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"The Platform Paradox" with professor Mauro F. Guillén

Today I’m delighted to have a very distinguished guest in our show. Mauro Guillén is one of the globally recognized futurists and experts on global trends.

He is a professor in Wharton School of the University of Pennsylvania, where he is Director of Lauder Center for International Business Education and Research and in September he is starting as new Dean of Cambridge Judge Business School.

He is a bestselling author and today we’ll be talking about insights from his recent book Platform Paradox.

Mauro, the crux of your book is Platform Paradox. Among 10 major companies with the largest market cap 7 are platform companies. And yet the majority of revenue of these companies typically comes from just a few countries. This is the case with Amazon, which you're mentioning. Why do you think technology companies don't translate well across cultures and geographies?

Essentially, the issue is that as you know, platforms are driven primarily by network effects. In other words, more users on the platform attract other users. And so it is really important for these platforms to grow as quickly as possible and reach critical mass before others do. But the issue is that some platforms are primarily based on local network effects. Consider, for example, Uber or Lyft. A user of Uber, either the driver or the passenger, doesn't care about how many Ubers there are in another city in another location, they care about the local network effect. So when that happens, then there's nothing preventing other competing platforms around the world from essentially entering the space before Uber does. And that's why we see a proliferation of ride hailing applications around the world. It's really the nature of the network effects that makes it sometimes really hard for a platform to gain global market share very quickly.

I love your point that not all network effects are created equal. And that having an additional user in this country doesn't necessarily translate into additional value to a user on the other side of the globe. Can you please elaborate on how you think about regional vs national vs global network effects?

Again, network effects can operate on many different kinds of levels. And I think what's important is to study who are the people who are using that platform? Let me illustrate this with the example of Airbnb. Airbnb depends on tourism. Now, most tourism is national. For example, Americans are going to another American city or location. After that, the most frequent type of tourism is regional tourism - so that Americans are going to Canada or Americans going to Mexico, or Americans going to the Caribbean. And after that is global tourism, for example, Americans going to Europe or going to Asia, or going to the Middle East. In other words, a platform such as Airbnb then, on both sides because you have hosts and to have guests, they need to take into consideration these network effects and the fact that the most frequent are the local. So when it comes to them expanding the platform around the world, they need to allocate resources, they need to make decisions, they need to prioritize markets in such a way that they are playing to those different network effects.

I had experience of launching platform products in different geographies myself, and it feels sometimes as if you're essentially launching a new business in a new geography. What is interesting about your book is that you expand into saying that success in one country doesn't necessarily mean success in another country. And the opposite is true - failure in one country doesn't necessarily mean failure in another country. Why do you think companies like Uber, that you mentioned, and Amazon failed in such strategic parts of the world like China, for example?

Well, I believe that most of the time, the reason is that a strong local competitor emerges before companies such as Uber or Amazon can become big enough and can reach a critical mass of users in those markets. So China, of course, is a textbook case study for this, because it’s a large market. And not only that, they have very capable local entrepreneurs. And so companies such as Alibaba or Didi were launched shortly after Amazon and Uber here in the United States. And given that the network effects are relatively local, especially in the case of Uber, but also in the case of Amazon, because you have to have a local delivery infrastructure - that is a key thing. In the case of ecommerce platforms, then it really becomes also important to develop assets on the ground, to have boots on the ground as they say. And therefore, then the local platforms in principle will have an advantage over foreign platforms, because they can create, they can build up that infrastructure much faster than a foreign company. I think those are the kinds of dynamics that essentially prevent very powerful brands otherwise, from winning in every market in the world.

A platform economy requires both competition and collaboration at the same time. The dynamic of expanding internationally is inherently intertwined with finding local partners or doing some kind of M&A activities, or scaling, for example, like Uber was scaling - city, by city, country by country with launchers on the ground. If you were to distill your playbook that you outlined in Platform Paradox of scaling internationally, what are a couple of principles that you would mention?

So the first principle is that a platform, if it wants to succeed in more than one country, needs to allocate resources for growth and needs to prioritize markets in a way that is consistent with the geographical level at which the network effects operate. So that can be illustrated with the cases of Uber or Airbnb. And then the second, I think, very important principle is that the network effects can be very complex. Because you don't only have, for example, users attracting more users, or, in the case of two sided platforms like Uber, drivers attracting more passengers and passengers attracting more drivers. You also have the other very, very important dynamic, that the users that you may have in one geographical market may be affecting the number of people who would be willing to use that platform in another market. And again, the case of Airbnb, I think, is very important. Because remember, the hosts on Airbnb don't move - they have their property in one country, in one city, in one location. However, the guests move around the world by definition, because they are tourists or business travelers. And therefore then, if for example the platform has many guests in Europe, let's say in one European country, then you can expect very strong network effects in other European countries, where a lot of people from that original country go on tourism. So once again, what I think is really important is to understand the nature of the network effects in two terms in two ways. And this is why I think two principles are the right number here. One is the geographical level at which the network effects operate, and the other one is whether we're talking about same side versus cross side network effects.

