Platform Scaling, Fast and Slow
Conventional wisdom says digital platform businesses should scale quickly, but that’s a mistake in some markets.
Image courtesy of Michael Glenwood Gibbs/theispot.com
Shortly after its 2009 founding in San Francisco, Uber executed a simple strategy that rapidly led to its expansion on a global scale. To achieve network effects by connecting as many drivers and passengers as quickly as possible, the company prioritized launches in new cities. It hired core teams of general managers, operations managers, and community managers in multiple cities at once. In each city, these teams attracted drivers by offering existing black-car services an app — and sometimes a free smartphone — to monetize their idle time. To attract riders, the teams offered subsidized fares to attendees of large conferences and other high-profile events, signing them up and then gaining thousands more riders through word of mouth.1
Rapid scaling, as exemplified by Uber, is a core element of platform strategy, with speed considered the decisive factor in the race to succeed in winner-takes-all and winner-takes-most markets.2 But we’ve found that rapid scaling may not be the best strategy for all platforms. In some cases, a more careful, incremental, and thus slower approach to scaling is more beneficial.
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In studying platform businesses, including Airbnb, Amazon, Apple, Expedia, Facebook (particularly its e-payment project, Libra), Google, Grindr, LinkedIn, Netflix, PayPal, and Uber, we found that regulatory complexity and regulatory risk are two significant but often neglected factors in platform scaling decisions. Moreover, they are likely to become increasingly important in the years ahead as efforts to regulate tech companies gain momentum and as more companies in a greater variety of sectors and markets seek to capture the benefits of platforms.
Plotting Regulatory Complexity and Risk
Regulatory complexity describes the current level of legal and regulatory barriers that govern platform entry and operations in a sector.
References
1. Y. Moon, “Uber: Changing the Way the World Moves,” Harvard Business School case no. 316101 (Boston: Harvard Business School Publishing, 2015).
2. See, for example, R.I. Sutton and H. Rao, “Scaling Up Excellence: Getting to More Without Settling for Less,” (New York: Crown Business, 2014); and R. Hoffman and C. Yeh, “Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies” (New York: Currency, 2018).
3. A. Breland, “Americans Want Tougher Regulations for Tech Companies: Poll,” The Hill, April 20, 2018, https://thehill.com; Hogan Lovells, “A Turning Point for Tech: Global Survey on Digital Regulation,” Oct. 30, 2019, www.hoganlovells.com; and G. Edelman, “Congress Unveils Its Plan to Curb Big Tech’s Power,” Wired, Oct. 6, 2020, www.wired.com.
4. R. Menezes, M. Moore, and P. Do, “Billions Have Been Spent on California’s Ballot Measure Battles. But This Year Is Unlike Any Other,” Los Angeles Times, Nov. 13, 2020, www.latimes.com.
5. “Justice Department Sues Monopolist Google for Violating Antitrust Laws,” U.S. Department of Justice, Oct. 20, 2020, www.justice.gov.
6. N. Silver, “The Signal and the Noise: Why So Many Predictions Fail — but Some Don’t” (New York: Penguin Press, 2012).
7. KPMG, “There’s a Revolution Coming: Embracing the Challenge of RegTech 3.0,” 2018, https://assets.kpmg.
8. Y. Yang and J. Fontanella-Khan, “Grindr Sold by Chinese Owner After U.S. National Security Concerns,” Financial Times, March 7, 2020, www.ft.com.
9. K. Gurses and P. Ozcan, “Entrepreneurship in Highly Regulated Markets: The Battle for Pay TV in the U.S.,” Academy of Management Journal 58, no. 6 (December 2015): 1709-1739.
10. C. Condon, “Fed’s Brainard Raises Red Flags Over Facebook’s Libra Project,” The Guardian, Dec. 18, 2019, www.theguardian.com.
11. H. Murphy and I. Kaminska, “Facebook’s Libra Overhauls Core Parts of Its Digital Currency Vision,” Financial Times, April 16, 2020, www.ft.com.
12. In “Blitzscaling,” Hoffmann and Yeh also employ the term “fast scaling,” but with a different meaning than used here.
13. Hogan Lovells, “A Turning Point for Tech.”
14. For a more detailed discussion of the specific characteristics of platform business models, see, for instance, G. Parker, M. van Alstyne, and S. Choudary, “Platform Revolution: How Networked Markets Are Transforming the Economy — and How to Make Them Work for You” (New York: W.W. Norton, 2016).
15. C. Keese, “The Silicon Valley Challenge: A Wake-Up Call for Europe” (Munich: Penguin Verlag, 2016).
16. C. Kapalschinski and L. Holzki, “Free Now Will zur Roller-Plattform Werden,” Handelsblatt, Nov. 7, 2019, www.handelsblatt.com.
17. B. Uzunca, J.P. Coen Richtering, and P. Ozcan, “Sharing and Shaping: A Cross-Country Comparison of How Sharing Economy Firms Shape Their Institutional Environment to Gain Legitimacy,” Academy of Management Discoveries 4, no. 3 (September 2018): 248-272.
18. M. Farrer and N. Khomami, “More Than 500,000 Sign Petition to Save Uber as Firm Fights London Ban,” The Guardian, Sept. 23, 2017, www.theguardian.com.
19. E. Engleman, “SOPA Bill Petition Collects 7 Million Signatures, According to Google,” The Washington Post, Jan. 19, 2012, www.washingtonpost.com.
20. S. Harnett, “Gig Companies Are Making Their Workers Promote Prop. 22,” KQED, Oct. 20, 2020, www.kqed.com.
21. L. Brainard, “Update on Digital Currencies, Stablecoins, and the Challenges Ahead” (remarks at Monetary Policy: The Challenges Ahead — An ECB Colloquium Held in Honour of Benoît Cœuré, Frankfurt, Germany, Dec. 18, 2019).
22. S. Webb, “Facebook’s Libra Is a ‘Failure,’ Says Swiss President,” Coin Rivet, Dec. 30, 2019, https://coinrivet.com.
23. W. Henisz, T. Koller, and R. Nuttall, “Five Ways That ESG Creates Value,” McKinsey Quarterly, Nov. 14, 2019, www.mckinsey.com.
24. “Edelman Trust Barometer 2020,” Edelman, January 2020, www.edelman.de.
25. N. Megaw, “Index Ventures’ Jan Hammer: Bringing Perspective to Single-Minded Tech Founders,” Financial Times, March 8, 2020, www.ft.com.
26. Hogan Lovells, “A Turning Point for Tech.”