The Case Of Fidelity And Platform Services

Most of us think that banks lack true innovative power. I guess that’s true in a structural sense – they have huge legacy systems and to release any kind of integrated applications have to do a lot of work on Cloud or other intermediary platforms.

But yesterday I had a long chat with Sean Belka who runs Fidelity Labs, the innovation arm of Fidelity, the fund managers.

Fidelity Labs is experimenting with a number of user interface and user experience technologies like Google Glass.  Sean made the point that Fidelity is interested in working out how it can differentiate itself in all the major social platforms. Social is a must-have but it can also provide some competitive advantage.

It’s interesting to see such a powerful player with a strong interest in social as a channel but more interesting still is the story Sean tells about Fidelity as a platform company (I’m going to write elsewhere about how we define platform. In short I think we call many things “platform” but the term covers a lot of different activities).

In the case of Fidelity their funds platform has all the characteristics of an extensible platform of the type we saw emerge in different sectors like mobile from about 2008 onwards.

It is similar to a two-sided marketplace in some respects but it is also a rich information market, a facet you don’t see in two-sided markets; and it brings in intermediary as well as primary players in the market. Thousands of funds and brokerages and other third parties do business through it. It is often called a “supermarket” but supermarkets do not have rich information markets.

This type of platform is, however, now working its way into retail as competitors grapple with how to compete with Amazon.

Sean was making the point that the platform has been around for nearly 20 years and provides a continuous source of durable advantage.

That advantage is “utility-like”. It is both a source of low-cost competition and a differentiator – the significant convenience of a single shop for investments.  And Fidelity can now make more of the differentiation as it increasingly turns to social channels like Facebook and LinkedIn, increasing the usability of services and improving UX.

These improvements defy traditional low-cost competitor rules – they don’t lead to lower qualities of service. Better UX leads to better service and fewer hurdles for making trades or taking other actions.

This platform-platform strategy is also picking up. While Facebook is currently about social communications it must surely edge its way towards taking full advantage of its audience reach.

The fact that fund managers have developed incredible platforms – Fidelity’s serves over 5,000 partners – is an oversight in most accounts of platform business. We tend to think of the tech-first examples like Apple and Android and Amazon.

But like eBay, Fidelity predates both. And next steps: Cloud, deeper personal service and service integration, allied to AI, all on the platform. Financial services could, in fact, be a pace setter.

Does A Platform Imply A Two-Sided Market?

Digging deeper into how platforms are conceived, used and then managed, it is worth asking do they always imply a two-sided market? The idea of the two-sided market stems from work by Parker & Van Alstyne (2000;20002005)  and Rochet & Tirole (2003). Those markets are generally understood as a refinement of network effects. A network effect happens for example when a company like Facebook has a given number of members each of whom will benefit if the platform has more members, i.e. more friends. That incentivises those users to bring in other users.

In the case of many software markets, recruiting new users is given over to existing users (e.g. DropBox and its double incentive marketing). This is valuable when the addition of users makes everyone’s experience better (e.g. Skype). It needs to be incentivised when the network effect is low (DropBox). Network effects have a profound effect on how business models are designed.

But are all platforms bound by network effects or by two-wides markets? Some clearly are:

AirBnB users benefit when there are more apartments; Uber users benefit when there are more taxis. These types of services have grown as match-pairing technology improved.

This is substantially different, however, from Skype where each user needs another user, not another Skype or service provider. This is a more classic network effect. Every user is motivated to bring in other users to make the service more valuable.

On the other hand, Quirky users do not need other Quirky users to make their products happen. They need the services the platform provides.  GrabCad members do need other members but not in a truly imperative sense. Having access to other members lies in the category of “very nice to have” rather than “must-have”. The counter parties truly add value without causing dependency.

Here are Parker & Van Alstyne’s examples of two-sided markets:

” credit cards, composed of cardholders and merchants; HMOs (patients and doctors); operating systems (end-users and developers), travel reservation services (travelers and airlines); yellow pages (advertisers and consumers); video game consoles (gamers and game developers); and communication networks, such as the Internet.”

Another characteristic of platforms is way that they enable economic activity. In these instances the platform is only enabling a consumption transaction or service.For example in credit cars, that is abundantly obvious. The platform exists to enable transactions. But also in gaming the fundamental objective is to consume the game.

In many instances of platform though, the platform is enabling productive activity. In the case of GrabCad, the objective is to share design drawings in order to reduce the time of development of new products. In open source platforms a similar productive activity is taking place.

In these cases too the platform has a network effect but is not bound by a two-sided market. It is bound instead by a moral framework.

Platforms have many characteristics that make it difficult to nail down one definition. Here are some examples.

The last column “exchange” refers to the degree to which exchange is a focal point of the platform. Exchange can be a high r low focus or it can be direct or indirect.

“Multiparty” is a new development in platform environments, beyond two-sided markets. For example Apple’s struggle with Health Kit is going to be making it work for multiple-sided markets including hospitals, family doctors, labs, devices, monitoring services, analytics and users. In that sense the market itself becomes ecosystem-like and poses new degrees of complexity on marketing and coordination.

