What are platform businesses?

Platforms are among the largest, most profitable, and defensible businesses. Amazon, Apple, Alphabet, Meta, Microsoft, and Nvidia all have platforms at their core (more on them later). And many other companies have built dominant competitive positions anchored by platforms within their respective markets: Airbnb, Alibaba, Booking, ByteDance, Coupang, DoorDash, eBay, Mastercard, Meituan, MercadoLibre, Nasdaq, Naver, PayPal, Pinduoduo, Roblox, Sea Limited, Tencent, Uber, Visa, etc.

Yet despite their importance, the term “platform” is used so loosely that it has lost much of its meaning. Commentators, executives, investors, and entrepreneurs routinely apply it without a clear definition. And nearly every other software company now claims the label, often to make its prospects appear more promising.

In this post, we offer a clear and precise definition of platform businesses to cut through the confusion and focus attention on their key features.

Our definition is simple (see our 2015 academic paper for more details):

Platform businesses enable direct interactions between customers who have chosen to join the platform.

Despite its simplicity, however, the definition carries some important nuances, as we will see.

To unpack it, let’s start with a few obvious examples. eBay is a platform because it enables buyers and sellers who have deliberately joined it, to find each other and trade directly, on terms they largely control, with limited involvement by eBay.

The same is true of thousands of other online marketplaces: Airbnb, Alibaba, Craigslist, MercadoLibre, OpenSea, Pinduoduo, Swimply, Upwork, etc.

Google Search enables search users and advertisers to find each other and transact through clicks and conversions. Similarly, Google’s AdSense/Display Network connects publishers and advertisers: publishers control ad space, advertisers set bids and targeting, and Google makes the match and delivers the ads.

Payment platforms (e.g., Alipay, American Express, PayPal, Venmo, Visa) enable transactions between consumers and merchants who have signed up. They focus on the payment step, rather than discovery. By contrast, food delivery platforms like Deliveroo, DoorDash and Zomato combine discovery, payment, and delivery for consumers, restaurants, and drivers.

Platforms are not limited to facilitating commerce. Dating apps (Bumble, Hinge, Tinder), social networks (Instagram, Reddit, TikTok, X), and messaging apps (Discord, Telegram, WhatsApp) enable communications between users.

Videogame consoles like PlayStation and Xbox are platforms that enable users to play games produced by third-party developers for those consoles. This was true even before the consoles had their own game marketplaces (PlayStation Store and Xbox Marketplace), which are platform businesses in their own right.

Most platforms today are digital, but they need not be. Shopping malls (the Dubai Mall, Roppongi Hills) and trade fairs (the Consumer Electronics Show) also qualify: they connect consumers with various retailers or suppliers without producing or owning the relevant products.

Platforms can involve one type of customer (e.g., Telegram, WhatsApp, Zoom) or multiple types. eBay connects buyers and sellers; Android connects users, device makers and app developers; TikTok connects creators, viewers, advertisers, and merchants via TikTok Shops.

Platforms have two important properties which follow directly from our definition. First, they exhibit network effects: as more users join, the platform becomes more valuable to each user because there are more users to interact with. A social network is increasingly attractive to every user as more users join. A marketplace’s appeal to each buyer increases with the number of sellers it hosts—and vice versa.

Second, because value is created through direct interactions among users, platform businesses tend to have significantly lower cost structures than their non-platform counterparts. Unlike traditional media companies (Disney, Paramount) who spend large amounts of money on content creation, social media platforms (TikTok, YouTube) produce no content—their users do.

Together, these features create enormous leverage, driving the scale, profitability, and defensibility of successful platform businesses. While we have already enumerated many examples that illustrate this point, Craigslist arguably comes closest to the Platonic ideal: in 2019, it generated over $1 billion in revenue with about 50 employees, margins near 90%, and a website stuck in 1995.

Just as important as what our definition includes is what it excludes.

First, platforms must enable direct interactions. This excludes retailers, which buy products and resell them in their own name.

“Direct interactions” means customers—not the intermediary—set key transaction terms and are responsible for carrying them out. When the intermediary controls pricing, merchandising, and inventory (as retailers do), it is not a platform. This is why platforms require far less capital and scale more easily than retailers, be they online or offline. Businesses like 7-Eleven, Carrefour, Chewy, Costco, Trader Joe’s and Zappos are not platforms: they take inventory risk and control pricing, display, and returns. By contrast, eBay and flea markets do not take inventory and allow sellers to set terms.

Similarly, Netflix is not a platform because it acquires or produces content, and controls consumer access through subscriptions. YouTube is a platform because it enables third-parties to create and manage their own content channels for viewers.

The same distinction applies to services. Upwork and Fiverr enable direct interactions between freelancers and clients. By contrast, outsourcing firms like Infosys employ workers, set prices, and control delivery, making them service providers, not platforms.

Second, platforms require all relevant customer groups to join. For this reason, B2B vendors that help businesses interact with their customers are not platforms unless the businesses’ customers also join the vendor.

Joining a platform requires an explicit decision: paying for access, buying a device, or incurring meaningful effort (e.g., creating a profile or driving to a mall).

