Beware of the “platforms”

Jonathan Knee writes for FT:

Increasingly, the term “platform” has come to be used as little more than a kind of trigger word to separate investors from their money. Characterising otherwise more pedestrian businesses as “platforms” has become the go-to move to goose valuation multiples or just attract interest.

For instance, the healthy salad fast-food chain Sweetgreen insists it is a “food platform”. Similarly, the US technology-enabled real estate business Compass included the term platform 291 times in its initial public offering filing earlier this year. But its shares have fallen more than a third since early IPO highs amid questions over how different its business model really is from traditional agents.

These are the new buzzwords (“platforms”) that are meant to draw investor interest. I wonder how do the investors miss the connection completely. Platforms arise from a “core” with interconnected nodes that facilitate interaction between these nodes and create value for everyone involved. For example, Google- as a search platform connected with the digital advertisers and end users. Yes, it is a abuse of the privacy- that’s a topic for some other day.

This is interesting insight:

Two aspects of digital platforms are often thought to be particularly attractive — low fixed-cost requirements and potentially huge addressable markets. But the structural implications of these qualities is that any business can break-even at low market shares. This in turn has an obvious consequence: a future filled with a relentless stream of new entrants and intense competition.

Inherent nature of any digital business- it can be disrupted by other larger/well-funded scale as the money is required for creating network effects at the cost of monopolising the market place. This network moat is instructive in the context of hospital chains, for example- which are natural monopolies and will have interesting spin offs when the AI goes mainstream.

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