Multi-sided platforms (MSPs) refer to platforms that facilitate two or more classes of entities to create value for each other via the platform. The classic example is a video game console, where the two sides are video game developers/publishers and video game players. In the case of LinkedIn, the two sides are recruiters (either companies or head hunters) and job-seekers (passive or active). There may be other sides like advertisers, but let’s focus on those two for this discussion. The value to job-seekers is the prospect of getting a job offer, which is enhanced as the number of recruiters grows. The value to recruiter is finding the perfect candidate for the job, which is enhances as the number of active job-seekers grow. The mode of communication here is LinkedIn’s InMail, which allows paying recruiters to email potential candidates using LinkedIn’s platform.

Ideally, LinkedIn wants to grow both sides of its platform, especially the paying-side (recruiters). However, as the number of recruiters grows, the average number of InMail emails to potential candidates (job-seekers) also grows. After some threshold, the increased number of InMail emails will annoy job-seekers driving down their engagement, which will ultimately reduce the value of the recruiters. The question here is whether equilibrium will be reached or will the value decline on both sides start a fast downward spiral.

The more interesting question is where this phenomenon can be observed in other MSPs. As the number of sellers grows on eBay, selling the exact same product, does the value of buyers increase or decrease. While there may be a greater variety or choice, the resulting indecision may frustrate potential buyers into moving away from the platform. This is the issue Amazon struggled with when they started to allow 3^rd party sellers to sell via Amazon – repeat entries for the same product resulting in customer confusion.

In fact, this can also be observed in single-sided platforms that exhibit strong network effects. When I first started using twitter, I started by following my friends and news sites or blogs. Next, I began to follow twitter users in the industries I was interested and then ultimately anyone that followed me. As I amassed people I followed, I became overwhelmed with the number of tweets I would have to read for the ‘follow’ relationship to be meaningful. At this point, I quickly stopped using twitter, returning to it only once I had scrubbed the list of people I followed to a manageable amount.

As the size of a side in an MSP grows, so does the perceived value for the other side(s). However, those other sides may experience downsides as a result of that growth leading to the realized value for these other side(s) being lower than before the growth. As a result, the platform may lose engagement from those other side(s). Losing engagement is obviously bad for a platform as it will also reduce the value for the side that experienced the growth starting a downward spiral.

At Amazon.com, where I interned this past summer as a product manager, all employees live and die by the leadership principles (link: http://amzn.to/vRdUca). My personal favorite: Leaders Are Right, A Lot.  In a spectacular collision of bad decisions and heightened media coverage, Netflix’s Reed Hastings led his formerly untarnished brand through significant and, in my opinion, avoidable errors that led to multiple collapses of the stock price. Though the post-mortem has yet to be written (probably because the market thinks Reed may grace us with a few more foibles before this is over), I think there are a few lessons we can already take away from this mess.

#1 Simplify, don’t complicate

 In an age when every e-commerce site, search engine, grocery store, and lemonade stand spends lavishly on ways to simplify processes for their customers, Netflix went the opposite direction. Netflix used to be thought of as the simplest way to get your movies. First they came through the mail slot, and now some come streaming. Either way, for millions of Americans Netflix was (and still is) the portal to the world’s most impressive collection of movies and TV Shows.

On July 12, 2011, Netflix staff blogged that the company would “separate plans to better reflect the costs of each and to give our members a choice: a streaming only plan, a DVD only plan or the option to subscribe to both.” Customer satisfaction and retention rates were impressive before this moment, but Hastings chose to couple a price hike, which many consumers would have stomached, with a de-simplification of the beloved Netflix user experience. In the words of Julie Bogen, a customer responding to the announcement, “I was not even angry until I read that post; now I just want to throw things.” Customers understand that prices rise over time. But there’s no excuse for making their lives harder.

#2 Don’t tell your customers why they’re mad

Have you ever been in an argument where the other party tried to calm you down by telling you that they understand why you’re mad? BUT it turns out they had misjudged? Anger and disgust are two of the many feelings that people in this situation feel. Well Hastings did just that.

On September 19th Hastings sent out an email entitled “An Explanation and Some Reflection” in which he told users “many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology.” The email was sent just after the market opened, and within a series of hours the stock lost 10% of its value.

Successful online e-commerce businesses deliver customer delight through a combination of price, selection, delivery, and user experience. “Respect and humility” relate to none of these. Customers perceived Hastings as being so incredibly out of touch with their feelings that funds, in mass, dumped Netflix’s stock.

#3 Sometimes the airlines know a thing or two

Reed can see the future. In a short period, physical DVDs will be relics. But that time is not now. A few years ago airlines started charging to have physical tickets mailed to your house. Mailed tickets are expensive, inefficient, and disrupt the complex boarding programs that airlines have implemented. Crusty users needing tickets mailed in an envelope were satisfied paying for the premium service, and the rest of us were happy not to be subsiding their archaic needs. Reed assumed we would see DVDs as antiquated and understand why we were being punished for still using them. The problem, of course, is that most content is not available via Netflix’s streaming service, so the punishment seemed uncalled for.

