Platforms and Power (with Hamilton Helmer and Chenyi Shi)

Summary Notes


In this episode, hosts Ben Gilbert and David Rosenthal are joined by Hamilton Helmer and his colleague Chenyi to delve into the complex world of platform businesses and the application of the Seven Powers framework to assess their strategic power. They discuss the nuances of value creation and capture within platforms, emphasizing the importance of scale, customer perception, and the ability to fend off competitors. The conversation highlights the distinction between network effects and network economies, with a focus on the challenges platforms face in maintaining power due to multi-homing and the potential for arbitrage. The episode also touches on the critical role of technology in reducing transaction costs and enabling new markets. Throughout, the dialogue underscores the intellectual rigor required to understand and navigate the intricate dynamics of platform businesses.

Summary Notes

Announcement of Guest for Arena Show

  • Acquired podcast is hosting an arena show at Climate Pledge Arena in Seattle.
  • The first announced guest is Jim Weber, CEO of Brooks Running.
  • Brooks Running is a local Seattle company that has experienced significant success.
  • Jim Weber's personal story is highlighted, including his battle with cancer.
  • Brooks Running is a division of Berkshire Hathaway and has grown from millions to over a billion in revenue, competing with giants like Nike and Adidas.
  • The company's growth is attributed to a focus on creating exceptional running products.
  • The event will include time for drinks and mingling, and proceeds will go to the One Roof Foundation.

"It is fresh off his full page profile in the New York Times this weekend, Jim Weber, the CEO of Brooks running."

This quote announces the guest for the arena show, emphasizing the significance of Jim Weber and Brooks Running's success story.

"Berkshire Hathaway. People who don't know Brooks running is a very successful now standalone division of Berkshire Hathaway. Local Seattle story."

The quote connects Brooks Running to Berkshire Hathaway, highlighting the company's status and local relevance.

"They were like accidentally bought by Berkshire as part of a fruit of the loom roll up. And they were sort of this bland nothing brand. And by unbelievable maniacal focus on making fantastic running products. That is how they became the billion dollar business that they are today."

The quote details the transformation of Brooks Running from an unremarkable brand to a billion-dollar business through dedicated focus on product quality.

Platforms and Power

  • Hamilton Helmer and Chenyi Shi are developing a new framework for applying Seven Powers to platform businesses.
  • Platform businesses are complex and serve as intermediaries for transactions.
  • The framework is in the early stages, highlighting the principles that guide platform businesses.
  • Chenyi Shi is recognized as a rising star in the field.

"My colleague Chenyi and I have been developing a new framework for how executives can apply seven powers for platform businesses, which are way more complicated."

This quote introduces the new framework for applying Seven Powers to platform businesses, acknowledging their complexity.

"So obviously we jumped at the chance to get to dig into this with Hamilton, since we later found out that by platform he means this very broadly, like any business that serves as an intermediary to make transactions."

The quote defines platforms broadly as businesses that facilitate transactions, indicating the framework's wide applicability.

Role of Technology in Platforms

  • Technology is a key driver for new platforms, reducing transaction costs and creating new markets.
  • Platforms are not limited to digital technology but have ancient roots.
  • The framework should be applicable to both modern and ancient platforms, such as traditional matchmakers.

"Platform is not tied to a particular form technology. But technology is the driver for new platforms to emerge."

This quote explains that while platforms are not confined to a specific technology, technological advancements are crucial for the development of new platforms.

"They operate as platforms. So this is sort of the scope we're going after."

The quote emphasizes that the framework aims to cover a broad scope of platforms, including those that predate modern technology.

Assessing Platform Power

  • Hamilton Helmer and Chenyi Shi pose three key questions to assess the power of a platform.
  • The questions explore the creation and perception of value on platforms and the barriers preventing competitors from achieving equivalent value propositions.
  • Understanding the economic value created by a platform and how it changes with scale is essential.
  • The framework considers the diminishing marginal utility of platform growth and the competitive landscape.

"So the first question is, what's going on here economically? Who's gaining and where's the money?"

This quote outlines the first question of the framework, focusing on the economic dynamics and value creation within a platform.

"But that question is different than the question of, okay, you've created all this value. How do you get to keep some of it for yourself? Which is what power is about."

The quote distinguishes between creating value and retaining it, which is central to understanding a platform's power.

Pilot as a Startup Accounting Solution

  • Pilot is a partner of the Acquired podcast, offering accounting, tax, and bookkeeping services for startups and growth companies.
  • Pilot is the largest startup-focused accounting firm in the US, backed by notable investors.
  • The service aligns with the philosophy of focusing on core business strengths and outsourcing non-core functions like accounting.

"Pilot is the one team for all of your company's accounting, tax, and bookkeeping needs."

This quote introduces Pilot as a comprehensive solution for startups' financial needs, emphasizing the convenience of outsourcing these services.

"Accounting is like example number one of what he's talking about. Every company needs it. It needs to be done by a professional."

The quote reinforces the importance of professional accounting services for startups and the rationale for choosing a service like Pilot.

Economic Value Creation and Change Over Time

  • Discusses how value is generated on a platform and how it evolves with more participants.
  • Emphasizes the importance of understanding the quantifiable value creation process.

"How is economic value being created on your platform, and how does that value change as your platform starts to get more participants?"

This quote introduces the first key theme of the discussion, focusing on the creation of economic value on a platform and its dynamics as the number of participants increases.

Perception of Value Creation by Participants

  • Addresses how different customer groups perceive the value created by the platform.
  • Highlights the change in perception as the platform scales.

"How does each group of your customers perceive their economic value from your platform, and how does that change as your platform scales?"

This quote emphasizes the importance of understanding how various customer groups perceive the value they derive from a platform and how their perceptions might shift as the platform grows.

Value Capture and Defense Against Competitors

  • Concerns the ability of a platform to retain the value it creates and protect it from competitors.
  • Identifies the challenge of preventing competitors from reaching parity.

"How do you prevent your competitors from getting to equivalence?"

This quote speaks to the third key theme, which involves strategies for maintaining a competitive edge and ensuring that competitors cannot easily replicate the platform's success.

Power Dynamics: Benefit and Barrier

  • Describes power as a combination of benefits provided and barriers to competition.
  • Differentiates between the benefit of the platform to users and the barriers that protect that benefit from competitors.

"Power involves two things, a benefit and a barrier. Right? So the first question is the benefit, and the third question is the barrier."

Hamilton Helmer clarifies the concept of power in the context of platforms by breaking it down into two components: the benefit provided to users and the barriers that prevent competitors from eroding that benefit.

Multi-homing and Its Impact on Platforms

  • Multi-homing refers to customers using multiple competing platforms simultaneously.
  • It can erode the unique value a platform offers and impact profitability.

"A lot of the differential value a platform can generate is a result of differential scale they have with their participants. And multi homing is what arbitrage out all of that differential value."

Chenyi Shi explains how multi-homing can negate the additional value created by a platform through its scale by allowing customers to easily switch between competing services.

Ride-Sharing Industry and Competitive Dynamics

  • Discusses the ride-sharing industry as an example of platform competition and value creation.
  • Highlights how multi-homing and undifferentiated services impact the industry.

"So in the case of ride-sharing business, particularly, the things you really want to ask yourself is what is preventing my customers from also accessing the other platform that's competing with me and your customers, referring to both your riders and your drivers."

Chenyi Shi uses the ride-sharing industry to illustrate the challenges platforms face when customers can easily use competing services, making it difficult to maintain a competitive advantage.

Metasearch as a Disintermediation Tool

  • Metasearch enables customers to compare offerings from multiple platforms, reducing friction.
  • It can weaken a platform's power by making it easier for customers to find alternatives.

"Metasearch as a category enables your customers to arbitrage away your power with less friction."

Ben Gilbert discusses how metasearch tools can diminish a platform's control over its customers by simplifying the process of finding and comparing alternative services.

YouTube as an Example of a Powerful Platform

  • YouTube's vast and diverse content library creates a strong value proposition for users.
  • The platform's scale and content variety contribute to its power and competitive advantage.

"YouTube will continue to compound the economic value of their lead. Because even though there's... 100 billion hour on YouTube and only 10 billion hour on competing platforms, the thing I want to watch is so unique to me as a person..."

Ben Gilbert points out how YouTube's extensive content library caters to the unique preferences of individual users, reinforcing its market position and value creation.

