The difference between pipe and platform business models
Platform business models create value through the exchange of services or content between two groups, producers and consumers. The exchange is enabled by a panoply of technologies, from cloud computing to data analytics, and in most companies with such platform business models, users are able to both offer and receive a product or service. Uber, YouTube, and Airbnb are some of the companies that have found success using these exchange-type platform business models.
At the recent MIT Platform Strategy Summit, Sangeet Paul Choudary, founder of the think tank Platformation Labs, was asked to describe the platform business model and how it differs from the traditional pipe business model. Read on to learn the core differences between the two, and how platform business models operate.
What is a platform business model and how is it different from a traditional pipe model?
Sangeet Paul Choudary: When I first thought about the platform business model, I wanted to illustrate how significant the shift is from traditional business models. So to illustrate that, I used the metaphor of a pipeline. The traditional pipeline business model is one in which the flow of value is linear from a producer to a consumer, and that's the model that we've seen in the industrial era where manufacturing, media, services, everything has followed a pipeline business model. What we've seen today in an age of connectivity and in an age of data and intelligence is that we're seeing vast amounts of network flows of value.
So you look at a hotel. It has a pipeline flow of value, but if you look at Airbnb, it has a network flow of value, hosts and guests interacting with each other. And platforms are the plug-and-play infrastructure that enable and harness this network flow of value. Platforms specifically perform two key roles. They enable plug-and-play infrastructure into which producers and consumers can directly plug in, and they then govern the market interactions that ensue on top of the infrastructure. And that's fundamentally what makes a platform business model very different from a pipeline business model.