Applying Platform and Ecosystem Thought to the Internet of Things

Why isn’t one dominant platform like Windows emerging in the internet of smart, connected things [IoT]?  The main reason is that IoT is a far more complex market than those that came before, and a single platform won’t be enough to meet a wider variety of user demands.

In previous eras, like PC and Mobile, there was only one core technology for operating systems to harness.  In contrast, IoT is only a convenient blanket term that actually includes many different vertical markets (e.g. enterprise, consumer, wearables, gateway, healthcare, transportation, etc.), and encompasses a myriad of different devices, user experiences, and input methods.  Microsoft/Windows dominated horizontally when there were only PCs, and was able to insist on one experience no matter the hardware; but IoT platforms face a multitude of user experiences.  Instead of a single platform achieving dominance in IoT, it could take multiple platforms to reach those needs.

Underlying Market Dynamics

Additionally, IoT’s underlying market dynamics differ from those of the PC/Windows era.  The market fit and network effects that led to Windows’ dominance at the time no longer carry over or accrue to IoT platforms in the same way.  PCs/Windows achieved dominance based upon securing sales and distribution relationships with enterprise customers, but the internet has since opened up new customers (by reaching large groups of individual consumers).  These new consumer markets reward companies very differently from enterprise markets, rewarding them instead based upon the quality of the user experience.

The PC/Windows market primarily began as an enterprise market, meaning that those in charge of purchasing decisions were not always the primary users, and that the quality of the user experience was not often the highest priority in those decisions.  Rather, the enterprise market wanted open, generic commodities in bulk, and rewarded companies with the greatest product fit and the strongest distribution relationships.  This happened to be Microsoft.

In contrast, neither mobile nor IoT have had one single dominant OS emerge yet.  With the new consumer markets opened up by the internet giants, it is now crucial to deliver superior user experiences to attract users, rather than to just control sales, distribution, and access to enterprise customers.  Given these new ground rules, OS wars are currently at an equilibrium (e.g. iOS vs. Android), and there will likely continue to be multiple winners in IoT (e.g. Homekit, Brillo, IoTivity, AllJoyn) as well.

The Powers that Be in IoT

IoT is composed of various consumer and enterprise markets.  On the consumer side, Google and Apple will continue fighting into the IoT era, one that is nearly as large as both previous eras combined (~4 billion PCs/smartphones vs. ~5 billion IoT devices in 2015).  Google and Apple have already acquired the biggest developer and user platforms and are well-positioned to control the home vertical.

Google's Brillo/Weave is an open system that may unite a universe of differing devices, varying inputs, constraints, and uses.  A customizable and interoperable platform, where information is aggregated in an intelligent hub, and combined with a conditional rule-set that is dependent upon a user's needs would be powerful.  On the other hand, Apple/HomeKit's vertical integration and possession of one the most powerful iOT gateways, the iPhone, will help it to keep delivering a complete, albeit closed, user experience.  Apple's integrated approach towards software, hardware, and design thinking--designing wearables and IoT devices from the ground up, rather than based upon physical interfaces--will also help it to continue capturing high-end users.

Other companies (e.g. Intel’s IoTivity, Qualcomm’s AllJoyn, etc.) that might understand IoT very well, but haven’t aggregated users like Apple and Google have, could yet still succeed by going into enterprise vertical markets, or industrial application spheres.

The Internet's Ripple Effects upon Consumer Firms

Why do flat organizational structures and digitization matter so much for innovation?  The public eye is fixated upon startups, but massive change is also happening within incumbent corporations.  Since corporations are contemplating this question, we should retrace just how we got from the internet, to startups taking advantage of changing business economics and models, to enterprises now responding by prioritizing flatter hierarchies and digitization.

The internet prizes users

The internet has changed how companies grow and stay competitive (i.e. generate outsized or monopoly profits).  To paraphrase the peerless Ben Thompson, it used to be that a company either had to 1) gain a horizontal monopoly in one of the three primary parts of the consumer market value chain (suppliers, distributors, and consumers/users), or 2) integrate two of the parts so as to have a competitive advantage in delivering a vertical solution.  To achieve the latter, delivering a vertical solution, it was common to integrate supply and distribution.

Now, by making the distribution of goods and content free, the Internet has modularized suppliers, and rendered supplier-distributor relationships and integration less valuable.  Also, by reducing transaction costs to zero, the Internet allows distributors to reach or integrate with consumers/end users at scale.  All this is to say that the balance of power has tipped towards consumers.  Therefore, distributors no longer compete based upon exclusive supplier relationships, but rather now compete for consumers and users.

