When Snap – the parent company of the popular social media application, Snapchat – made its recent debut as a public company, a full coterie of technology journalists, investors and analysts debated its long-term prospects. Will Snap displace Facebook as the internet’s global behemoth, or is it the next Twitter – a tool beloved by journalists and sports fans, but limited in its broad appeal and ability to monetize? Will Facebook leverage its vast resources to reverse-engineer the most popular elements of Snap? Will Snap demonstrate generational or age-specific appeal?
These are all legitimate questions that compel focus on a limited but meaningful subset of metrics: daily active user growth, aggregate advertising revenue, average revenue per user (or, ARPU), geographic reach, and user demographics. But when I take measure of Snap, or any other internet company, I apply a different lens. Rather than read tea leaves in search of forward financial returns, I’m interested in whether a company shows a durable ability to disrupt and refashion the broader ecosystem.
To that end, my first question of any technology company is: are you a product company, or a platform company?
Product companies begin by building hardware or applications (either consumer-facing or business-facing) that often enable new activities or automate, streamline, and simplify older ones. My industry – advertising technology – offers a useful example. Many early “ad tech” companies introduced products into the market that automated digital advertising and enabled marketers and publishers to buy and sell advertising inventory at scale. But what happens if new products come along and displace or supersede these offerings? Then what?
In recent memory, I can point to myriad companies that introduced products that achieved rapid adoption by, and popularity with, consumers. Sony, Phillips, and Toshiba (VCRs and DVD players) – Motorola and Nokia (mobile telephones) – TomTom and Garmin (GPS systems) – Amazon (e-readers). Each of these products, though widely influential for a time, eventually reached a tipping point, after which it met either with commoditization or obsolescence. Streaming outdated both video cassettes and DVDs. The smart phone displaced mobile flip phones and superseded e-readers. Bluetooth systems made portable GPS units useless for owners of most new cars.
In short, products do not often exhibit long-term disruptive value. Platforms do. In each case, companies that invested in underlying platform technology were able to exert lasting influence over the way in which people consume content and information.
Platform technology takes years to build. It contains core features and capabilities that companies later package and incorporate into consumer-facing or business-facing products. It is the strength and sophistication of the platform, rather than the individual products built on top of it, that determine a company’s power to reorder and dominate a market.
Here’s one example:
The conventional story arch around Amazon is that it began life as an online bookstore and then expanded into other e-commerce verticals. In fact, it started by building a core platform with distinct capabilities and features, presumably including user authentication, order management, data management, real-time decisioning, pricing, clearing, and content recommendation. (I say presumably, because I have never worked at Amazon and can only speculate about the functionality of its core eCommerce platform.) These capabilities rest on sophisticated, machine learning technology that took years to build and scale and require ongoing development and refinement. Amazon subsequently rolled these capabilities into distinct B2C or B2B products, and its customers – whether they are consumers buying books or independent booksellers plugging into the company’s marketplace – capture the platform’s functionality by adopting some or all of these products.
Working from a platform-first approach enabled Amazon to scale its business in an initial vertical (books) and subsequently build products in adjacent verticals like music, film, and clothing. But all of its products and marketplaces – its bookstore, streaming service, third-party marketplace, and web services – rely on that underlying platform.
An example of why platform-first companies often succeed where product-first companies falter is the e-reader. Though the Amazon Kindle was not the first such device, it quickly became the most popular after its launch in 2007. With the introduction of the iPhone and iPad, the Kindle – like all e-readers – became instantly obsolete. Why buy a device that does one thing when you can buy another that does an infinite number of things? If sales of Kindle devices dropped off, the Kindle application continued to thrive, in part because it leverages Amazon’s powerful platform, which in turn allowed Amazon to dominate global book distribution.
Another benefit of platform-first companies is that they often, though not always, unlock new value by inviting partners to build products and marketplaces adjacent to their own. Amazon was able to move its Kindle application to the iPhone, because the iPhone’s underlying technology platform is designed to encourage such co-innovation.
When in 2005 Steve Jobs launched an internal initiative to build iOS, he faced a central dilemma. As a Bloomberg article framed the question: should Apple endeavor to “shrink the Mac, which would be an epic feat of engineering, or enlarge the iPod?” Jobs set two teams of engineers – one that worked primarily on the Macintosh’s operating system, the other of which focused mainly on the iPod’s – in competition. Ultimately, the Mac team, led by Scott Forstall, won the day. Because iOS was based on the company’s mature and widely-adopted desktop platform, developers were quickly able to rejigger preexisting applications and build new ones for the mobile platform.
The end result is a wide-ranging ecosystem of partners and competitors, all building their own products and marketplaces atop iOS. Today, Apple sells music and streaming services on the iPhone, but so do Amazon, Netflix, Spotify, Hulu, and Pandora.
Platform companies are also critical in the business-to-business space. Salesforce, arguably one of the pioneers in software-as-a-service, saves its enterprise customers the cost of constructing and maintaining their own core computing infrastructure. Its marketplace, AppExchanger, which Business Insider once termed “eBay for business software” – and which Forbes dubbed “iTunes of business software” – offers other companies an opportunity to leverage the functionality of the Salesforce platform to develop their own products adjacent to Salesforce’s. The company even developed its own programming language, Apex, which enables third parties to write and run code on its shared architecture. Though most of its products and partners are not as familiar to consumers as popular streaming services or social network apps, to millions of sales and marketing professionals, the Salesforce ecosystem is a critical CRM and customer success asset.
My key takeaway is that product-first companies come and go. Many of them will make money and return value to investors. Some will even upend or help reinvent existing industry verticals. But companies that are most likely to disrupt and dominate the internet long-term are those that first construct a platform and then roll up its features and capabilities into distinct products and marketplaces. The best of these companies also invite other innovators (be they friends, competitors, or frenemies) to build their own products and marketplaces on top of their platform.
There is little doubting that Snap has produced a popular and well-designed product. But is it fundamentally a product-first or platform-first company? Are Spectacles to Snap’s platform the equivalent of the Kindle to Amazon’s platform? Will a vibrant ecosystem of products and marketplaces emerge atop Snap’s core infrastructure?
Sitting here today, I don’t know the answer, but it’s the question I’ll be asking myself as I follow Snap’s progress as a public company. It may not help forecast short-term profit and loss, but it’s a powerful barometer of its lasting influence over the internet.
