WORLDVIEW: Amazon, Uber moves suggest tech platform boom is over

By Felicity Duncan.Companies like Uber, Alibaba, Amazon, Facebook, Netflix, Airbnb, and WeWork all have one important thing in common: they were born as platform businesses..In modern parlance, a platform business is a particular type of tech company that creates value by facilitating exchanges between third parties. So, for example, Alibaba was born as a marketplace in which third-party sellers and consumers can engage in commerce. Uber was born as a platform that enables third-party drivers to find consumers looking for a ride. Netflix was born as a platform for linking up consumers with third-party media content created by big Hollywood studios, and so on..___STEADY_PAYWALL___.Platforms make money by capturing a small portion of the value of each transaction. Facebook, for example, charges money for linking up users with advertisers, while WeWork charges its clients for short-term leases of buildings that WeWork has long-term leases on..The idea of a platform business isn't new – flea markets are an old-school platform business where stallholders pay a fee to set up and transact with wandering shoppers. But in the digital age, we have seen an explosion of platforms that leverage technology to make transactions faster, more frequent, and more frictionless..Technology has allowed digital platforms to build up incredibly huge networks (Facebook has over a billion users, and there are over a million third-party sellers on Amazon) and to create trust systems, like customer ratings and reviews, that enhanced users' confidence and willingness to transact. Digital payment systems and transparent pricing have helped reduce transaction friction..All of this has paid off handsomely. Studies show that platform companies have performed extremely well. Over the last ten years, they have enjoyed faster growth, and much fatter profit margins than other types of companies while employing fewer workers..For a long time, then, the platform train has seemed unstoppable. New platforms have been created in industries ranging from lending (peer-to-peer platforms like Lending Tree) to fine art (ArtX). The momentum behind platform businesses has driven a large chunk of the returns on the US stock market as investors flooded into fast-growing companies that promised to leverage the power of platforming..But it looks like times may be changing..Consider the following:.Netflix spent $6bn on original content in 2016, $9bn in 2017, and $12bn in 2018 – it's expected to spend $19bn this year;WeWork has created a $3bn property fund to buy office buildings it has previously leased;Amazon spent $14bn to acquire grocery chain Whole Foods in 2017 and it plans to spend $6bn on original content for its Prime video service this year;Uber purchased over 100 "dark kitchens" to provide takeaway food for its Eats business in London and has invested hundreds of millions in developing technology for its own self-driving fleet of vehicles..In other words, many of these "platform" companies are doing decidedly un-platformy things. In fact, they are moving up and down the chain in their industries, trying to position themselves so that their platforms don't match third parties with one another but instead match their own products with consumers. In other words, they're moving from being platforms to being regular old companies that sell stuff to people..Why is this happening? There are a number of reasons..For a start, some platforms are seeing third parties move into their space. Amazon and Netflix are trying to create their own content because big content producers like Disney are creating their own platforms to sell directly to consumers. Digital technology cuts both ways, and if a newcomer like Disney Plus can offer more, customers will switch..For another thing, many platform companies are finding that their platform isn't quite the license to print money they hoped it would be. Ride-hailing platforms like Lyft and Uber, for example, have set the price of rides so low that they have been forced to subsidise them using investors' capital. This is not sustainable, obviously. To help combat this, Lyft and Uber are planning to cut out the third-party middleman by investing vast amounts of capital in their own self-driving car fleets, which will transform them from platforms to old-fashioned cab companies..And for another thing, regulators are starting to take aim at platforms that are using their monopoly power to dampen competition. The Apple App Store, for example, is in trouble after an interesting Supreme Court ruling. Marketplaces like the App Store – where owners of Apple devices buy apps for their phones, tablets, and computers – claim to be neutral platforms that bring together buyers and sellers and take a cut. But the US Supreme Court ruled that buyers could sue Apple for the 30% cut it takes on app sales under antitrust (competition) laws. Similar rulings have hit Google in the EU and India has adopted new rules to limit platforms' power. Regulatory attention means lower margins and more headaches for big platforms. Moving up and down the value chain can defray some of this..As platform companies are losing faith in the model, so are investors. The underwhelming Uber IPO – the company is still trading well below its $45 IPO price – suggests investors are becoming wary platform companies, especially ones like Uber that have yet to demonstrate an ability to make money..All in all, I think this is a good thing. Many businesses in the platform space have not actually delivered real economic value in the form of better efficiencies, more production, and higher productivity. Instead, they've mostly shifted around the margins of things like shopping, driving around the city, or watching TV. They've made life more convenient, but they haven't fundamentally improved living standards the way that, say, refrigeration or the combustion engine did. Perhaps the next wave of innovation will help address real problems like housing and healthcare shortages, declining real incomes, and climate change.

WORLDVIEW: Amazon, Uber moves suggest tech platform boom is over

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