Platform Advantages: Not Just Network Effects

Over the past few years, there’s been growing legal and academic interest in platforms — their functioning, potential harms, and advantages over competitors.

On that last question, most of the literature that I’ve seen has focused on factors like network effects and access to data. However, a forthcoming book by Carliss Baldwin proposes some significant additional – and structural – advantages that accrue to those who control them. Design Rules Volume 2: How Technology Shapes Organizations¹
builds on Volume One (which I wrote about earlier) with a goal to ‘build and defend a general theory explaining how technologies affect the structure and evolution of organizations that implement the technologies.’

Baldwin argues that “whether a technology will generate the most value through single, unified corporations, through platform-based business ecosystems, or through open source projects depends on the balance of complementarity within the technical system.” Let’s unpack that (in my words, with apologies for any misinterpretation of her work).

Modularity

Imagine a technical system, such as a service provided across the Internet, that comprises numerous components. This is a common occurrence because, as mentioned in Volume One, we manage complexity through modularity. We break down tasks into smaller units that can be distributed among many individuals, preventing any single person from having to comprehend the entire system’s intricacies.

These components can have various degrees of coupling – i.e., interdependency. While we always strive for loose coupling, which allows for easy modification or replacement of components without affecting others, it’s not always feasible to avoid tight coupling when there are close dependencies.

Coupling and Governance

Baldwin points out that systems with many tightly coupled functions are better situated in a single company due to the ease of managing these relationships within the hierarchical and closely related environment of a modern corporation. Conversely, she suggests that those with very loosely coupled functions are more appropriate for implementation across multiple entities because this arrangement enables the generation of greater overall value.

In the middle lies a “Goldilocks zone,” where some amount of coordination is necessary, but there’s still a benefit to distributing functions amongst many actors. These conditions allow formation of a business ecosystem – a set of “independent organizations and individuals engaged in complimentary activities and investments.” As Baldwin points out:

Ecosystems rely on distributed governance, meaning that each member has the right to make certain decisions according to his or her own interests and perceptions. In place of direct authority, coordination of an ecosystem requires negotiation among members with different priorities and interests.

Platforms

There are many examples of such distributed governance schemes, including Open Source and Open Standards. However, it’s hard to ignore the dominance of platforms in the current landscape, which she defines as ‘a technological means of coordinating design, production, and exchange within modular architectures.’ Platforms aren’t so much distributed governance schemes as they are centralised control points (or even choke points).

She then goes on to break down a typology of platforms, with particular focus on transaction platforms, like eBay, Amazon, and Chrono24 – and communication platforms, such as Facebook, Bluesky, and X.

Here’s where things get really interesting. Baldwin argues that certain core processes are essential to implement these types of platforms are are bound to be tightly coupled, thereby heavily tilting the table towards implementation by a single company:

The need for tight integration of core processes is the first reason for-profit corporations subject to unified governance have replaced organizations subject to distributed governance in almost all digital exchange platforms. Traditional exchange processes did not require the same high degree of synchronization as algorithmic processes.

In transaction platforms, she identifies search and ad placement, dynamic pricing, and data analysis and prediction as processes that must occur within milliseconds to provide a satisfactory user experience. For communication platforms, the relevant core services are search and ad placement, ad selection, dynamic pricing of an ad, and (again) data analysis and prediction.

What this means for the Internet

Yes, search is more difficult on a federated platform like Mastodon, but it’s possible if you relax the need for immediate updates – as it can be if you rework the relationships in that arena. When you get past that, it’s also hard not to notice that these core processes are mostly advertising-related.

And that’s crucial. These companies have stepped in to solve coordination problems (“How do we communicate around the globe? How do we do transactions with people we haven’t met?”) by creating platforms that fully exploit their centralization. They are supported by real-time advertising systems because the table is tilted towards that outcome, and building a real-time advertising-supported ecosystem with distributed governance is hard.²

Much of that friction goes away if you relax the constraint of being advertising-supported, or even remove the real-time requirement from advertising (e.g., by using contextual advertising). However, you still have a coordination problem, and because real-time advertising is the most lucrative way to monetise a centralized position, decentralizing these systems means big companies won’t be nearly as interested in these outcomes.

The history of the Internet is illustrative here. We had RSS and Atom feeds, but there wasn’t a business model in that: however, there was in ‘news feeds’ on Facebook. We had open messaging protocols like XMPP, but they were supplanted by proprietary chat platforms that wanted to lock their users in and monetise them. Meanwhile, e-mail is being slowly swallowed by GMail and a few others as we helplessly watch.

In short: there are less-recognised structural forces that push key Internet services into centralized, real-time advertising-supported platforms. Along with factors like network effects and access to data, they explain some of why the Internet landscape looks like it does.

Decentralized alternatives must overcome those forces where they can’t be avoided. They also need to be developed and supported, and to compete with those centralised platforms, they will need to be well-funded. To go back to the RSS/Atom example, there is a lot of work that could improve that ecosystem, but no one has a strong incentive to do so.

In these conditions, ‘build it and they will come’ is insufficient; simply creating Internet standards and Open Source software won’t solve the coordination challenges. Most current Internet companies lack the incentive to fund such efforts since they’re unlikely to accommodate real-time advertising.

Who might? My thoughts turn to the various discussions surrounding Digital Public Infrastructure. Exploring how to make that viable is a crucial (and important) topic that I’ll leave for another day.

This is just one aspect of Design Rules Volume 2; there’s much more to discover in this excellent book. I’ve been enthusiastically recommending it to anyone who takes the time to listen.

Thanks to Robin Berjon for reviewing this article.