singaporeen
Platform power

Platform power

11-04-2017 | Research
Surging connectivity is powering a new business model: the platform company. Platform companies, such as Uber, Airbnb and Alibaba, facilitate commercial or social interaction between interested parties that faced high costs of finding each other in an unconnected world. What are these companies’ investment merits and what are the risks investors should keep an eye on?
  • Steef  Bergakker
    Steef
    Bergakker
    Senior Portfolio Manager

Speed read

  • Platform companies have yielded very good investment returns
  • Investors should develop a deep understanding of the nature of network effects
  • Envelopment is a strategic risk that should be monitored

Robeco Singapore Private Limited

12 Marina View 
#10-02, Asia Square Tower 2 
Singapore 018961 
Email: robecosg@robeco.com
Tel: +65 6909 6898

Contact

Over the last few years, we have witnessed the meteoric rise of new businesses such as Airbnb, Uber and Alibaba, which have been able to build a global presence in just a few years. A common feature of these upstarts is that they operate as a mediator between value creators and value consumers that would not, or to a much lesser extent, have interacted without the platform.

Platform companies dominate in terms of market capitalization

The virtual nature of the networks and meeting places means that it is much easier to grow these businesses than businesses that employ physical assets. The world's five largest companies in terms of market capitalization today, i.e. Apple, Alphabet, Microsoft, Amazon and Facebook, are all platform companies and have become household names in a very short time.

Platforms are not a modern invention. Real physical platforms like bank branches, airports or restaurants and bars have been around for quite some time. Physical market places, which go back to early civilization, can perhaps be considered the archetype of the platform business model.

What distinguishes modern platform companies from archetypal platform companies is the evolutionary leap forward in business reach made possible by the exponential increase in connectivity of the last 15 to 20 years. Modern information and communication technologies have turbo-charged the old platform business model and expanded its reach from mainly local to truly global. Commercial and social interaction that was impossible or prohibitively expensive in the past can now take place almost instantly and at very low cost. This has proven to be a huge game changer.

The monetization challenge

Platforms can generate a lot of economic value for their users. However, capturing a part of that economic value can be challenging for platform operators. An important part of the economic value created by the platform operator is the reduction of search costs. However, once a potential consumer and producer have found each other, there can be an incentive to go off platform, negotiate a private deal and avoid having to pay a commission to the platform operator. This is especially a problem for platforms that connect service providers with service consumers where often substantial sums of money are involved and the likelihood of repeat transactions is low.

In principle, platform operators can try to monetize by charging a transaction fee, charging for access, for enhanced access (e.g. premium articles on online newspapers) or for enhanced curation (e.g. vetting services for online dating services).

An additional monetization possibility is analyzing, leveraging and selling the data that platform traffic generates. This can potentially represent huge commercial value, but is fraught with privacy issues.

The market is characterized by some very large companies that completely overshadow the rest. This is a manifestation of increasing returns caused by the network effect that tends to lead to winner-takes-most/all outcomes.

Which markets are susceptible to platform disruption?

Platform companies have already invaded many markets and increasingly start-ups adopt a platform business model. Where we can expect platforms to pop up next? In their book ‘Platform Revolution’ Choudary, Parker and Van Alstyne list four characteristics that make markets susceptible to platform disruption: information intensiveness, non-scalable gatekeepers, high level of fragmentation and large information asymmetries. Industries that tick many of the boxes are education, energy, finance, healthcare, labor services, logistics, and transportation.

Platform companies have generated extraordinary returns. Most of them have massively outperformed both the S&P500 and MSCI All Countries World Index over one, three and five years. This can largely be attributed to network effects, as a source of growth and competitive advantage. Once increasing returns from network effects kick in, growth becomes self-sustaining and requires very little capital. As a result, returns on invested capital improve and economic value creation soars.

In markets with winner-takes-most/all characteristics, growth is only limited by the market’s size. As the network’s size grows, scale advantages grow as well, raising entry barriers and extending the competitive advantage period while further compounding profitability. Finally, as users become ever more embedded in the network, switching costs tend to rise as well, adding to the competitive advantage.

Investors need to understand the nature of network effects

The main task for investors is to develop an understanding of the nature of the network effect in combination with the cost of multi-homing and switching costs for users. In addition, careful examination of the monetization and governance model a company employs, is required to get a full understanding of the strengths and weaknesses of platform companies.

Once a platform has reached critical size, it becomes very difficult to dislodge, provided company management doesn't slip up too badly. Investors can usually look forward to a long period of value creation. Two risks should be monitored, however. One is the introduction of Schumpeterian improvements in functionality by competing platforms. While this does happen from time to time, it seems a fairly remote risk as a platform’s main functionality is finding a match, which, by definition, a successful platform already does.

The second is the risk of envelopment by another platform. This means that one platform provider moves into another one's market, combining its own functionality with the target's, to form a multi-platform bundle. This is possible if there is significant overlapping in user bases and/or there are significant economies of scope. Envelopment is a risk investors should be aware of.

Leave your details and download the report

Disclaimer:

I agree to the Robeco Disclaimer and the collection and use of my personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy Policy,  including for the purpose of direct marketing of Robeco products or services. Your data will be treated with utmost care and will not be passed on to third parties.

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

Logo

Important Information

Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.

By clicking on "I agree", I declare that: 

  • I am a qualified investor as defined under 1
  • I have read and understood the Terms and Conditions and Disclaimers as described under 2

1 - This website may only be accessed directly or indirectly by the following persons in Singapore:

1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.

2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).

3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.

4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.

2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms.  If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore.  The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction.  It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights.  You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos.  You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video.  Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website.  You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason.  The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.

Disclaimers
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice.  The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited.  By accessing to the Website, you agree to the foregoing.  

The funds referred to in the Website are for information only.  It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors.  The contents of the website is not reviewed by the MAS.  Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions.  You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.

Any decisions made based on the information contained in the Website are the sole responsibility of yours.  Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.  The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.  

Investment involves risks and may lose value.  Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future.  The value of your investments may fluctuate.  Past performance is no indication of current or future performance.  The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future.  The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons.  The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes.  Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.

Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence.  An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

I Disagree