One example of where this has played out is with enterprise software vendors and systems integrators, whose businesses have suffered at the hands of Software as a Service (SaaS) and freemium.  Their business models revolved around selling all sorts of services through the exclusive sales team-customer relationships, and were such that as long as they had the best distribution or relationships, they would win regardless of how good the products were.  Now, in contrast, the most successful companies aggregate suppliers—meaning the suppliers come to them—and connect them to the consumers/users with whom they have developed an exclusive relationship at scale.  The perfect example of this is Facebook, which has achieved the historic task of monetizing a staggering 1.5 billion monthly active users.

Digitization and flat hierarchies are bridges to users

And that's precisely why flat organizational structures and digitization matter for innovation, because they both enable you to get closer to the customer or user, which in turn allows you to use data to adjust your strategy more quickly and make better decisions.

Digitization achieves this by integrating the practices of looking at data to learn more about the customer, and of using those insights to design better customer interactions and products, into one continuously improving and iterative process.  Because of the way that the internet has elevated the consumer and user, user experience has become the most important factor in determining success.  Companies that design the best user experience will gain the most consumers and users, and in turn attract the most suppliers.

The other element of digitization is reconfiguring organizational structures so that they can take better advantage of analytics.  Flat organizational structures, in particular, enable those with their ears closest to the customer data to be decision-makers.  At a corporation, the most valuable resource is people’s labor and time (what they work on, etc.), but it is often allocated by plan and command, non-price mechanisms (i.e. by hierarchy).  Ironically, free markets are generally seen as good, and corporations are themselves the emblem and engine of free enterprise, but the market for people's time at those places is an area that is relatively resistant to that principle.  Meanwhile, startups are often considered more nimble, “entrepreneurial,” closer to the pulse of the customer, and capable of identifying real issues quickly; all because they are flatter, and decentralize and individualize time and team allocations.

Yet flat hierarchies and democratization may not always suit every organization.  As an extreme example, you wouldn't want the military to be run that way.  Flat hierarchies still involve their own trade-offs, as they can still be subject to power politics, and can hide power structures and shield individuals from accountability, leading to abuse or dysfunction.

Digitization and reconfiguring structures is more broadly about getting all of the siloed data and putting it in front of the people who can make use of it, or putting those people in power to act upon those insights—and flatter structures are just one method of doing so.  Sometimes, this can entail ring-fencing certain initiatives or projects within a company so that they can grow and develop independently.  Other times, it can involve finding out where the silos of experts and dispersed talent are, and integrating them better.  Or, it can involve simplifying lines of accountability and empowering those further down the hierarchy with decision-making rights (i.e. having fewer cooks in the kitchen when it comes to making decisions so you can get things done).

Building a Durable Product in Marketplace Lending

It’s been fascinating to follow the marketplace lending space over the past year.  The creation of different classes of marketplace loans (whole vs. fractional) has materially improved capital access by shortening the amount of time it takes for borrowers to secure funding.

In the early days, when borrower demand still outpaced lender supply, it could take up to a few days to fill a loan.  Lenders consisted of small retail investors with limited capital, so platforms would split loans into fractions to make it easier for investors to participate.  Since then, large institutional investors (i.e. hedge funds, pension funds, insurance companies, banks, HNW individuals, etc.) have joined the marketplace.  For instance, Blackrock was responsible for funding 17% of loans on Prosper last year, while Santander backed 25% of whole loans on Lending Club.

Unlike retail investors, though, institutional investors are capable of investing at scale.  To accommodate this, platforms reserve blocks of loans on their marketplace as whole loans that can only be bought or matched in full.  With the substantial growth in whole loan pools, institutional investors are able to attain the legal advantages of investing in whole loans in large volume.  At the same time, platforms with an eye towards sound market structure and participation, have implemented measures to keep large institutions from crowding out retail investors (e.g. random loan assignment to pools to prevent bias in loan quality).

All the institutional investors entering the market are giving the entire funding process a shot in the arm.  Whereas it used to take several days for a borrower to get funded, it now averages less than a day*.  Furthermore, portfolio managers commonly employ purchasing algorithms through platform APIs, so many loans are in fact snapped up within just a matter of seconds.

While there are other issues involved in building a dominant business in this space (e.g. partnering to get products in front of more consumers), measures like these that maintain a competitive and diverse market are also key for building a lasting, durable product.  The bifurcation of marketplace loans, along with the measures taken to maintain a healthy balance in supply and demand, have been great developments in financial technology.  The next step in that regard may be to implement more secondary marketplaces for loans, where investors can exit investments by offloading them to other willing buyers.

*It may take several more days for loans to review and originate, and for borrowers to receive money.