fact
that the platform has reasonable activity to deliver value to users. A marketplace
where new products are listed often and get bought often, a discussion board
where there is high daily activity and retention.
71
a mechanism for reliably solving a pain point and/or delivering
THE EARLY ADOPTER

To appeal to an early adopter audience, the platform needs to
differentiate itself from every other failed attempt by building this
activity. Subsequently, as more early adopters join, the activity
increases and a positive feedback effect is built.
Early adopters tend to be tinkerers. They want to be on the next
big thing and play around with it. A platform gaining momentum
with activity is a signal for early adopters to join in.
benefit.
PLATFORM RELIABILITY
How does one achieve reliability on
platforms?
A platform becomes consistently useful
However, for a platform to gain broader adoption among a

mainstream audience, activity alone may not be enough.
and reliable when it has a strong model
A platform gains
mainstream adoption
when it demonstrates
robust and reliable
curation. TWEET
for curation.
WHY TRUST RULES MARKETPLACES
APPEALING TO THE MAINSTREAM

Geoffrey Moore, in his seminal work Crossing The Chasm,
explains how appealing to an early adopter crowd is different
from appealing to a mainstream audience. The early adopters
tend to be more comfortable embracing risk while the mainstream
audience tends to be more pragmatic.
A marketplace connecting buyers and sellers needs a reliable

mechanism for managing trust. This is especially true for
marketplaces with high risk. AirBnB allows travelers to stay at the
houses of complete strangers. Early adopters and the
backpacking kind would take to such a platform if it offered
significant variety and price advantages. A more mainstream
Critical mass and activity/liquidity is by far the most important
audience would want to have concerns regarding safety (Is the
factor for platform success. However, activity is a necessary but
host reliable?) and service quality (Are the pictures representative
not a sufficient condition for mainstream adoption.
of the actual apartment?) addressed first.
To gain mainstream adoption, a platform has to be reliable. It
As a result, AirBnB has focused on developing a strong peer-
should move beyond being an intriguing innovation to becoming
based review system, not just for hosts but also for travelers. It
72
also, additionally, curates certain listings by sending certified
alone. Building curation systems from the early days of the
photographers to take genuine pictures of the apartment.
platform help make it more attractive for a mainstream audience
The importance of trust varies with the category (high-risk vs.

low-risk) as well as nature of transaction (remote vs. local, buy vs.
hire/rent).
as the platform grows.
CONCLUSION
To be effective, a platform needs to reach critical mass, develop
WHY SIGNAL RULES CONTENT PLATFORMS
the network effect and foster ongoing activity. This is where the
Content platforms and social networks need to develop a high
Magnet and Toolbox roles of the platform come to the forefront.
signal-to-noise ratio. While early adopters may enjoy tinkering
To be efficient, a platform needs to
with a new technology, a mainstream audience needs a reliable
have a strong curation system. This is
mechanism for consuming interesting content. Imagine YouTube
enabled by the Matchmaker role of the
with a poor search algorithm or without a voting mechanism to
platform.
separate the good from the bad.
Reliability is key to
mainstream adoption of
platforms. Trust rules
marketplaces. Quality
To reach a mainstream population, a
rules content platforms.
Some platforms like Twitter do not necessarily need curation
platform needs to achieve both
TWEET
because of the reverse chronological nature of the feed but most
effectiveness and efficiency. A strong
platforms need a reliable way of separating good content from
trust or curation mechanism builds
bad for a wider audience to find it useful. A high signal-to-noise
reliability into the platform, something thats frequently desired by
ratio ensures that users can use the platform efficiently to find
mainstream audiences.
what theyre looking for and be served the most appropriate

content.
A reliable mechanism for curation helps platforms gain
widespread adoption. More often than not, the platform owners
focus needs to expand beyond catering to activity and liquidity
73
Chapter 18
Case Study: How to disrupt Craigslist

KEY QUESTIONS
Craigslist, that ugly set of electric-blue links that still stands around like an exhibit
1. Why is it so difficult to disrupt Craigslist?
from the museum of early web design. Poor design and a general lack of features
2. What is Craigslists weakness?

3. How can a startup go about competing
with a mature and dominant platform?
havent come in the way of the sites popularity. Not only is the site an eyesore, its
a regular destination for scammers and spammers, alike.
How does an ugly, stuck-in-the-nineties product continue to enjoy success in an
industry where design and user experience are so important?
THREE FACTORS GOVERNING PLATFORM ADOPTION

Craigslist is a platform that connects buyers and service seekers with sellers and
service providers. Platforms that connect two or more diverse groups have no
value for users without a critical mass of users using it. Beyond the critical mass,
the platform gains strength on account of network effects becoming more useful
as more users use it.
The success of such platformsdepends on the following three factors:
The network effect: The single most important factor for a platform is its ability
to build the network effect. Without a minimum number of buyers and sellers,
platforms simply arent valuable enough. With network effects, a winner-takes-all
74
dynamic sets in and the platform continues to grow on the

strength of its network effect.
BUT DOESNT THE UI SUCK?

