Andrei Hagiu, an associate professor at Harvard Business School, and Julian Wright, an economics professor at the National University of Singapore, recently published a working paper on “Multi-Sided Platforms” (available as a PDF). In it, Hagiu and Wright define what makes a platform multi-sided and offer a set of use cases in which a multi-sided platform (MSP) might be better or worse than a traditional reseller model.
Publishing is already familiar with some types of multi-sided platforms. A magazine, for example, gathers an audience of readers and then sells access to that audience to advertisers. A conference creates a program for individuals to attend; it also sells exhibitors space (and sometimes presentation opportunities) to engage the meeting attendees.
Hagiu and Wright define MSPs in a way that might exclude at least the magazine example. In particular, they propose that an MSP “creates value by enabling direct interactions between at least two distinct types of affiliated customers.” A summary of their work written by Julia Hanna goes on to note:
“Direct interactions could be commercial (e.g., transactions or contractual relationships) or noncommercial (e.g., communication on a dating website). Affiliation requires platform-specific investments of time or money or both.”
In their paper, Hagiu and Wright identify what Hanna describes as “four key trade-offs between operating as a reseller and a MSP” (presented verbatim):
- “Resellers enjoy economies of scale for high-demand products; however, an MSP model is more cost-effective if a business is built on sales of low-demand items.
- “Resellers have a greater ability to aggregate their bargaining power, bundle, and otherwise benefit from complementary products and product substitutions that independent sellers would miss out on.
- “Resellers can offer significant added value (and benefit from reputation effects) by verifying the quality of goods when that quality is difficult to confirm. But that position can be prohibitively risky and costly if large numbers of unverifiable products are on offer, in which case the MSP model becomes more attractive.
- “When a product doesn’t work out, the buck all too often stops with the reseller, not the supplier; an MSP is immune to this risk.”
Although we tend to think of MSPs in terms of activities like Amazon facilitating the sale of used books, it’s possible that a publisher with a large supply of low-demand items might move to create its own platform.
If so, the tension between the first bullet (long-tail products that MSPs can cost-effectively help monetize) and the third (where sellers of some reputation ensure the quality of goods) will continue to be a source of healthy consideration and debate. Significant benefit could accrue to the publishers who figure a way to eliminate that tension.