What is governance?
Governance is the set of rules concerning who gets to participate in an ecosystem, how to divide the value, and how to resolve conflicts. To understand good community governance is to understand the set of rules for orchestrating an ecosystem
- Always create value for the users, you serve
- Do not use your powers to change the rules in your favor
- Do not take more than a fair share of the wealth
Example of Facebook: not good governance due to the amount of data they sample without knowledge of the users. Too big to fail
Platforms as states - Why does governance matter?
The goal of good governance is to create wealth, fairly distributed among all those who add value
Affect millions of lives as some of the platforms are bigger than nations
Good governance is important in both nation-states and platform businesses because absolutely free markets, in which people and organisations interact with no rules, restrictions, or safeguards, can’t always be relied upon to produce results that are fair and satisfactory to those involved
Multisided platforms involve numerous interests that don’t always align. This makes it difficult for platform managers to ensure that various participants create value for one another, and it makes it likely that conflicts will emerge that governance rules must resolve as fairly and efficiently as possible
A market failure
The case of the Ambiguous Ale (example p. 162) is an example of market failure – a situation in which “good” interactions (fair and mutually satisfactory) fail to occur, or “bad” interactions do.
If you can’t find an item you want on eBay, then a good interaction has failed to occur. If you did find an item you wanted but god cheated, abused, or deceived, then a bad interaction has occurred.
The four main causes of market failure
Information asymmetry: arises whenever one party to an interaction knows a fact that other parties don’t and uses that knowledge for personal advantage
Externalities: occur when spill over costs or benefits accrue to anyone involved in a given interaction. There are positive (e.g., Netflix using information from someone like you to recommend movies to you) and negative (e.g., bothered neighbors with Airbnb) externalities. People do not complain about positive externalities, but it is value not fully captured by the platform.
Monopoly power: arises when one supplier in an ecosystem becomes too powerful because of its control of the supply of widely sought good and uses this power to demand higher prices or special favours (or price staggering)
Risk: is the possibility that something unexpected and essentially unpredictable may go wrong, turning a good interaction into a bad one. E.g. Uber and taxi drivers. Making the taxi industry go wrong.
Four levers to address market failures:
According to Alvin Roth, a well designed market:
Increases safety (via transparency, quality, or insurance)
Provides thickness (enables parties from both sides to find one another more easily)
Minimises congestion (hampers successful searches, when too many people participate or low quality drives out high)
Minimises repugnant (extremely unacceptable) activity
The system of control involves four main sets of tools to avoid market failure:
Laws
Norms
Architecture
Market
What does laws include?
The laws of a platform are its explicit rules – for example, the terms of service drafted by lawyers, or the rules of stakeholder behaviour drafted by the platform’s designers. These laws moderate behaviour at both the user and the ecosystem level.
Concerning national laws, the platform is rarely responsible for the users’ behaviour. Hence, the users bear the downside risk
Platform laws should be and usually are transparent. However, an exception: applies to laws that might facilitate bad behaviour. The underlying principle: give fast, open feedback when applying laws that define good behaviour, but give slow, opaque feedback when applying laws that punish bad behaviour (otherwise they will know what they get punished for and thereby can work around it)
What does norms include?
They reflect behaviours, which means that they can be constructed through the intelligent application of the discipline of behaviour design: A recurring sequence of trigger, action, reward, and investment
The trigger is a platform-based signal, such as an email, a web link, a news item, or an app notification. This prompts the platform member to take some action in response.
The action, in turn, produces a reward for the member, usually one with some variable or unanticipated value, since variable reward mechanisms like slot machines are habit-forming. (e.g., getting money when charging a shared electric vehicle)
The platform asks the member to make an investment of time, data, social capital, or money. The investment deepens the participant’s commitment and reinforces the behaviour pattern platform managers want to see
it’s desirable to have users participate in shaping the system that govern them. You can nudge users.
What does architecture include?
It refers basically to programming code. Well-designed software systems are self-improving they encourage and reward good behaviour, thereby producing more of the same
Architecture can also be used to prevent and correct market failures through arbitrages - e.g., providing spelling assistance, so people wont get cheated the ones taking advantage (with the beer example)
The blockchain protocol: write self-enforcing contracts that automatically reassign ownership once contract terms are triggered. Neither one of the parties can then back out of the deal
What does the market include?
Markets can govern behaviour through the use of mechanism design and various incentives – not money alone, but the trifecta of human motivations that may be summarised as fun, fame, and fortune
Social currency, measured as the economic value of a relationship, includes favourites and shares. It also includes the reputation a person builds up for good interactions. The number of followers etc.
If a developer working on a platform invents a valuable idea, who should own it, the developer or the platform? It’s possible to imagine arguments on both sides of the issue
Rather than seeking to minimise their own risk, platforms should use market mechanisms such as risk pooling and insurance to reduce risk for their participants and thereby maximise overall value creation
Principles of smart self-governance for platforms
- Internal transparency: due to the tendency of “siloed” departments, making it hard to solve problems that span over multiple divisions. Also hard for outside partners and developers to work with the platform team. Hence, a clear view to all devisions is needed
- Participation: give external partners and stakeholders a voice in internal decision processes equal to that of internal stakeholders. Otherwise, the decisions made will tend to favour the platform itself, which will alienate outside partners and cause them to abandon the platform
- Just and fair governance: create wealth in two ways: first, if you treat people fairly, they are more likely to share their ideas. Second, fair governance leads participants in a market to allocate their resources more wisely. It will create more wealth than if the rules grant a platform owner the ability to make arbitrary decisions without accountability. Platforms that respect their users can expect more from them
(4. flexibility in order to respond to both fast and slow moving parts of the platform)
Pipeline vs. platform general measurements and metrics
Pipeline: A pipeline manager is concerned with the flow of value from one end to the other. Cash flow, inventory turns, and operating income.
Platform: is concerned with the creation, sharing, and delivery of value throughout the ecosystem – some occurring on the platform, some elsewhere. Measure the rate of interaction success and the factors that contribute to it. The most important metrics are those that quantify the success of the platform in fostering sustainable repetition of desirable interactions. What matters is activity – the number of satisfying interactions that platform users experience
Metrics that track the life cycle of the platform: mention the three stages:
- Metrics during the start-up phase: simple measures to guide around key questions of the platform and the core interaction, platform design and launch, curation, matching, pulling users in etc. Tracking active producers and consumers who are participating in successful interactions.
- Metrics during the growth phase: has reached critical mass. Focus shift to customer retention, and ratio of active users to paying customers. Monetisation becomes a critical issue
- Metric during the maturity phase: the challenge of user retention and growth requires the platform to innovate in order to stay competitive. Discover new ways to create value. Measuring the degree to which producers and consumers are repeatedly participating in the platform and increasing their participation over time
Stage 1: metrics during the start-up phase explained
Focus on the core interaction and the benefits it creates for both producers and consumers on the platform
Three main metrics to define success or failure:
- Liquidity: tracking the percentage of listings that lead to interactions within a given time period. Illiquid situations discourage users from participating (if a Uber-user want a car, but there is no car available). User commitment and activity important. Not sign-ups. The ratio of active users - active users/total users. The growth rate in active users
- Matching quality: refers to the accuracy of the search algorithm and the intuitiveness of the navigation tools offered to users as they seek value-creating interactions . Precision in matching leads to lower search costs for users – that is they invest less time, energy, effort, and other resources in finding the matches they want. The sales conversion rate: the percentage of searches that leads to interactions. Or number of likes on a post on Instagram - the ratio of posts and likes
- Trust: refers to the degree to which users feel comfortable with the level of risk associated with engaging in interaction. Achieved through curation. Both sides should be successfully curated so that users are comfortable with the level of risk involved in engaging in interactions on the platform. Measure engagement per interaction, time between interactions, and percentage of active users = shows degree of commitment
Stage 2. Metrics during the growth phase explained
Work to ensure balance on the two sides of its market. Can be monitored by calculating the producer-to-consumer ratio, with an adjustment to include only active platform users.
Calculate value for producers: the platform should monitor figures that include the frequency of producer participation, listings created, and outcomes achieved, interaction failure (where is has been started but stopped). Monitor producer fraud - e.g., not able to describe it or not delivering it on time. This can all calculate life-time-value: mechanisms by repeat producers provide recurring platform revenues without incurring additional acquisition costs
Calculate value for consumers: monitor the frequency of consumption, searches, and rate of conversion to sale (the percentage of click-throughs that result in completed interactions) – can calculate consumer LTV. Programs designed to encourage loyalty with valuable consumers. The interaction conversion rate too = number of searches leading to interactions.
The side-switching rate – the rate at which people concert from one type of user to another – offers an important metric that the platform can use to track the health of its user base and to maintain balance across its network
Stage 3. Metrics during the maturity phase
Three requirements:
- Drive innovation: must be able to adapt to the needs of its users and to change in the competitive and regulatory environment. identify necessary adaptions is by studying the extensions provided by developers
- high signal to noise ratio: If you have a large signal to noise ratio, you offer clients and colleagues relevant information that translates into business value. Relevant information vs. not relevant information or interactions
- Facilitate resource allocation
The importance of simplicity in your metrics
Overcomplex metrics make management less effective by introducing noise, discouraging frequent analysis, and distracting from the handful of data points that are most significant. The more, you measure, the less prioritized you will be
“Vanity metrics” such as total sign-ups – a relative meaningless statistic that often increases even as the volume of interactions is flat or actually declining
Your metrics should meet the three A’s:
Actionable: they provide clear guidance for strategic and managerial decisions, and in being clearly related to the success of the business
Accessible: they are comprehensible to the people who gather and use the information.
Auditable: they are real and meaningful – based on clean, accurate data, precisely defined and reflecting the reality of the business as perceived by users
The most important metric: Happy users
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1. Introduction and platform definition13
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1b. The Basics: Network Effects and Architecture24
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2. Business Model Radar and the Basic Platforms8
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3a. Disruption and Platform Launch19
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3b. Monetizing Network Effects and Openness24
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4. Managing Platforms18
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5a. Platforms, Competition, and Business Services13
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5b. Customer Journey12
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6. IoT and Servitization6
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7. Regulation and the Future of Platforms28
