Facebook wunderkind Mark Zuckerberg and his partners made it look easy. The social networking platform ignited almost immediately after it was introduced at Harvard College. It didn’t take many friends seeking friends and guys seeking girls and vice versa to create enough “fissionable material” as I discussed in the last entry. Within a week, more than half of the undergrads had signed on. Facebook then repeated this over the next few years at other colleges across the country by introducing the network when this startup was sure there was critical mass at the school. Over time these individual networks were knitted together and today, six years after its start, Facebook has more than 500 million users globally, accounts for more time than any other site including Google, and is growing quickly. Its large user base attracted advertisers and attracted application developers.
Igniting a platform is hardly ever this easy, although looking backwards it may seem that way. I’ve told the story about the start of Diners Club in Paying with Plastic. It started with a handful of restaurants that took the card and a few hundred people who carried the card. We know resultswere spectacular—it ignited within a year. But think about how hard it must have been for Frank McNamara and his colleagues to persuade consumers to carry a card they could only use at a few merchants. To get an idea of what these payments pioneers were going through that first year you should listen to one of the YouTube founders describes how they ignited that video sharing platform. It required a lot of trial and error to get people to upload videos and for people to watch them. And it took months to reach the critical mass necessary for blast off.
That brings me to an important point on starting new platforms. It is helpful to distinguish between two obviously related aspects of reaching ignition.
(1) The design of the platform to provide value to its users by getting both sides on board and interacting with each other.
(2) The strategies for getting enough people to use the platform to release the values from these interactions.
A great design can help ignition, but it seldom guarantees it. Suppose you design a platform that would provide great value to users if it got enough users on board. Well, you still need to figure out how to go from no users to critical mass. A startup with a better set of ignition strategies can beat a startup with a better design. In practice, platforms reach ignition when they have provides interdependent users more value than they can get with other alternatives and when they have a sound ignition strategy for reaching critical mass.
Mobile payments platforms illustrate this point. A lot of mobile payments platforms have had trouble getting off the ground. That’s especially true in developed countries. In Kenya, though, M-Pesa reached critical mass quite quickly and has grown rapidly. Ignacio Mas and Dan Radcliffe have explained how this 2007 startup managed to get more than half of Kenyan adults using this mobile payments method that allows P2P and P2B payments and transfers.
They attribute a good part of the success to the fact that M-Pesa was solving a very real problem. People didn’t have convenient ways to transfer money to each other and they needed to because of many families that were separated between cities and rural areas. There were relatively few banks and money was transferred unreliably by bus and other transport methods. They developed a killer mobile phone based app to “send money home” and built on their basic payment product.
M-Pesa still had to crack the so-called chicken-and-egg problem. They needed a network of retail stores to redeem payments and to help outfit mobile phone users and they needed enough consumers to want to use this method to make this attractive to the stores. As it turns out, M-Pesa was able to reach critical mass more easily than other payment startups have because it started with a base of mobile phone users (it was started by Safaricom which is the dominant carrier) and a network of stores that already sold prepaid phone cards. Like Discover, which started with the Sears cardholder base and Sears stores, M-Pesa started with access to many of the components necessary for critical mass.
M-Pesa ignited because it offered a service of great value to senders and receivers of money and because it had the wherewithal to get enough senders, receivers, retails stores, and other platform participants on board quickly enough. Other mobile payments platforms may have just as compelling ignition strategies but fail because they ultimately don’t provide enough value while others may provide value but haven’t been able to reach critical mass.
Payments entrepreneurs and investors can learn a lot from looking at the multi-sided platforms that ignited in various industries and understanding the strategies that helped them reach critical mass. Imitation is, after all, the sincerest form of flattery. And we can all learn a lot from looking at the many many more platforms that crashed and burned. The next installment will profile a few and see what we can glean from their disastrous ends.
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Filed Under: Other, Payments, New Business Models, two-sided market