A "WINNERS TAKE ALL" platform
In theory, a platform could get a "winners take all" position considering the network's power, network effects and network externalities. I this article, I will present three key elements that should, in theory, create a winner take all position. And then, I will have examples that confirm and challenge the argument.
First, the platform needs strong and positive network effects. This means that the network effect, where more users lead to stronger and stronger network effects, needs to keep the momentum and not wear out. Uber is an example where there will never be too strong network effects; due to a limited need for taxies in a city, reaching a sufficient number, the added value of more drivers will drop, and the network effect will flatten out. There are other services like social media where the network can grow with added value to millions, but even there, the added value with one more user will eventually flatten out but be strong.
An important nuance of the network effects is whether they are positive or negative. With a positive network effect, a positive feedback loop could create almost exponential growth. Unfortunately, there are many examples where a platform doesn't have good enough control over the intake of new users and eventually has too many users that create negative network effects. We saw that on Myspace with the "The naked hairy man problem. " Where legitimate users leave the platform, and the relative noise on the platform increase further, leading to a negative feedback loop.
Secondly, there should be low demand for differentiation. There should be minimal space for differentiation of the service where the service is standard and not possible, interesting, or legit to deliver in other versions. There is one thing with technical solutions like patented solutions that stop differentiation legally. But, there are also markets where the service is one-dimensional and is not easy to differentiate. For services like food delivery like Foodora or car-sharing services like Uber and Lyft, people only want to pay for transportation from A to B, and there is little leeway for extras or specials. In combination with strong network effects, in an undifferentiated market it could be possible to have a "winner take all" position.
Marketspace through focus and differentiation is often created where people have a heterogeneous taste. Suppose a "winner take all candidate" tries to be everything for everyone. In that case, there will eventually be room for differentiation and specialization where a challenger will focus on a smaller niche and handling this better than the big incumbent. Look at eBay vs. Etsy. eBay offered everything to everyone; Etsy saw that artisans wanted a different experience when buying art with more pictures and higher quality on buyers and sellers.
Thirdly, switching costs should be high to stop new market entries. This element is an old classic that still applies to platform markets also. If you have all your training data on Strava, it is a high cost to lose them to change to Runkeeper. This can also be more literally speaking, where you have invested in a platform license like Salesforce and invested money, time, and honor in implementing it. The switching cost to Microsoft Dynamics 365 is also high.
Before the internet age, they learned about the power of the network effect, with high switching costs leading to a "winners take all" market position, at least for a while. They studied cases like VHS vs. BetaMax where VHS's network effects won over a superior product quality from BetaMax. Today, we see that switching costs are low with platforms and the ease of the internet, with no high investments or lock-in effects.
To conclude, there is in practice not an easy task to achieve a dominant "winners take all" -like market position. Still, you can take many strategic steps to build a defensible platform business model, and platform b. can help you with that.
