Nov 26, 2014

Apple - Platform Thinking,Network Effects & Valuation

One of the electives that I took while in IIMK was this less fancied course - Complementary Products & Competitive Advantage  . The fundamental message in that course was in applying 'Platform Thinking' concept into a lot of situations . A platform could be thought of as an area where two or more types of consumers / producers join for their mutual benefit.  And the value of the platform grows as more and more consumers / producers join it.  Typical example of this is Card Payment networks - Visa & Mastercard.  So, if you are a card network provider,  merchants are forced to give that as a payment mechanism because consumers want that. And, more consumers joining the platform results in more merchants adopting it.  Like a domino / network effect. If executed well, it soon reaches a tipping point from where more consumers & merchants just adopt it.

This concept could be extended to a lot of situations - Currency is a platform  ( explains dollar's dominance  ) .. Amazon's kindle publishing is a platform..  Facebook is a platform ( you have users & advertisers ) , Airports could be thought of platforms connecting Airlines, Passengers & Retailers.    In a way, it is a kind of thinking that visualizes a business as a convergence point of different types of consumer - producer combinations

If there is a factor that has strongly differentiated Apple from Samsung in the smart-phone / tablet / field, it is internalizing this platform concept into their product strategy. In other words, platform thinking is Apple's competitive advantage. Product design, user experience, marketing strategies  - All can be copied.  But the game is no longer about producing a feature rich / perfect phone . It is all about enriching iPhone / iPad as a platform

This platform is much more than the App-Developing eco-system.  But it all started with it.  Apple took great care in nurturing the App-Developer eco-system.  Its entry barriers & tight quality checks resulted in attracting a well-paying user-base & a talented pool of app-developers adopt it as a platform.  It might be numerically less than the Android App store in terms of Apps or developers or consumers. But quality & experience-wise , I'd say Apple has nurtured it well.

They had a few more platform experiments -  iBooks  , Newsstand , Passbook .. All these are nothing  but interesting variants of platform concept that brought a distinct user-base & producers / sellers towards iPhone / iPad . With the latest entry  - Apple Pay -  I think Apple has virtually killed the competition . True, Samsung has Google Wallet  -  But its not about being first in the market. It is about properly launching it & marketing it to reach that Platform Tipping point from where the platform would itself grow.

The value of iPhone today is not about electronics / features / UI alone.. It is about access to these platforms that it provides you.  And it is this valuation that Corporate Finance often misses
In a networked world, if a company of Apple's size manages to make a 20%+ Jump in Stock in a month or two -  largely on account of the Apple Pay announcement - I've to say that it is being truly successful in internalization & execution of this Platform Strategy

See the Graph Below on Apple's Stock 

I've to say, Carl Icahn is spot-on in asking for share-buy backs. Because present valuations does not account what new platform ingredients can Apple innovate - and the network economy benefits that it can add to the company.

No comments: