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.
"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.
"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.
"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.
"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 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.
"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.
"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.
"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 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.
"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.
"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 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 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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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 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.
"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.
"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.
"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.
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.
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.
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, 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.
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.
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.