Harvard Business Review

IDEA IN BRIEF

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Multisided platforms (think inter-
mediaries like Amazon or eBay that
connect interdependent groups of
customers) can lower your transac-
tion costs and increase customer
reach. But, as Toys “R” Us learned
when it teamed up with Amazon,
choosing the wrong MSP can lead
to stiffer competition and loss of
control over customers. To select
the right MSP for your business,
consider three crucial decisions:
»
Should you use an existing MSP
or build your own platform?
»
Should your company partner
with one MSP or many? For in-
stance, many companies advertise
on both Google and Yahoo.
»
Which MSP features should you
adopt or reject to maintain competi-
tive advantage? Target preserved its
brand by selectively using Amazon’s
order-fulfillment services on its own
website.

What went wrong? To fuel its own growth and profitability, Amazon had recruited small, third-party merchants to sell toys and games directly through its website. In a two-year court battle, Toys “R” Us argued that Amazon had violated the exclusivity agreement and that the rising competition had hurt its online sales. Amazon tried to justify its actions by contending that the other merchants were addressing customer needs that Toys “R” Us couldn’t or wouldn’t satisfy. In the end, the court ruled that Amazon had violated the agreement; it allowed the companies to sever their relationship but didn’t award Toys “R” Us damages.

Toys “R” Us’s frustration is not unique. Companies large and small have been wandering in the wilderness, trying to figure out how to play with the rapidly growing number of multisided platforms such as Amazon. MSPs are products, services, or technologies that connect different types of customers to one another. Credit-card companies and eBay link consumers and merchants. Google’s search engine connects advertisers and users of its services. Microsoft’s Windows platform has three sides

(application developers, users, and OEMs), as does the Blu-ray standard for high-definition DVDs (content providers, manufacturers of DVD players, and consumers). Once a relatively obscure strategic problem, multisided platforms have become important for all companies today, thanks to the power of

the internet and related technologies. As new intermediaries have emerged to facilitate search capabilities and reduce transaction costs, companies find themselves acting either as an MSP or as a player on someone else’s MSP.

MSPs are doubled-edged swords for the average company. On the one hand, a platform can make a company more efficient or increase its customer reach. For example, by advertising on Google, a firm can gain access to an audience that otherwise may be impossibly expensive to attract. On the other hand, just because an MSP has a great installed base of customers or offers platform services that can significantly reduce costs does not mean that joining it guarantees success. Before Toys “R” Us struck its deal with Amazon, it should have recognized that the two companies’ long-term interests were fundamentally at odds. The success of Amazon’s platform depended on covering the “long tail” of consumer demand by offering any product in any category. By contrast, Toys “R” Us’s success was driven by the “short tail” of toys: pushing mainly hot products in high demand. Toys “R” Us should have anticipated that as soon as it succeeded

in establishing the toys and games category on Amazon’s platform, Amazon would have the upper hand and would try to wiggle out of the exclusivity pact. Toys “R” Us probably should not have agreed to put its online store inside Amazon’s site. At the very least, it should have extracted more concessions

Pure Platforms Platforms are products, services, or technologies that serve as foundations on which other parties can build complementary products, services, or technologies. Pure platforms do not have any contact with players’ customers.

EXAMPLES SAP’s ERP software, E-Ink’s electronic ink technology (used in the Amazon Kindle), Qualcomm’s CDMA technology for mobile devices

Pure Market Intermediaries Market intermediaries are firms that make a living by reducing search and transactions costs for two or more distinct groups of players. These firms generally take full possession or control of the goods and services whose sale they facilitate.

EXAMPLES Wal-Mart, 7-Eleven, Whole Foods

Multisided Platforms

An MSP is both a platform and an intermediary. MSPs can insert themselves between you and your customers, though they don’t take ownership of the goods and services whose sale they facilitate. MSPs support players that are interdependent, which creates indirect network effects.