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Staging Two-Sided Platforms
Founded in 1999, Shanda Interactive Entertainment Ltd. aspired to become China’s dominant platform for distributing entertainment content over the Internet, connecting consumers with third- party producers of games, TV shows, movies, and music. But how to get started? Why would content companies make their products available through Shanda’s new platform before it had significant consumer traffic? And why would consumers visit a platform without any content?
Shanda used a staged strategy to address this dilemma. Initially, the company offered only its own online games, accessed using prepaid cards in Internet cafes. After this business gained traction, Shanda added content from third-party publishers. It remains to be seen whether the company will realize its ambitions, but its “two-sided” platform is off to a good start. Shanda’s aims are understandable. Successful two-sided platforms can earn high returns, as evidenced by businesses as diverse as American Express, Century 21, Google, Microsoft Windows, Sabre, Nintendo Wii, Ticketmaster, and Verizon Yellow Pages. A two-sided platform provides infrastructure and rules to facilitate transactions between two distinct groups of users, for example, cardholders and merchants in the case of American Express.1 The platform harnesses cross-side network effects: users value the ability to transact with a variety of partners on the network’s other side.2 In most platform-mediated markets, the combination of strong network effects and high fixed infrastructure costs means there is only room for a few players. The entry barriers that allow two-sided platforms to earn high returns also make them difficult to build in the first place. Aspiring platform providers face formidable challenges when mobilizing a new network (see Appendix). The biggest obstacle: prospective users on each side will not invest in the platform until they are confident there will be enough users on the other side. Some see this as a “chicken-and-egg” condition, but we prefer to label it a Catch-22.3 A party subject to a Catch-22 must undertake two actions that each depends on the other being completed first. For example, you cannot get a job without experience, and you cannot get experience without a job. Starting up a two-sided platform presents a similar quandary.

 

 

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  • Posted on : April 28th, 2019
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