A Staged Solution to the Catch-22

Companies launching two-sided platforms—businesses that connect two groups of users, as credit card companies do—have often subsidized one group to get it to use the platform. This is a risky approach, because it requires a big up-front investment. A staged approach is safer: It establishes the platform in two distinct steps. Some of the Internet’s biggest success stories have been launched this way, including Google and Amazon. The staged approach addresses a catch-22 faced by any company hoping to capitalize on a two-sided platform: Prospective users on each side will avoid the platform until they are confident that the other side will have enough users to make it worth their while. Who’s going to sign up for a new type of credit card if no merchants accept it? And what merchant will accept the card if no customers carry it? (For more detail see “Strategies for Two-Sided Markets,” by Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne, HBR October 2006.) A company using a staged strategy begins by selling products or services to customers on just one side of a potential two-sided platform—products or services whose value to that side does not depend on the existence of the other. Once the company has built a big base of customers on the first side, it can target the second side for development. Google used this strategy: It originally launched as a vendor of web search services, operating Google.com and licensing its search engine to Yahoo and other portals. Initially Google.com carried no advertising; its sole (and modest) source of revenue was licensing fees. But after amassing end users, Google added advertisements and became extraordinarily profitable by serving searchers on one side and advertisers on the other. It brought new functionality to existing services as a means of transitioning to a two-sided platform. An alternative approach is to provide more of the same—to broaden a firm’s existing product line by hosting third parties that market similar goods and services, as Amazon did. Charles Schwab deftly managed such a transition years ago by adding third-party mutual funds and independent financial advisers to its in-house offerings. Staged strategies reduce investment risk but can be tricky to implement. Companies must earn the trust of new platform users. Third-party suppliers, for example, may worry about ceding control of their customer relationships to platform providers, who can favor their own products. Likewise, close communication is essential to maintaining the confidence of existing customers, suppliers, employees, and investors, who may be confused or alienated when a firm fundamentally changes its value proposition. Although Google successfully transitioned into a platform through improvisation rather than a careful plan, the road is littered with the casualties of poorly executed platform strategies. Think of eight-track cassettes, RCA’s VideoDisk, and IBM’s OS/2. By studying platform strategies that have worked, companies can hedge their bets.

A Staged Solution to the Catch-22

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