Platform economies challenge lawyers

Platform economies challenge many legal paradigms – and consequently the whole legal profession. First I would like to describe how platform economy differs from a traditional value chain based pipeline industry where most lawyers have got their experience from. In the end of this article I list the many areas of law that are undergoing a transformation and put judgement skills of lawyers to the test.

From value chains to platforms

Technological development enabled digital transformation. With the possibility to scale services globally, it was no longer necessary to own the infrastructure. Data utilization enabled the creation of something new, or at least it made it possible to increase the value of products and services. Platforms play a key role in this digital transformation.

The playing field of platform economies

The “value creation network” of platform economies comprises owners, service providers, producers and consumers. The platforms’ owners manage the platforms and own the IPRs. Service providers are the platforms’ customer-facing representatives, for example a mobile phone. Producers are responsible for the supply. A good example of this is an app on a mobile phone. Consumers who use the service form the fourth group.

How does a platform economy differ from the traditional “production pipe”?

Businesses based on value chains differ from a platform economy at least in terms of management, resource optimization and value creation. Management differs because the competitive advantage in a value chain-based business is built on control over more or less unique and valuable resources (either physical, such as factories or mines, or immaterial, such as patents). In a platform economy, there is no need to control resources, unlike when earnings are based on value chains. Resources are not controlled but “orchestrated”. In a platform economy, “production” is carried out outside the platform (not in a production pipe). Naturally, the competitive advantage is still also based on resources that are difficult to copy, but the resources of a platform economy are different from traditional ones: the community and the resources provided by its members (cars, apartments, information). In other words, the competitive advantage is based on a network and the ability to orchestrate it. This has a direct effect on corporate culture.

A further difference between a platform economy and a production pipe economy is related to the optimization of operation. Instead of optimizing internal resources, in a platform economy it is the interaction that is optimized. Businesses based on value chains aim to optimize product flows in the production pipes: from production to consumers. The objective is to optimize the entire chain from the procurement of raw materials to sales and marketing. As a platform business is based on the enabling of the network-internal interaction, the focus is on network activation instead of process definition. For this reason, the emphasis is on building and maintaining the ecosystem. In addition, roles will get mixed. In a platform economy, consumers can also take the role of a producer, for example, by uploading their own videos to YouTube. This difference has an effect on how operations are made more efficient.

The third difference, when compared to traditional businesses that are based on value chains, is related to value creation. In a platform economy, there has been a shift from customer value to the value of ecosystems. The objective in value chain thinking is to optimize the value created for the customers at the end of each chain throughout the life cycle. However, platforms aim to maximize the total value of an expanding ecosystem. Sometimes this can mean free or underpriced services for certain types of consumers in order to attract the desired consumers. In other words, growth is created and measured by different means.

Information as a commodity

In a platform economy, the exchange of physical or digital goods is based on information. The platform will produce “goods” if the producer finds a consumer. The value creation of even complex platforms can be understood by focusing on this “information commodity”. For example, if one wants to create a dog walking service, the most reasonable way would be to start the creation of a new service by focusing on what information would be needed to connect the dog owner and dog walker. Only after that would the interaction be created and, after that, the platform—not the other way round:

platform > interaction > information.

An essential element of interaction is the interface and with that good user experience.

Strategic role of lawyers

Many new innovations of platform economies are on a collision course with authorities. The biggest challenge is the uncertainty over rules and their application. The line between entrepreneurship and employment is unclear. Taxation is a headache. Consumers can be surprised when they find out that the consumer protection regulations are not applicable—or such regulations come as a surprise to the platform entrepreneur. The biggest challenge concerns perhaps the utilization of data either from the perspective of data protection or the data-related rights and power—it has been stated that American companies know more about Indian citizens than the state of India does. There are also other questions related to platform economies: the platform operators often dictate the contractual terms and conditions and assume no liability. Costs and responsibilities are left for the local operators to bear. A large part of value creation takes place somewhere other than on the domestic market.

This is why it is called a revolution. At the same time platforms offer a lot of benefits: efficient use of resources, less expensive services, price comparison, larger variety of choice, recycling economy etc. It is important understand the challenges in order to find acceptable balance between pros and cons, maximizing benefits and minimizing downsides requires excellent judgement from lawyers but it is also what good strategies are all about. Lawyers have become essential when creating realistic and enforceable business strategies.