Data Platforms and Network Effects

Very interesting area of interest.

Data Platforms and Network Effects

By Michael A. Cusumano

Communications of the ACM, October 2022, Vol. 65 No. 10, Pages 22-24  10.1145/3555833

Industry platforms are foundations that bring people and organizations together for a common purpose, which usually includes making money. They function at the level of a market or ecosystem, rather than only within a specific firm. They often start with products such as operating systems and microprocessors, services such as social media and messaging systems, or marketplaces for e-commerce and financial transactions. They can link thousands, millions, or even billions of users and other market actors. But another type of industry platform has recently received attention from consultants such as The Boston Consulting Group as well as investors, entrepreneurs, and policymakers. These platforms center around data. Some have become extremely valuable. How can data inspire industry platforms and what is their potential as businesses?

A distinctive feature of industry platforms, and fundamental to their definition, is the ability to generate positive feedback loops with increasing returns for users and other market participants.4 We call these feedback loops "network effects." They occur on the same-side of the market when a platform connects users directly to other users, such as with the telephone, a social media or messaging app, or any peer-to-peer exchange system. Then cross-side network effects can occur when an industry platform connects demand (for example, buyers) with supply (for example, sellers). Network effects imply the value of the platform increases, at least potentially and sometimes geometrically or exponentially, with each additional user or "complement," such as apps for a smartphone or drivers for a ride-sharing service. But, when it comes to data, who are the users and what are the demand and supply sides? And where are the network effects, if any?

Data can have standalone value as a digital product or service but to evolve into a multisided platform business it needs additional qualities.

Data can have standalone value as a digital product or service but to evolve into a multisided platform business it needs additional qualities. First, the data should be in a form suitable for analysis and curation. "Data is the new oil," as the mathematician Clive Humby stated back in 2006. But most data, like oil, needs refining in order to be useful.8 Second, more data should result not simply in more data but in increasingly useful data. Some observers have called this a "data-network effect."3,13 It resembles a same-side network effect, though here the focus is on the data itself. Third, analyzing the data should reveal useful characteristics of different market actors. These connections provide the basis for cross-side network effects and monetization opportunities. Fourth, as with some other industry platforms, a complementary ecosystem of third-party product and service providers is likely to emerge, powered by cross-side network effects, to help collect, store, analyze, share, and sell the data. ... '