Heterogeneity of Preferences and Platform Scale

  • The concept of heterogeneity of preferences affects the returns to scale for platforms.
  • Platforms like YouTube benefit from high heterogeneity, increasing the importance of scale.

"The content you watch has so many dimensions that you care about... And that is a space where in order to get to a scale where I'm good enough, that this additional piece of content is not going to appeal to my users anymore."

Chenyi Shi explains how the diverse content preferences among YouTube users necessitate a larger scale to satisfy a wide array of interests, which in turn strengthens YouTube's position.

Information Accumulation and Search Costs on YouTube

  • YouTube's knowledge of user preferences and content quality reduces search costs.
  • Accumulated information provides YouTube with a competitive edge over copycat platforms.

"YouTube accumulates this unique set of knowledge about both what you like and watch time of others that attest to the quality of the video. So that makes the search so much easier on YouTube compared to a competitive platform..."

Chenyi Shi discusses how YouTube's accumulated data on user preferences and content quality makes it easier for users to find what they want, making it difficult for competitors to match YouTube's user experience.

Network Economy Power of YouTube

  • Network effects on YouTube increase the platform's value with each new content upload.
  • Confidence in finding desired content on YouTube reinforces its network economy power.

"There seems to be some sort of buried thing in my brain that is aware of their network economy power, where at first I thought it was brand, but it's more like I have the assumption that the latest SNL skit is going to be there because everyone uploads their stuff there."

Ben Gilbert expresses how the expectation of finding any content on YouTube is a manifestation of the platform's network effects, which strengthens its power and user loyalty.

Different User Behaviors on YouTube

  • Users interact with YouTube in various ways, including searching for specific content or browsing for entertainment.
  • Understanding these behaviors is crucial for platform operators to cater to different customer segments.

"Without being YouTube, you won't know exactly how your customers split between people who search and people who just look for enjoyment on your platform and every platform should have a clear sense of how their customers are split into those groups."

Chenyi Shi emphasizes the importance for platform operators to recognize and understand the different ways in which users engage with their platform, as it affects how they perceive value and the platform's power dynamics.

Platform Power Opportunities and Value Capture Timing

  • Discusses the timing for platforms to start capturing value from their power opportunities.
  • Differentiates between achieving product-market fit and capitalizing on inherent power potential.

"For me, the key thing here is to remember that the product market fit and power questions are different questions."

Hamilton Helmer highlights the distinction between finding a product-market fit and leveraging a platform's potential for power, suggesting that these are separate challenges that require different strategies.

Apple's Historical Struggle with Power in the PC Industry

  • Reflects on Apple's past challenges in creating a defensible, powerful position in the PC market.
  • Discusses attempts and failures to find a power opportunity in the PC industry.

"Here's the most brilliant innovator of our generation, and yet he couldn't solve the problem and he ended up losing his job."

Hamilton Helmer uses Steve Jobs and Apple as an example to illustrate the difficulty in finding and exploiting a power opportunity within a competitive industry.

Apple's Business Strategy and Margins

  • Apple computers command higher prices than competitors due to the brand and proprietary chips, leading to high margins.
  • The company's strategy involves controlling the entire product stack, driven by aesthetics and user experience rather than just power.

"It is remarkable amount that people will pay in dollars they wouldn't pay to a different manufacturer with a different operating system for an Apple computer."

This quote emphasizes Apple's ability to charge premium prices for their products, which contributes to their high profit margins.

"I'm a huge fan of Steve Jobs, and I think his impulse to control the stack was not based on sort of power, but aesthetics almost."

Here, Hamilton Helmer highlights Steve Jobs' focus on controlling the product experience, which has been a key aspect of Apple's business strategy.

The Power Equation in Business

  • Businesses must address the 'power equation' to avoid becoming commoditized.
  • Companies that focus solely on innovation without establishing a power position risk failure.
  • The transition from rapid growth to establishing a profitable business model is a critical phase.

"You have to solve the power equation or else you end up competing in a commodity way on your base business."

Hamilton Helmer discusses the importance of establishing a power position in the market to avoid commoditization and maintain profitability.

Platform Profitability and Subsidies

  • Dialing up profitability often involves reducing subsidies and increasing prices.
  • The decision to increase prices is tactical and must consider both immediate and long-term effects.
  • Subsidies can be reduced once a company feels confident in its power position.

