Two Fundamental Types of Digital Business Models
In the last two parts of our Digital Business Models fundamentals series, we learned that the best way to categorise business models is by Value Creation.
This leads to the 11 Digital Technology Verticals in the image with thousands of companies in each.
Each vertical is characterised by similar sets of customer value propositions. With this, they have a range of similar value creating activities.
However, the approach to creating value within the same vertical can significantly differ.
At the most fundamental level, we distinguish between two types of business models:
The Linear Business Model
The Platform Business Model
From a customer perspective, both types may appear to provide similar value propositions (or even the same). However, both types lead to very different business models.
In this article, we look at the key differences between the linear and the platform business model.
Linear Business Model vs Platform Business Model
So what’s the difference between these two types of business models?
They differ in how they create and deliver value.
Most traditional business models fall under the linear business models (well over 90%). As for digital business models, it is impossible to quantify what percentage falls under which type.
However, the biggest digital companies by market cap fall under the platform business model or use it for a considerable portion of the value proposition.
Value Creation
Linear business models create value by sourcing inputs from suppliers and creating something of higher value for their customers than the sum of the individual parts. There are dozens of different sourcing, design and manufacturing models.
Not all linear business models transform the vendor inputs. Amazon sources their inventory, stores and delivers it to the customer faster and cheaper than anyone else (including the manufacturer). They also provide more choice and comparison features than others.
Platform business models have a so-called supply side strongly involved in value creation and value delivery to the platform’s customers.
In the platform business model, both the digital company and the supply side are strongly involved in value creation and delivery. In the linear business model, the supplier is considerably detached from the customer.
The supply side can consist of:
Other people who provide a service or share an asset, e.g. on Fiverr, Uber, Airbnb
Companies / organisations that provide a service or product: merchants on eBay, hotels on Booking.com, universities on Coursera
Hardware or software products that provide value (and are part of an ecosystem), e.g. apps on the Apple App Store, downloaded and used on the iPhone
Customers of the platform business model are often called the demand side.
As for terminology, be aware that in popular coverage the terms “platform” and “ecosystem” are used very loosely and may not always refer to what we have described here.
Examples
Within each of the 11 verticals, we have representatives from both the linear business model and the platform business model.
Asset & Service sharing
Companies like Lime bikes (partially owned by Uber) and all other bike sharing companies are linear business models as they own the asset provided to the customer and do most of the upkeep.
Companies like Uber, Getaround (hire cars), Deliveroo and Upwork are platform business models as most of the value is created and delivered by the supply side (drivers, car / home owners, freelancers).
The digital company also creates considerable value. Simply compare the size of the bed & breakfast sub-market within the lodging industry before and after Airbnb.
Travel & Dining
Digital businesses in this space are mostly platform business models as they intermediate between the supply side (hotels, restaurants, etc) and the demand side (customers).
Hotels and restaurants have their own digital presence but that does not make them a digital business as their core value propositions are lodging and gastronomy, i.e. non-digital.
Content & Media
The two biggest players in this vertical run fundamentally different business models.
YouTube is a platform business model with most of the content created / uploaded by the supply side (these can be individuals or companies).
Netflix is based on the linear business model as they create most of the content themselves (>80%). Even when they licence or purchase titles, this falls under the linear business model as these are selected, sourced and paid for by Netflix.
eCommerce
The standard Amazon is a linear business model with a tremendous amount of inventory sourced, stored and delivered by Amazon.
Amazon Marketplace and eBay are platform business models where the transaction is intermediate by these companies. However, sourcing / manufacturing of the inventory is conducted by the supply side (merchants).
Hardware and Software Technology
This is a fascinating space with thousands of interconnected companies and solutions.
Linear business models are used by many Apps. Most apps where the user does not interact with other users or businesses are likely to be based on the linear business model. And even a portion of apps where there is interaction with others are based on the linear business model, e.g. collaborative productivity SaaS tools.
Platform business models in this vertical are often characterised by creating an ecosystem of products and services. Here the supply side consists of other hardware and software. It is often referred to as an “ecosystem”.
The demand side can be the end customer or - intriguingly - other hardware / software platforms.
Apple vs Microsoft in the 70s/80s
Check out the video where we are showing the battle of Microsoft vs Apple in the 70s & 80s that Microsoft won in a crushing manner. In fact, Steve Jobs was forced out of the company he co-founded because it was close to bankruptcy.
The main reason for this was that Jobs decided to keep their flagship computer the Apple Lisa closed to 3rd party software and hardware, i.e. a linear business model. Without an ecosystem and exactly 7 pieces of software, it had no chance against DOS-based computers that had an ever-increasing ecosystem of hardware and software components.
Interestingly enough, Jobs repeated the same mistake with the iPhone 1G which had no App Store. All 3rd apps were supposed to run on Apple’s Safari browser. A fear of history repeating through the ecosystem that Google’s Android was about to unleash brought Jobs to his senses… and finally, there was an Apple product with a 3rd party ecosystem. The rest is history and the strongest testament to the Platform Business Model one can imagine. Check out the video …
Key Insight
Key insight: within one vertical we can have competitors using the linear business model competing against the platform business model. Sometimes they can co-exist (Netflix and YouTube) and sometimes one or the other will prevail (Apple vs Microsoft in the 70s/80s). It will not always be clear which one will be successful but knowledge about digital business models can help you make educated evaluations.
Other differences
We have focused on value creation. As for other business management concepts, some are similar between linear and the platform business model, such as economies of scale. Other concepts are partly overlapping. And finally, there are those concepts that are entirely different.
Check out our in-depth coverage of the platform business model here to learn the most important concepts.
Check out part 4 of our Digital Business Model fundamentals series: Success-defining Concepts in Digital Business Models.