Maximize profits vs. Build platform

This is a classic one that every company faces sometime in their life: should we focus towards building a platform or try to go for maximizing profits? There are merits going either ways. Building a platform helps in the long run once you are able to make your platform the de facto standard for a customer base. Maximizing profits helps you to cash on the innovation you brought to the market before competition catches up.

At the same time, there are downsides for both the approaches. In case of the platform race, most of the time it’s winner takes all. For some reason, if your platform does not transform into the standard, you might end up losing all. Talking about maximizing profits, this is a risky if you are planning to go big in the long run. More profits normally lead to smaller customer base. It also makes the field more lucrative for other companies, leading to more competition. So now you end up with a smaller customer base and smaller profits to fight competition.

I believe building a platform is a risk worth taking. By building a platform, a company in turn raises the barrier to entry for competition. Once there is a platform, it is really hard for competition to come up with something new and replace the existing status quo. The best example in this space is Microsoft Windows. Windows is there on 90% of computers in the world. There are more applications on Windows than on any other operating system. Microsoft sold Windows for relatively low price in order to build the platform, at the end making money by converting it into a volume game. To displace Windows from the operating systems world and replace it with something else is an uphill task, to say the least.

Another growing phenomenon in the platform world is Facebook. Facebook has done an amazing job creating a platform. Facebook took a bold decision by providing application developers access to their interface and letting them serve their own ads, all in spirit of building a platform. Today there are more new applications created for Facebook than for any other social networking site. Same is true for number of new users joining any network.

Both these examples make a strong case that once a platform gets successful, it’s really hard to replace it. At the end of the day, integration beats innovation, hands down. In the process you take a hit on your short term profits. But then there are lucky (and smart) few like Apple iPhone who change this discussion to build platform “and” maximize profits.