A platform connecting buyers to sellers, like Craigslist, tends to
Curation of content:The platform should have a mechanism for
be extremely transactional in nature. Users use Craigslist to get a
separating signal from noise. Platforms that encourage user-
very specific job done. Content-intensive platforms like YouTube
generated content often have an abundance of content and users
or Pinterest, or social networks like Facebook are engagement-
need a mechanism, like search or personalized news feeds, to sift
intensive and need a good user experience to engage users long
through the noise.
enough.
Curation of participants: Platforms may need to have a
A poor user experience can often spell failure. In contrast,
mechanism for determining reputation of participants. This is
Craigslist is a platform that is focused on helping buyers find
especially true for transactions that may involve the risk of fraud.
sellers. And as long as there are more buyers and sellers on
Being largely free (no transaction cut, no subscription cost for

most categories) and on account of having started in the early
years of the web, Craigslist has built tremendous network effects.
While many believe that technology makes or breaks an internet
board than on competitors, users continue to find value, despite

the ugly interface.
Essentially, Craigslist is unlikely to be disrupted purely on the
strength of a cleaner UI, better features and superior technology.
business, Craigslist clearly demonstrates that platforms win

through the value that the community creates.
SO WHY IS CRAIGSLIST SO PARANOID ABOUT PROTECTING

ITS DATA?
Three factors governing platform adoption: network effect,

curation of content and curation of participants. TWEET
Craigslist has played villain with the startup community in recent

times, mercilessly doling out cease-and-desist letters to any
startup attempting to build a better transaction experience
leveraging its data.
75
If Craigslists network effects are so strong, and a competitor with
acceptable for certain categories (e.g. selling low-value goods), it
better features and design isnt reason enough for users to
can be an important decision criterion for categories with high
switch, why has it been so paranoid about other emerging
risk (e.g. babysitters, dating, apartment sharing) or high ticket
platforms leveraging its data and content? Network effects, after
investment (e.g. trading used high-end goods).
all, would prevent users from moving to a new platform en masse,

in spite of better features.
Trust has been a thorn in the flesh for Craigslist. People havelost
their lives while engaging in Craigslist transactions. While con
artists abound, asking buyers to part with their credit card
ACHILLES HEEL: WHEN TRUST TRUMPS LIQUIDITY

To answer this question, lets revisit the three parameters
numbers, a more widespread problem lies in the fact that users

cannot build reputation on the platform over time. Hence, the
platform does little to aid a buyers decision making.
mentioned above. Craigslist scores very high on liquidity and

network effects. It could definitely improve its signal to noise ratio
by curtailing spam but that is less of a product design problem
SO WHY DOESNT CRAIGSLIST SET UP A REPUTATION
and more a curation problem. The platform has been taking some
SYSTEM?
measures towards that by curbing sexually explicit listings and

cutting spam in some categories by making them subscriptionbased.
Craigslist is a horizontal platform, a one-stop source for listings

across categories. Trust and reputation are very contextual. The
parameters worth considering when sharing a lawn mower are
However, Craigslists real weakness lies in the third parameter:
very different from the parameters considered when hiring a
Trust. Marketplaces are built on trust and thrive on trust.
babysitter. Craigslist, arguably, may not have high activity per
Transactions require participants to trust each other. Parents
category outside the top few verticals so a category-specific trust
looking for a babysitter need a mechanism to ascertain their
system may work only for a few categories. A horizontal
credibility. Hosts need to know that travelers camping at their
reputation system, on the other hand, while feasible, wouldnt be
home are reliable, and vice versa.
very useful because of the contextual nature of trust.
Craigslist, the king of liquidity, ironically, doesnt have a reliable
Trust and reliability are key factors in online platforms gaining
method of determining a users reputation. While this may be
widespread mainstream adoptionfor high risk verticals.
76
TOO MANY AIRBNBS SPOIL THE PARTY
A BRIEF GUIDE TO THE END OF CRAIGSLIST
Craigslist understands the importance of online reputation in
Craigslists paranoia and crackdown are understandable. Airbnb
transactions. Its paranoia stems from a constant threat from other
has effectively created a playbook of sorts to build a
networks, which may provide better trust and curation
marketplacewith network effects. Heres how that reads:
mechanisms. These competitors can leverage its community and

content to build network effects of their own, while adding the
Use Craigslists network to build liquidity and
security and trust layer to gain larger adoption.
Build a reputation system contextual to your vertical
Airbnb famously allowed hosts to post their listings to Craigslist
The combination of liquidity and vertical-specific reputation offers
and directed travelers back to Airbnb for
greater value than a horizontal platform.
the transaction. Additionally, Airbnb also