"I think it's an idiosyncratic, tactical question that as a business progresses, you have to make a decision about when you start increasing prices."

Hamilton Helmer explains that the decision to increase prices is unique to each business and must be made carefully, considering the company's stage and market position.

YouTube's Ad Load Strategy

  • YouTube increased ad loads without losing customers, demonstrating a successful adjustment in their profitability strategy.
  • The platform previously offered high value to users with low ad presence.

"In recent years, they've been dialing it up quite a bit and they don't seem to be bleeding customers."

David Rosenthal points out that YouTube has managed to increase its ad loads, thus increasing profitability, without a significant loss of customers.

Surplus Leader Margin Concept

  • Surplus Leader Margin is the maximum additional charge a leader can impose while maintaining competitiveness.
  • The concept is detailed in the appendix of "Seven Powers" and is a strategic tool for pricing decisions.
  • Power is a combination of market share and differential margin, and sometimes short-term margin is sacrificed for market share.

"Understanding what is your surplus leader margin, how much is the maximum you can charge given the best alternatives out there and dial up the tune when it's the right time."

Chenyi Shi explains the concept of Surplus Leader Margin, which helps companies determine how much they can charge and still maintain their leadership position.

Statsig's Role in Product Development

  • Statsig is a feature management and experimentation platform that helps companies ship products faster and measure their impact.
  • The platform is used by companies like Notion, Brex, and OpenAI.
  • Statsig enables data-driven decisions, A/B testing, and provides statistical reporting on product changes.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing and see the impact every feature is having on the core business metrics."

The host describes Statsig's services, emphasizing how it aids product teams in making informed decisions and improving their products.

Apple's Extractive Pricing and TSMC's Long-Term Strategy

  • Apple's extractive pricing strategy in the App Store is contrasted with TSMC's long-term customer retention strategy.
  • TSMC's pricing may be tied to strategic goals, such as customer loyalty and future revenue.
  • The unique industry characteristics of semiconductor manufacturing influence TSMC's pricing and capital investment decisions.

"I have an iPhone and I really like it. I realize that every time I turn around it's trying to get me to buy the iCloud or something and they're trying to take advantage of me."

Hamilton Helmer acknowledges Apple's aggressive monetization strategies but also recognizes the high switching costs for consumers, which justify Apple's approach from a business perspective.

"That allows them to get a customer lock in is too strong a word, but a comfort with future customer comfort."

Hamilton Helmer explains that TSMC's pricing strategy is designed to ensure future business and customer loyalty, which is critical given the industry's large capital investments and technological advancements.

The Balance of Power and Customer Value

  • Companies with high switching costs must balance lock-in with customer value.
  • Creating value for customers can naturally lead to switching costs without resorting to win-lose propositions.
  • The trade-off between power and customer satisfaction is a delicate one that companies need to manage carefully.

"What is it that I can do for my customers that create value for them? And then if that proposition has with it a way that they're tied to me, then so be it."

Hamilton Helmer advises companies to focus on creating value for customers, which can lead to switching costs as a byproduct rather than as a primary goal.

Platform Competition and Customer Relationships

  • Platforms often compete with their own customers, especially when considering direct transactions.
  • Maintaining a competitive position requires understanding the dynamics between platform, customers, and pricing.

"Platforms are naturally also competing with your own customers. Because what if your customers go direct to each other?"

Chenyi Shi points out the inherent competition between platforms and their customers, highlighting the delicate balance required in platform business models.

Platform Value and Competitive Differentiation

  • Platforms must prove they provide enough value to justify taking a cut from transactions.
  • There are two layers of competitive questions: proving value to users and offering a differential advantage over competitors.
  • Airbnb's insurance program is an example of a value-add service that could be replicated by competitors like VRBO.

Buyers and sellers just transact off you. So as a platform, you have to first prove that you provide enough value that they should pay you a cut and stay on the platform.

This quote emphasizes the necessity for platforms to demonstrate their value to users to retain them and justify transaction fees.

The insurance program of Airbnb, could a competitor also offer a similar insurance program and achieve similar value add to your customers?

This quote raises the question of whether a platform's offerings are unique enough to prevent competitors from replicating them and eroding the platform's competitive edge.