PLATFORM Network effect Two-sided market Multi-sided market Exchange
Quirky Low No No Medium
AirBnB Medium Yes No High
GrabCad High No No Indirect
App Store High Yes No High
Health Kit High No Yes MultiParty
Credit cards High Yes No High
Billing Medium No Yes Multiparty

I’ll come back with some more thoughts in the next few days. Here is a definition provided by Gawer, taken from Parker & Van Alstyne:

“Industry platforms are products, services or technologies that are developed by one or several firms, and which serve as foundations upon which other firms can build complementary products, services or technologies.”

I don’t find this enlightening but I do think it illustrates the difficult of finding a good definition.

Platform

How we define a business platform goes a long way to shaping how we see the new economy. In my view there is no satisfactory definition out there yet.

Alex Moazed, CEO of Applico Inc, had a go at defining it recently:

A platform is a business model that creates value by facilitating exchange between two or more interdependent groups, usually consumers and producers.

The definition has the advantage of brevity but it doesn’t encapsulate what platforms are really about and how they function.

Along with David Card, SVP at GigaOm research I have been searching for a more encompassing decision for a new paper on IT-Business integration, due to be published end June.

We’re clear that many things are described as platforms even though they have quite different characteristics.

Netflix’s description of its internal processes suggests these are now largely “platform” based. Their cumulative effect is to enable an exchange. But organizing a whole enterprise around platforms suggests the concept has to mean much more than exchange.

It’s clear from this that “platform” can be a powerful term for internal reorganization.

Another feature of a platform is that it enables other people to create or produce. In that context it usually also facilitates exchange, as Alex Moazed says.

These platforms also tend to be tightly coupled to ecosystems, or loose groups of people who use a shared production resource such as an SDK and a “platform”.

Then there are platforms that are very much about exchange  marketplaces like eBay and Etsy.

And GE stakes a claim for its industrial data initiative also to be called a platform. In this case GE generates data from its global installed base of energy turbines and offers that out to a developer community via data APIs.

platform graphic

What about Expedia’s transaction platform, which 5,000 businesses now use as the back office to small scale travel businesses?

Or AirBnB’s, which is a resource sharing platform, as is Uber’s. And yet, then again Quirky has developed a platform that is almost wholly production orientated, and so too has GrabCad, a platform for engineers who want to share designs. Isn’t Kickstarter a platform? And the Respect Network, a platform for storing personal data.

There are huge differences between these projects and yet there is also commonality.

The commonality is the enabling factor. They are not selling a product to a consumer. They are enabling financing, production and transaction. These factors mean the platform is the economy. It is facilitating the factors of production and exchange.

More formally it facilitates the sharing of core services, the development of co-productive resources, and the development of marketplaces.

Connection

After the first edition of The Elastic Enterprise the idea of connectors, one of the five dynamics we identified,  took root in the business community. In the space of a couple of years new ideas around connectors emerged and developers, start-ups and not-so-young companies began creating new, friction-reducing products as part of the new business infrastructure. It also made me realize that is the real back story to the elastic enterprise: the creation of the new business infrastructure.

One of these is Ping Identity. I wrote about Ping and identity recently on Forbes:

Identity is the new universal connector, the technology that is making seamless, friction-free business happen. It invites companies to become adaptive and nimble. Previous (and continuing) examples include RSS in content and APIs more generally.

But there is also another area, billing. I got talking recently to the folks at MetraTech whose billing solution is being used by airports like GRU in Brazil to stitch together new business models and incentive schemes for a broadening community of concessions. I’ll be writing about that soon for GigaOm research:

Without a billing partner that can help deploy a settlement system across the whole partner base, the airport (GRU) will have to rely on manual monthly transaction management – old ERP. In place of that it uses Metra Tech’s relationship billing system.

The billing system is in fact built on its own abstract or metadata model rather than being specifically designed for airports or any vertical. That makes it highly adaptive and explains why Metra Tech can function with a small organizational footprint. Vertical service integrators can quickly adapt the platform to a specific client in a specific sector.

Translated into an abstract operating model, the billing metadata model becomes the key connector, enabling a wide range of business relationships at variable settlement rates. It reduces friction, meaning none of the business partnerships needs to be managed on a day-to-day or month-to-month basis. And it enables the partnerships to maintain flexibility.

Enterprises can improve their performance and flexibility by adopting connector technologies. The context for that could be the idea of federation or simply universal access. Companies can federate services between multiple partners providing customers with one single signon. Or they can provide their own workforce and partners with single point of access to a wide variety of cloud services.

Either way the idea is to take pain and friction out of connection. Something similar happens when platforms like Apprenda provide customers with a way to migrate assets quickly to the Cloud. Sounds complex but it simply means providing enterprises with a way to unlock information silos by moving the assets into a space where they can be made accessible.

Connectors look like the unsung heroes of innovation. They are not glamorous but they are part of the new infrastructure of business, rapidly being constructed by companies like Ping, MetraTech and Apprenda. Do you have a connector strategy?

