Thursday 19 July 2012

Why platforms matter

A Platform is a beautiful thing

The most powerful man isn't the King, it's the gatekeeper who controls access to the king.

Be it the Rahmenator for Obama, Anji Hunter for Tony Blair or (most notoriously) Martin Bormann for Adolf Hitler, enormous power has always been invested in the gatekeeper. Well in business it's the same thing, and its a licence to print money.

The holy grail for any technology company is to become the de-factor standard on which everyone else depends. You want to know why Microsoft and Oracle mint a 40% margin and have dominant share in the core businesses? It's because they are the platform. Effectively it means you are "da man", and if anyone wants to do anything they have to pay you a toll (let's be polite and call it a "licence fee") to play.

And when everyone else starts playing around you they create an eco-system, which is an even more beautiful thing. It acts like an impenetrable defensive jacket which wraps around you platform and keeps rivals out. Millions of pieces of software have  been built on Microsoft's Windows platform. Further billions on dollars have been spent by businesses building and maintaining systems on this platform. Everyone's invested in the eco-system. No one wants to leave.

Or on a smaller scale Apple control's the iOS platform and collects easy tolls from buyers of iPhones and sellers of Apps. Meanwhile the eco-system it has built up, while slowly being hauled in by Android, remains a key reason for people to buy its products (particularly in the Tablet market, which Android hardware has been there for a while but the software struggles to keep up).

That was one reason Facebook killed the opposition. They have one great idea very early on. While their competitors were building a website, they built a platform which Farmville and the like could plug right into (shame they've failed to do much with that platform since - but that's another story).

Every baby tech company wants to be a platform when it grows up. Because, to be brutally honest, that's where the money is.

But platform's aren't forever

Now having said that platforms are big, bad and hard to compete with, it had to be said that nothing lasts forever. Platforms can and do fail. Sometimes slowly but occasionally very occasionally quickly.

When a platform fails its like an avalanche - a catastrophic event which wreaks havoc on the environment. And when it fails rapidly its like an earthquake.

Of the top of my head Nokia is the most recently example of a fail (-ing) platform (particularly its Symbian smartphones). Yahoo too. MySpace had a shot but lost it (although these are all companies which, while dominant, never quite perfected the platform game in the first place). Often when they fail its due to two things - rapacious, fast moving competition and blinkered, complacent management.

Of course from an investment point of view this is a beautiful opportunity - a chance to profit by shorting the failing company and buying into the leader. And the great thing is a failure like this takes months or years, leaving plenty of time to profit from a long trade.

But that's another story.

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