Importance of Power in Businesses

  • Power is crucial for the durability, attractiveness, and success of a company.
  • Founders often value the impact and legacy of their company beyond financial success.
  • To ensure a company's long-term success, one must consider where the company holds power.

Why should you be interested in power? That may sound like an OD question for you, but I was doing a class recently with some earlier stage founders talking about power...

Hamilton Helmer discusses the importance of power in business, highlighting its role in making a company a great place to work and ensuring its durability.

Yeah, I've just climbed this great mountain of achieving product market fit. Isn't that enough?

David Rosenthal questions whether achieving product-market fit is sufficient for a company's success, leading to a discussion on the necessity of power for long-term viability.

Network Effects vs. Network Economies

  • Network effects occur when additions to a network increase its value to other users.
  • Network economies involve power resulting from direct network effects, which are less common than indirect effects.
  • The distinction between network effects and economies is important when considering a platform's competitive advantage.

We teased earlier that we were going to talk about the difference between network effects and network economies.

Ben Gilbert sets the stage for a discussion on the critical distinction between network effects and network economies in the context of platform businesses.

So the things that happen there are somebody joins the network... And something happens to somebody else in it that has a value implication. That's the network part... That's the effect. That's a network effect.

Hamilton Helmer defines network effects, explaining how they contribute to the value of a platform by making it more valuable as more users join.

Network effects describes only the value creation, and it's a statement without consideration about competition, which the latter is all power is about.

Chenyi Shi clarifies that network effects alone do not imply competitive power, which is a separate consideration.

Crusoe: A Clean Compute Cloud Provider

  • Crusoe is a cloud provider for AI workloads, using wasted, stranded, or clean energy.
  • Their partnership with Nvidia and use of remote energy sources allow for better performance per dollar than traditional cloud providers.
  • Crusoe's environmental angle is significant, as they utilize energy that would otherwise be wasted.

Crusoe, as listeners know by now, is a clean compute cloud provider specifically built for AI workloads.

The host introduces Crusoe, a company specializing in providing cloud services for AI workloads with a focus on using clean energy.

Crusoe's data centers are nothing but racks and racks of a.

The speaker highlights the hardware infrastructure of Crusoe's data centers, emphasizing their specialization in AI workloads.

Because Crusoe's cloud is purpose built for AI and run on wasted, stranded, or clean energy, they can provide significantly better performance per dollar than traditional cloud providers.

The host explains the advantages of Crusoe's cloud services, including cost efficiency and performance, due to their unique energy sources and AI focus.

Misconceptions About Flywheels

  • Flywheels represent product-market fit but do not indicate a company's power.
  • The ease of creating flywheels often coincides with the potential for multi-homing, which can dilute competitive advantage.
  • Assessing whether a company's flywheel is unique or replicable by competitors is essential.

So flywheels are a sign of product market fit and tell you absolutely nothing about power.

Hamilton Helmer explains that while flywheels show that a product resonates with the market, they do not provide information about a company's competitive power.

Anecdotally, there's one exercise we did which is really simple but surprisingly interesting, which is we took a flywheel of a company that's really popular... and it still works.

Chenyi Shi describes an exercise that demonstrates how a company's flywheel can often be applied to its competitors, questioning its uniqueness and competitive power.

Platform Power and Multi-Sided Markets

  • Platforms facilitate exchanges between buyers and sellers, creating value through efficient matching.
  • Power in platforms is derived from one platform offering materially better services than another in a sustainable way.
  • The challenge is to maintain a competitive edge in platforms where multi-homing and technology advancements can lower barriers to entry.

I thought it might be useful for me to do a quick take of kind of a summary of some of the points that we've talked about in platforms.

Hamilton Helmer summarizes the discussion, emphasizing the value creation and complexities of platform businesses and their relationship to power.

The value comes from matching a buyer and a seller. But power in these things is really different.

Hamilton Helmer distinguishes between the value created by platforms through matching and the power that comes from a platform's ability to outperform competitors.

So the question often is first, so you have to meet two conditions. The value that one platform delivers has to be materially better than the other.

Hamilton Helmer outlines the conditions for a platform to have power, including delivering superior value and maintaining that advantage through barriers to multi-homing.

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