I believe that the more lenses we have on network effects, the better, the deeper we understand them. What do you mean, when you say one-sided versus two-sided?

Let's use Airbnb once again - we have guests, and we have hosts. If you have more guests, then that attracts more guests to the platform - more people by word of mouth, and so on and so forth. If you have more hosts, then that also attracts more hosts, but not only that. Those would be the same side effects. Cross side effects would be more hosts attracting more guests, and also more guests maybe attracting more people as hosts who would like to list their properties on Airbnb. So you have same side and you have cross side network effects,

The new phenomenon that we see originated in China and yet not picked up at scale in the West is super apps. More and more comprehensive products, platforms overlaid on another platform. And you also mentioned in your book that platforms don't grow alone, they grow in constellations. For example, Match Group owns 10+ different platforms, like dating products. Facebook owns at least three from the top of my head, and then Amazon is essentially a bunch of different products bundled together.

Well, that's a very important as you know strategy in business, and not just that in the digital age. But traditionally, that is to say that companies like to diversify into other areas. And they either launch a new business or they acquire an existing company, and then they add that. So what we've seen in the digital world is that, for example, an ecommerce company may set up a digital payments platform. And they also set up other kinds of platforms like a marketplace and so on and so forth. In other words, when you do that, you can create advantages for the user. Because you can tell the user “well, your cost of adding your name to this platform is actually minimal, because you're already in our family of platforms. And not only that, then you can also price accordingly. You can cross subsidize, you can offer better deals to your users, while multiple platforms. So I think this works really, really well with digital platforms, because information is everything. And let's not forget, perhaps your most valuable asset that platforms have is not the user base, but it's the information about those users. Why do they make decisions? Why do they purchase things? What do they do almost every minute of the day? And that gives them the opportunity to say “oh, they're doing this, why don't we launch a platform so that we can cover that need that they have?” And in so doing, of course, they can steal business away from competitors. So this bundling strategy of essentially launching additional things is part of the diversification strategy is extremely powerful and extremely useful for digital platforms. There's no question about it.

Do you see them doing that through organic growth or more with M&As? From your perspective, what is their typical strategy?

You know, the advantage of mergers and acquisitions, especially in a rapidly changing field, such as digital platforms, is that you are not only launching a new business, but you’re acquiring an existing user base, and you're eliminating a potential competitor. So it has all of the advantages. Now, acquisitions, as you know, are expensive and they are also difficult to integrate. So relative to launching a new business from scratch, they have those disadvantages, but I think that in the case of digital platforms, the advantages are probably much bigger.

In one of your interviews, you mentioned that you're writing a book to understand the digital space and dynamic of platform companies. Why now is a right moment to do that?

Let me answer the question in this way, I decided to write this book about three years ago. And the reason was that I was teaching a class at Wharton with all of the cases being digital platforms, because I thought that the students really wanted to understand that. And I realized when I was teaching that class, that existing theories or existing concepts, existing ways of thinking about strategy in the context of digital platforms, especially international strategy, were not fully developed. And so I thought, let me just write a book so that I myself can understand how these works. And of course, then I can tell the world. That was the motivation behind writing the book. I was having trouble identifying the best strategy for digital platforms based on existing ways of thinking based on existing theories and concepts. And that's why I decided to write the book primarily, as you know, around the concept of network effects.

I think it's such a beautiful way to learn about the topic by writing a book. What are the other insights, how do you see the world differently after writing the book?

Well, I think I have a better understanding of the reasons why we are increasingly seeing that industry after industry, that the entire economy is now being driven by platform businesses. So we have the ones that have been launched as such. But in addition to that, Roman, we have established companies that have been around for 20 years for 50 years, some of them for 100 years. And now they've been forced to compete against these platforms. And of course, what they're doing is they are either launching their own competing platforms, let's say, for example, Walmart, right? Or they are collaborating with some of these new digital platforms. In other words, I think this has changed everything in the economy. And the thing is that people, as you know, find these platforms so useful. We all belong to or do business regularly with at least five or six or seven platforms, every single day. They have become part of our lives. So consumers can no longer live without platforms and neither can companies.

Such an insightful way to put that. So you're one of the best known futurists and one of the most regarded people in thinking about global trends as well. And you have your great bestselling book behind you, 2030. Looking in the next decade, where do you see platforms? How do you think they will evolve?

Well, I think we're going to see major transformations at all levels. And I think the biggest of those transformations will actually involve different kinds of trends converging on one another, and creating a different situation, for example, in markets or in the business world. And I also believe that perhaps, technological change will play a role in all of those transformations. Technology by itself can be very important, but it will have even bigger consequences if you interact with, for example, some economic trends or some population trends. Just to give you an example, I think that technology is going to be very impactful in the near future with a population above the age of 60 or 70. Because I think that home robotics are going to become really, really important. And so here what we see is the combination of we have the technology, we have robotics, we have AI, we have all of these. But in addition to that, we also have a population trend, which is that every day that passes we have more people at advanced ages, and many of them need help at home. That's how I see the future - I see the future as big transformations that involve different kinds of trends.