Wrap-up

Let me say, I’m bullish on Netflix. Despite the hoopla and avalanching stock price, Netflix is the only place to turn if, for still a tiny price, you want access to all the content the world has to offer. Their service is still a bargain, and no one is truly competing with them. Until the studios get their acts together and learn how to license their content to multiple services, mail order DVD services (of which Netflix is the unquestionable leader) will play a significant role in the delivery of one-stop-shop video content. When streaming content really hits the net, then this conversation gets more interesting. Until then, I hope Reed goes back to getting things right, a lot.

INTRODUCTION
 
On September 28th Jeff Bezos revealed Amazon’s newest invention, the Kindle Fire. It’s a new tablet computer that runs on a tailored version of the Android operating system. More importantly, it uses Amazon’s new mobile web browser known as Silk, which was built to give users an ultra-fast browsing experience. The $199 Kindle Fire was also optimized for Amazon’s digital media products, including its movies, games, eBooks, music, and more.

This tablet isn’t just another e-reader from Amazon. The company’s bigger vision is to use it as a platform for growth by subsidizing the tablet’s cost to consumers to drive mass adoption and then integrating its entire ecosystem of products into the Kindle Fire.

SUBSIDIZATION & VALUE CREATION

During the launch presentation, Jeff Bezos said, “We are building premium products at non-premium prices.” But how can Amazon deliver a modern tablet at such a low price? Subsidization. In fact, early estimates indicate that the components and material costs alone total $262 per tablet. And that doesn’t even include the non-material costs, such as marketing and transportation.

At a price of $199, it seems Amazon is set to lose at least $63 for every unit it sells. However, management and the company’s shareholders believe the consumer value created by the Kindle Fire can be captured later by using the device as an instrument to grow the company’s retail, eBook, video, music, and other business lines. Furthermore, Amazon’s brand penetration and awareness will unquestionably improve.

For now, the low price mitigates adoption risk for consumers, providing Amazon with increased sales volume and a larger installed base to harvest by cross-selling its other products.

INTEGRATION & CAPTURING VALUE

In order to capture the value it passes along to consumers through “non-premium” prices, Amazon has successfully integrated its other offerings with the Kindle Fire. The list below outlines how the company’s other businesses will benefit from the new tablet:

Shopping and e-commerce

Retailers are discovering that the number of consumers who shop on their websites using tablets is steadily increasing. Even more interesting is that those users have higher conversion rates than shoppers using a traditional PC (4.5% for tablet shoppers versus 3.0% for PC shoppers). Additional research has shown that tablet shoppers also spend 10% – 20% more per order than traditional PC users. By delivering the low-priced Kindle Fire, Amazon will help expedite the growth of the overall tablet market and provide its users streamlined access to its many online e-commerce properties.

Amazon.com’s redesigned website

If you’ve visited Amazon.com recently, you may have noticed some changes. The new design is a simple, tablet-friendly site that will make mobile shopping easier. Since its flagship web property is suitable for mobile devices (especially the Kindle Fire), Amazon won’t have to create separate mobile apps. Instead, shoppers can simply navigate to Amazon.com using their mobile device’s web browser and use all of the functionality available to PC users.

eBooks

Last year Amazon announced that its eBook sales outpaced sales of traditional printed books. This is a startling figure given that e-readers have only been on the market for five years. The Kindle Fire will certainly play an important role in expanding the company’s eBook market.

Amazon Prime

The Kindle Fire will come with a free 30 day subscription to Amazon Prime, which gives shoppers two-day shipping on all Amazon purchases. In addition, Kindle Fire users will also have free access to Amazon’s ever-growing library of digital videos through the Prime service.

Amazon App Store

Although the Kindle Fire runs Google’s Android operating system, it comes with a pre-installed version of Amazon’s App Store, not the Android Market (which is most common among other Android tablets). Platform control will surely drive more traffic to Amazon’s App Store.

Media Content

In addition to its already large inventory of movies, songs, newspapers, and magazines, Amazon has announced new content deals with Fox, NBC, and CBS in the past two months. These contracts will significantly expand the company’s online video streaming service, which will yield substantial synergies with the Kindle Fire.

Cloud Computing

In an effort to promote the use and benefits of the company’s cloud computing offerings, the Kindle Fire is equipped to remotely back-up all of a user’s content on Amazon’s servers.

FINAL THOUGHTS:

Many companies have tried breaking into Apple’s dominant share in the tablet market without much success. In a recent interview, Jeff Bezos said, “Some of the companies that have made tablets and put them on the market … the reason they haven’t been successful is because they made tablets. They didn’t make services.” Since the company’s broad product portfolio provides it with dozens of ways to capture value, Amazon is essentially delivering services, not just a product, to consumers. This is something other technology giants, including Apple, will struggle to match.