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Upside, barriers to a ride on the sharing economy

Ride-sharing juggernaut Uber is held up as the face of the platform business model — an approach that creates value by facilitating exchanges between consumers and producers.

Before CIOs sign up their companies for a gig in the sharing economy, there are a few things to know. Chris Taylor, general manager, Uber Boston, bears both good and bad news for organizations looking to build a platform on which an ecosystem of value creators and consumers can converge. Taylor, speaking during a recent panel discussion on platforms at the 2016 MIT Sloan CIO Symposium, detailed the pros and cons of these business models.

First, the upside:

• Scalability

Taylor cited the platform business model’s “speed to scale” and the ability to unlock the potential of unutilized assets globally as its most valuable asset. In Uber’s case, that means linking up people seeking rides with cars and drivers. The company operates in more than 450 cities around the world; it hit the billion-trip-milestone in December 2015. The ride service was officially launched in 2011.

• Flexibility

Since platforms don’t carry the baggage of traditional enterprises, platform creators can rapidly change their offerings. Taylor points out that Uber is “selling you the ability to get where you want to go.” The platform isn’t necessarily wedded to its current car-and-driver approach. Indeed, getting from point A to point B could eventually involve autonomous vehicles. Uber began testing a driverless car May 2016 in Pittsburgh.

• Investor support

Platforms such as Uber are garnering considerable support on Wall Street. Marshall Van Alstyne, professor at Boston University, Digital Fellow at MIT and the moderator of the platform panel, pointed out that Uber’s market capitalization exceeds that of BMW — underscoring the idea that the platform holds the greatest value, not the metal box running on it.

Now, here’s the cloud to go along with the silver lining:

• Barriers to entry

Platform business models, when successfully executed, thrive on network effects. Those effects come into play when more and more value creators and more and more consumers participate in the platform. The value of the platform increases with every additional participant. In the case of a transportation platform, the more drivers sign up to provide rides, the more valuable the offering becomes for consumers. On the other side of the platform, a large pool of riders will tend to pull in more drivers. Network effects, however, also hinder platform newcomers.

“It’s more attractive for drivers to join a platform that is dominant,” Taylor said.

And playing catch-up with a platform that enjoys a superior network effect is going to be challenging, he added.

• The criticality of user experience

If your company plans to make headway against other platforms, plan on making user experience a priority. That also goes for established platforms hoping to hold onto a healthy population of consumers and the value creators they attract. The best defense, Taylor said, is “providing the best service to both sides of the platform.” Uber monitors key metrics to keep tabs on the rider and driver experience. For drivers, the key measures include utilization (How busy are they?) and sales (What do they make per trip? Per hour?).

“We have to offer the best earning potential,” Taylor said.

• The need to juggle supply and demand

Startup platforms face a chicken-and-egg problem: The platform needs buyers to attract sellers and sellers to attract buyers. Keeping those forces in balance is a continuing challenge for platforms. If a rider seeks a ride and finds none available, that’s a rider that may switch platforms or alternative forms of transport.

Taylor said it all boils down to keeping “a tight link between supply and demand.”

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