Understanding platform capitalism is critical to making money in the 21st Century. To explain, a platform is a network; or ecosystem, (usually) digital that supplies goods or services.
The owners of a platform can make money from those goods or services in three ways. First, platforms like Netflix (NASDAQ: NFLX) charge a flat fee or toll for admission to the platform. For example, Netflix members get to access unlimited amounts of streaming video by paying a fee.
Second, a platform charges a fee on each transaction. For example, PayPal (NASDAQ: PYPL) charges 2.9% per transaction; or 30₵ a sale, for payment processing.
Third, many platforms charge businesses for access to customers or viewers. Specifically, Alphabet (NASDAQ: GOOG) charges advertisers for access to people using the Google search engine. Plus, Amazon (NASDAQ: AMZN) and Alibaba (NYSE: BABA) charge merchants for access to customers.
Can Platforms make Money?
In addition, there is a fourth model in which the platform offers both a toll and advertising based model. For instance, Spotify gives music fans a choice between a subscription service and a “free advertising-based service.”
Notably, Spotify has around 96 million premium subscribers and another 107 million unpaid subscribers, Music:)Ally estimates. To explain, musicians have the choice of offering their songs free or subscription on Spotify. Moreover, the subscribers pay a €4.89 ($5.47) fee.
Interestingly Spotify’s 4tht Quarter 2018 revenues of €1.5 billion ($1.68 billion) grew by 30% in 2018, Music)Ally calculates. Specifically, 46.4% of those revenues; or €1.32 billion ($1.48 billion), come from the premium subscriptions. Additionally, Spotify made €175 million ($195.82 million) or around 34% of its revenues from advertising in 2018.
Plus, Spotify reports an operating profit of €94 million ($105.18 million), and a net profit of €442 million ($494.58 million) for 4th Quarter 2018, Music:)Ally notes. Impressively, Spotify is making money after losing €596 million ($666.89 million) in 4th Quarter 2017.
How Platforms make money
This is impressive because Freakonomics describes Spotify as a “company that doesn’t really make anything.” Instead, Spotify; like PayPal offers a convenient, simple, and relatively seamless means of connecting customers with a product they want: songs.
Notably, some of those songs; like Beetles’ tunes, have been around for over half a century. Hence, Spotify makes money by finding a new way to monetizing an existing product.
To explain, Spotify took music, digitized it, and made the songs available through a convenient online platform. Interestingly Spotify claims to offer access to 15 billion hours of digital content.
How Platforms Grow
Finally, the Spotify platform is easy to access by touching an app. Moreover, Spotify plans to grow its platform by making $400 to $500 million worth of acquisitions in 2019, Music)Ally reports.
In particular, Spotify is trying to expand its audio offerings by purchasing podcast companies like Gimlet Media. By buying podcast systems, Spotify’s management hopes to offer unique content people cannot find anywhere else.
Finally, over 300,000 artists use the Spotify for Artists program. Thus, those unpaid content creators are making vast amounts of new content at little or no cost.
How Platforms Expand
Not surprisingly, other companies are trying to duplicate Spotify’s success. For instance, Microsoft (NYSE: MSFT) purchased the app and software directory operator GitHub in June 2018.
Notably, GitHub claims its platform or Octoverse contains 96 million repositories that contain over 1.1 billion and apps and software solutions. Moreover, the Octoverse connects 31 million developers with 2.1 million organizations. Finally, those developers received 200 million requests for software in 2018.
Thus, Microsoft is trying to create a Spotify for software with GitHub. In particular, Microsoft expanded its “workforce” by 31 million developers by purchasing GitHub. Moreover, Microsoft need not pay those developers. In fact, the developers work for free and only make money when Microsoft sells software through GitHub.
Consequently, platform capitalism is one of the most profitable business models around. Everybody who wants to make money online needs to learn to navigate the world of platform capitalism.
Plus, investors need to learn to identify companies that own potentially lucrative platforms. Microsoft, GitHub, and Spotify demonstrate that platforms could be the future of capitalism.
