MIT Sloan Management Review Article on Why Some Platforms Are Better Than Others

Although successful digital platforms can deliver remarkable value to users and riches to entrepreneurs and investors, in some sectors it isn’t clear that anyone will turn a profit.

The dramatic influence of the internet on how businesses operate and the emergence of a handful of gigantic, digitally enabled corporations have led to breathless pronouncements regarding the importance of a new class of monopolies built on digital platforms. Such platforms, it is said, can fuel network effects that lead to winner-take-all marketplaces. This perspective is often coupled with infectious optimism and investment euphoria regarding the extraordinary scale and strength of network-effects businesses.

In theory, the key attribute of a network-effects business is its momentum-driven flywheel. Every new participant increases the value of the network to existing participants, attracts more new users, and makes the prospect of a successful competitive attack ever more remote — thereby bolstering the relative attractiveness of the business. The imagined innate indomitability of network effects stems at least in part from the breathtaking strength of notable platform businesses such as Facebook Inc.’s social network or Microsoft Corp.’s Windows operating system.