For example, Adyen sells systems that allow its business customers (e.g., McDonald’s, L’Oréal, The North Face) to accept payments from their customers, but the latter do not connect with Adyen directly. McDonald’s customers do not join Adyen in any meaningful way. Similarly, Kea provides restaurants with an AI-powered communication system that allows them to handle phone orders. But the restaurants’ customers need not even know Kea exists. In both examples and many others, the end user is not a participant, so these are not platforms in our sense of the term.

Above we have seen examples of pure-play platform businesses (Airbnb, Alibaba, Craigslist, Discord, eBay) and of businesses that are clearly not platforms (7-Eleven, Adyen, Chewy, Infosys, Kea, Zappos). But reality is oftentimes more complex: many businesses are neither 100% platforms, nor 0%, but instead fall somewhere in-between.

First, the distinction between platforms and retailers is a continuum, not a brightline. Amazon.com sits somewhere in the middle: roughly 60% of sales come from third-party sellers, while the rest come from its own retail operations. Spotify is also somewhere on the spectrum: it acts like Netflix (reseller) for licensed music, but more like YouTube (platform) for podcasts. Furthermore, it allows some direct interactions between users via playlist sharing. Ride-hailing services (Bolt, Grab, Uber) fall in-between as well: drivers can use their own cars, choose work schedules, and work for rival firms, but platforms set prices.

Second, some businesses evolve from products into platforms. Amazon Web Services (AWS) began as a B2B vendor of cloud services, but added a marketplace in 2012, connecting AWS customers with third-party developers—essentially, an AWS app store.

Many other software-as-a-service providers (Intuit, Salesforce, Twilio) followed similar paths, becoming partial platforms by creating marketplaces around their flagship products. The extent of the transformation depends on how much incremental value these marketplaces add beyond the core product.

Shopify went even further. It began as a B2B vendor of tools for building and running online stores, later it added an app store for complementary third-party apps, and in 2020 launched Shop.app, which creates a direct connection with its customers’ customers. The app enables consumers to track orders, discover and purchase products from Shopify merchants, and check out seamlessly across Shopify-powered stores. As a result, Shopify evolved from a one-sided product business into a three-sided platform connecting merchants, third-party developers, and end-users.

What about franchising businesses like Hilton or McDonald’s? The classic franchising arrangement—in which the franchisor provides brand licensing and operational systems to franchisees—is not a platform, but rather a B2B vendor. End consumers transact with franchisees, not directly with the franchisor, even though they recognize the franchisor’s brand.

However, when the franchisor layers on a system-wide loyalty program (as both Hilton and McDonald’s do) or a centralized booking or ordering app, it introduces a platform element to the business that can generate some network effects.

In general, we prefer talking about “platform businesses” rather than labelling whole companies as platforms. A single company can operate multiple platform businesses, as well as non-platform business lines. That said, it is still meaningful to describe a company as platform centric when its platform businesses account for a substantial share of its value. The difficulty is that this contribution is not always easy to measure.

Some cases are straightforward. The aptly named Meta Platforms is almost entirely built around platforms (Facebook, Instagram, WhatsApp). The same is true for Alphabet: most revenues and profits come from its advertising platforms—Google Search, Google AdSense/Google Display Network, and YouTube—and the Google Play marketplace linked to Android.

Microsoft and Amazon are also clearly platform-centric, though less purely so. Microsoft’s core platforms—Windows, Xbox, LinkedIn and GitHub—remain essential, and even its main products—Azure and Microsoft 365—have platform features (collaboration, APIs for third-party developers). Similarly, both Amazon.com and AWS are platform businesses to a significant extent, as explained above.

But what about companies like Apple and NVIDIA?

On the surface, they both appear primarily as product companies. Apple’s revenues are dominated by devices (iPhone, Mac, iPad, Watch), and NVIDIA’s revenues come entirely from selling high-performance graphics chips (GPUs). Yet both are best understood as platform centric. Apple’s iPhone would be far closer to a commodity smartphone had it not turned iOS into a platform for millions of third-party applications and opened the App Store marketplace. Likewise, NVIDIA’s dominance in GPUs today does not rely solely on hardware performance. Just as important are the network effects and switching costs created by CUDA, the software platform that lets developers build applications for NVIDIA chips—even in the absence of a centralized app store or direct monetization of these third-party applications. Without their respective platform components, it is difficult to see how Apple and NVIDIA would be two of the top ten most valuable companies in the world.

The key point is that platforms need not dominate revenue to be central to a company’s success. A firm may appear product-centric in its revenue mix yet rely on a platform layer as the foundation of its competitive advantage.

Defining platforms clearly is not a matter of academic pedantry, but an essential step in better analyzing business strategies and future prospects. The goal is not to classify businesses and companies in neat buckets labeled “platforms” and “non-platforms”. That exercise is both uninteresting and futile, as we have seen that real-world nuances make it hard to make such clean distinctions.

Rather, the objective is to identify the fundamental drivers of platform businesses and use them to articulate strategic decisions. Should a firm move toward a platform model or remain a reseller? What are the trade-offs? How can a particular product be turned into a platform and what is the upside of doing so? How much can a specific company’s platform component contribute to its competitive edge?

We explore these questions and many others in our various Substack posts.

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