The Role of Social In The Future Enterprise

Social media is like search engine optimization. It is easy to self-educate, it is slightly complex, but it is also game-like. In both cases the market or audience gives you feedback – you get likes or Tweets or analytics that tell you how many readers you got and who liked what. You know where to go next with it.

What it also does is distract you from the real purpose of communications – figuring out something valuable to say and laying it out for people to make a judgment or a contribution.

Are social media activities the best ways for an economy or an enterprise to market products? A low friction economy would rely on individuals to communicate their preferences to friends word of mouth. Continue reading

Looking For The Origins Of The Modern Ecosystem

Platform and ecosystem research generally uses two founding texts as a reference point for the modern ecosystem.

There is James F Moore’s work beginning with his 1993 Harvard Business Review article “Predators and Prey: A New Ecology of Competition”. Here’s a link to Moore’s later work on ecosystems in developing countries.

And there’s Iansiti and Levien’s Keystone Advantage. 

In the Elastic Enterprise Nick and I argued that the ecosystems we are seeing now do not necessarily have these keystone elements and nor are they easily summarized in the way we used to think when the main ecosystems were highly controlled collaborative entities such as Intel and Microsoft’s WINTEL ecosystem. This is Moore’s definition of an ecosystem:

An economic community supported by a foundation of interacting organizations and individuals—the organisms of the business world. The economic community produces goods and services of value to customers, who are themselves members of the ecosystem. The member organisms also include suppliers, lead producers, competitors, and other stakeholders. Over time, they coevolve their capabilities and roles, and tend to align themselves with the directions set by one or more central companies.

Why do I think it is wrong? The interaction between platform owner and ecosystem is highly variable. Those variations are an important source of learning (more of that in a minute). Continue reading

Skydivers, Mountaineers and Bicyclists – An Update on Google’s Project Glass

Realtime feed of skydiver wearing Google Glass prototype in descent to Moscone Center in San Francisco, June 27, 2012. Source: Google

Google had fun at its latest I/O developer conference with a theatrical level performance including skydivers wearing Google’s electronic glasses streaming live realtime video as they descended from high above San Francisco. As they landed on top of Moscone Center they relayed their payload to awaiting mountaineers who repelled down the side of the building. The payload was quickly transferred to bicyclists who road through the auditorium to cheering fans and up onto the stage to an awaiting Sergey Brin (see video).

Latest Details on Project Glass

Nonetheless, the theatrics provided some new information including the announcement that the glasses will become a product next year, and prototypes (i.e. beta version) are now available for $1500 to well-heeled developers flourishing in the Google ecosystem.

Continue reading

Glaxo Smith Kline Hoping To Become More Elastic

GSK is one of the biggest drugs companies in the world and like all big pharmas faces paradigm completion. That is to say their R&D paradigms have nowhere to go in a world where cost reduction is the overwhelming priority.

The company took a big chance a couple of years back by appointing a 40 something CEO, Andrew Witty. Witty has brought a little humility to GSK. Like GE’s leadership, he is now saying, publicly, that some of the problems of medicine are too big for a company to solve. Continue reading

The Ecosystem of People and Parts (And APPS!)

FitBit Wireless Activity Tracker

Nick wrote recently about the Pebble Watch, the watch that allows you to connect to your iPhone or Android data streams, and Google Glasses, two instances of the growing number of gateways to virtually constructed experiences. I find this connection between people and objects a fascinating development in ecosystem culture. It means  that ecosytems become more complex (with more devices, developers, producers) and more laden with opportunity. But there is another effect. There is a compression of physical and virtual worlds and, in that process, physical goods no longer need intrinsic value. They are a gateway.

To date an ecosystem has tended to form around a platform and a single device or device family – the iPhone and then Android. Then of course the tablets of Apple and Samsung came along. But the physical world adjunct or gateway to the platform is proliferating quickly. Here is GigaOm on the issue:

With the rise of consumer health-tracking devices and social-media-connected mobile health apps, the quantified-self movement has moved from data-obsessed engineers and hackers into the mainstream, thanks in part to new gadgets (such as the Nike FuelBand and the Fitbit) and apps like Strava and the Eatery.

The quantified-self movement already makes use of the Nike Plus, and in fact seemed stalled there for a while. But FuelBand, Pebble Watch, and Google Glasses are surely just the beginning of humans finding ways to augment their productivity and pleasure through connectivity using a plethora of devices. At this point connectivity becomes a whole lot more purposeful – to date it has seemed like connectivity for its own sake. There are other projects in the works such as Sidecar (due for launch soon).

But what it also raises is a very large question about the future of physical vs digital products. Right now the western system of consumption is configured around physical product design, production and distribution – at least in terms of how we characterize economic growth and business strategy. You either do product or you do servies, or you try to layer services onto product.Going forward product looks to be quite different.

What we are seeing is a sea change. The drift towards virtual production is becoming a strong tide. Products like Fitbit are not only fantastically valuable – they are also both extraordinarily personal and a gateway to the virtual with no intrinsic value of their own.

For those of us interesting in ecosystems it’s time to put in some overtime. What used to be a virtually connected economic group is fast becoming a hybrid of physical goods and virtual value.