lured sellers on Craigslist to list on Airbnb,
offering a better transaction experience.
Emerging networks oftenpiggyback on the
activity on established networks to gain
Airbnb
piggybacked on
Craigslists network
like YouTube did on
Zaarly, Swappel, Krrb and many others have used these

strategies to get traction on their own network.
MySpace and
Paypal on Ebay.
If an emerging platform can own a category with the effectiveness
TWEET
base, and a very small dent in its network effect. Craigslist
traction. PayPal grew on top of eBay,
that Airbnb has, it is potentially creating a dent in Craigslists user
YouTube grew on top of Myspace and
understands that ten startups repeating this feat in ten different
Flickr gained initial traction on the blogosphere. Airbnb effectively
categories could potentially create a dent sizable enough to
piggybacked Craigslists network to build its own.
weaken Craigslists network effects entirely.
More importantly, Airbnb has built a strong reputation system to
As weve seen with Friendster, Myspace and Digg, when users
build a worldwide community of travelers and hosts. It allows
start leaving a network, a feedback loop sets in that creates
both parties to rate each other and has focused on building a
increasing loss of users. Getting enough users away from the
huge corpus of reviews. Additionally, it offers verification services
platform may potentially dethrone the currently invincible
to verify hosts where a photographer visits the actual listing and
Craigslist.
takes representative photographs.

77
CONCLUSION
Craigslist is justifiably paranoid about competitors leveraging its
own liquidity to compete against it. Whether it can legally claim
rights over user-generated content is open to debate. But the fact
that Craigslist doesnt own reputation systems of its own is a key
opportunity for competing marketplaces.
To disrupt a player with strong network effects, build a better

curation model and a more secure interaction experience. TWEET
78
Notes to
readers
Credits: Walter Corno Creative Commons
If youd like to get more information on

this topic, please refer the blog Platform
Thinking, which is frequently updated
with the latest analysis on this topic.
lxxx
If youve enjoyed reading this book and

would like to share it with your friends,
CLICK HERE
lxxxi
For further advice or consulting, feel free

to drop me a note via
EMAIL
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PLATFORM

Sangeet Paul Choudary

Based on the blog Platform Thinking (http://platformed.info)

2013 Sangeet Paul Choudary

Credits: Fran Simo Creative Commons

As internet startups, we often believe that we are in the business

Airbnb enables hosts and travelers to interact and engage in

of building technology. The essays in this book set out to debunk

Instagram enables photo creators to show off and discuss their

2) The notion of value created in an external ecosystem of users

3) The idea that this value is created when users interact as

Welcome to the platformed world! Heres your guide and I hope

producers and consumers

you enjoy the view!

These factors underlie the importance of platform business

Sangeet Paul Choudary

Very briefly, platform business models enable creation and

Credits: Petr Jan Juraka Creative Commons

The Building Blocks of Platforms

We typically think of companies competing over products the proverbial build

a better mousetrap. But in todays networked age, competition is increasingly

2. Why are we seeing the emergence of

By building a digital platform,

Consider the market for smartphones. Nokia and

Source: Platform Thinking

The use of platform thinking extends beyond the tech sector.

pull. Where traditional ecosystems push, these new platforms

Retailers are shifting from distribution channels selling products,

pull. Platforms also rely on the power of network effects as

to engagement platforms co-creating value. Online retailers like

they attract more users, they become more valuable to those

users. And theres a growing academic literature that explores the

unique quality of value creation on what are called multi-sided

Nike is shifting from products to platforms. Building on the

success of its Digital Sport products, Nike recently launched

In our view, the success of a platform strategy is determined by

its Nike+ Accelerator to help companies build on the Nike+

platform. Nikes announcement reflects platform thinking. We are

Connection: how easily others can plug into the

looking for people who want to create

The rise of platforms is being driven by

[Nike+] to make the world more active.

three transformative technologies: cloud,

platform to share and transact

The rise of platforms is being driven by three

enables a global infrastructure for production, allowing anyone to

create content and applications for a global audience. Social

Successful platforms achieve these goals with three building

create businesses, contribute content, and purchase goods and

The Magnetcreates pull that attracts participants to the platform

with a kind of social gravity. For transaction platforms, both

Readers will recognize a number of intellectual foundations to

producers and consumers must be present to achieve critical

Source: Platform Thinking

must pay attention to the design of incentives, reputation

systems, and pricing models. They must also leverage social

products to platforms. Even those in the extermination business

media to harness the network effect for rapid growth.

may worry less about building better mousetraps, and more on

The Toolbox creates connection by making it easy for others to

building mousecatching platforms. For example, imagine a smart

The Matchmaker fosters the flow of value by making

would focus on building the

Platforms bring participants