If you go to Silicon Valley and ask about platforms and disruption of the traditional economy, everyone will point to a moment when Steve Jobs launched the iPhone. And now the majority of people in the developed world have smartphones, but you're saying that the penetration of smartphones in emerging markets is actually much lower than in the developed world. How do you think this penetration growth will play out into the growth of technology and platform adoption globally?

Let's take the example of smartphones, for example. As you said, the highest percentage of ownership of smartphones in the world is probably in South Korea, and is like 95%. But then, if you go to many developing countries, especially in Sub Saharan Africa, maybe it's only 10-15-20% of the population. Now, that's smartphones, they may have a regular cell phone, one of the older phones, and they can do certain things with that. But I’d like to actually see these as an opportunity. Look at the growth that's going to happen in Sub Saharan Africa, because the percentage is relatively low right now. By the way, India is the same. In India, only about 40% of the population has a smartphone. I think we're going to see a revolution in those places in the sense that the growth now in all of these mobile services is going to shift away from China, the US, Europe, and it's going to be so much faster in places like Sub Saharan Africa, much faster. Because once again, they're starting from a much lower base to begin with. I actually turn the situation on its head and say, look, whatever seems low today that to me is a high growth potential for the future.

Many people from the MBA community are following us and the tech community as well. And you are the Incoming Dean of Judge Business School, so you'll have many opportunities to educate European elite as well. How would you advise people to learn more about platforms, where would you suggest them to start? And how do you advise them to dig deeper into this technology?

I think, broadly speaking, given that so many things are changing, that we're going through these big transformations, as you say, I think it's very important for all of us to try to understand the nature of those transformations, we need to get information about them. So that's why I always tell people “look, spend as much time as you can, talking to other people who can tell you what's going on in their business in their industry. Don't only talk to people in your same company or in your same industry, because then you are only going to get one point of view. And maybe you will lose out on some of the interesting interactions. Try to gather information from as many different sources as possible diversely, and more importantly, read - it's very important. These days reading is actually cheap, or free, because you can just surf the web and look for things. But don't read only about the topics that you know a lot about. Read about other topics in technology fields that maybe are not related to exactly what you do. Because once again, you want to branch out, you want to be able to expose yourself to different kinds of influences. That's, I think, extremely important.

Regarding the future and looking at the next 10 years. We are currently living in this interesting moment of pandemic, but at the same time you describe yourself as a rational optimist if I'm not mistaken. What are you most excited about looking into the next 10 years?

Yes, I am a realistic optimist and that's because I think it is the only attitude that will help us overcome what's coming, all of these big transformations. But I am extremely optimistic about one very important thing. As you know, the pandemic has been devastating because people have died, people have lost their jobs, and so on and so forth. But I hope that something good comes out of this pandemic, and it makes me feel very optimistic. Which is that I think the pandemic has forced us to reconsider the way in which we do things. I think, perhaps the biggest or the best example of this is remote work. For both companies and for employees, I think the pandemic has essentially told us to take a second look at working from home. In my own area, I think the pandemic has forced us to look at remote learning, not as a second best necessarily, not as something that you do out of necessity, but perhaps it's something that you can incorporate into a hybrid format. So I'm very optimistic because I think this shock that a pandemic has been, has invited us to think outside of our normal parameters, to reconsider the way we do things. And I think that's always good. Because otherwise, as you know, Roman, as human beings we have this tendency to keep on doing things in the same way, forever. Inertia is a very powerful force. And unfortunately, I don't think before the pandemic, we were organized, so we weren't doing things in the best possible way.

That has been a fantastic interview. Let me ask you the last question. Is there anything that you would suggest our viewers to look at when it comes to specifically platform businesses? For example books from other authors? And I would recommend everyone to follow you, because you're very insightful when it comes to globalization and technology as well.

That's a great question. And in the spirit of what I said earlier, which is that we should be consulting different kinds of sources, we should be hearing from different perspectives. Instead of suggesting a book, what I will suggest is that people, for example, follow a magazine, such as Wired. I don't know whether you're familiar with Wired, but Wired is an amazing magazine. And it brings many different kinds of perspectives on technology, on digital businesses and platforms. So I think reading it on a regular basis actually gives you great insights. But if you don't like Wired, you can also read, let's say, the MIT Technology Review, or you can read Scientific American, which covers all fields of science, but of course, it also includes technology, and everything that has to do with the digital transformation. So what I'm trying to say is that I think it's very important to read something every day, even if it's only for 10 minutes. I think it's very important not to read only something by the same person from the same source but rather to diversify as much as possible. That will be my message for the audience.

Thank you so much, Mauro. It was like a pure delight to have you and I look forward to seeing you in the UK or following you in the Cambridge Judge Business School.

Thank you so much Roman for inviting me and please stay healthy.


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