Since the invention of computers, software providers have aimed to improve and optimise mission critical workflows. Such solutions focus on making value chains more efficient. Traditionally, enterprises worked along linear value chains, a stepwise transmission from producer to end-customer. Starting with the product design, followed by the manufacturing and the distribution via channels like wholesalers, retailers, licensees, or agents to the end customer. The problem with such linear business models is that they have intermediaries and gatekeepers. They control the channel to end-customers, which make markets inefficient and products and services more expensive. Intermediaries preselect products and services for their client base. Or they define product listings in stores or on marketplaces. And in the worst case they close their channels and markets for cost efficient, but low margin, products and prevent innovation from consumers.
From pipelines to platforms
In the past few years, new enterprises have entered the markets with an alternative business model to the linear value chains: The platform model. Platforms connect different market players – manufacturers, service providers, suppliers, distributors, and consumers – together, allow the exchange of goods, services, or rights directly between the market players and orchestrate the seamless and qualitative value delivery for the end-customer. Platforms also allow third parties like payments providers, logistic companies, or insurers to accomplish the trades or exchanges of the platform members.
Uber, Airbnb, Alibaba, Amazon and many more are all platform-based business models. They link providers and consumers, deliver a super-convenient user experience, and ensure a more or less consistent service quality. They eliminate intermediaries which leads to more market efficiency. In short, platforms outperform the linear value chains and that is why they are so successful.
Unfortunately platforms become more and more what they wanted eliminate – new intermediaries.
However, platforms have one key disadvantage: What began as a solution to deliver more market efficiency by cutting out intermediaries, is becoming the new intermediary itself. Some of the successful platforms today already show monopolistic and anti-trust behaviour. Amazon, for example, operates a platform for third-party merchants. Their share of Amazon’s revenues grew from 3% in 1999 to 58% (or 160 billion USD) in 2018. This proves that Amazon’s platform is an efficient and convenient channel for about 2 million small and medium merchants. In 2019, various European Competition Law Commissions including Germany, Austria, Italy, and the EU Commission itself have opened investigations against Amazon. The EU Commission claims that Amazon has analysed the sales and activities of these third-party merchants and leveraged these insights to push its own retail business.
From platforms to networks
One answer to the dilemma of market-controlling platforms is to force the platform providers to split into a platform operating unit and a retail business unit. Another solution is to take the platform business model and transform it into a network model with a multi-party governance.
This is where blockchain and distributed ledger technology (DLT) come into play. Like platforms, blockchains and DLT empower market participants to interact directly and transfer digitalized information, goods, services, assets, and rights with three key differences. First, decentralized networks are operated by the participating members themselves. Decentral operated programs and databases get knitted together to a network, while on a platform all members need to participate on a centrally governed database of the platform provider.
There are no “trustless” blockchains. Networks build on trust and governance.
Second, transactions on the network get validated on their correctness, finality, and irrevocability by a mathematical algorithm operated by multiple independent parties of trust. On a platform the validation is logged on the platform’s servers. Thirdly, as many parties operate the network, the network’s governance is also a shared obligation among the network members. Standardization rules and legal frameworks are commonly agreed and secured, while on a platform all the power lays with the platform orchestrator.
Blockchain business models as guarantor of market efficiency
Especially, this shared accountability is the key guarantor of market efficiency in a network. All participants have a deep interest to make the network to an efficient, reliable, and stable marketplace. They will define standards and common business rules for the interaction on the network. And because their competitors are also participating, the rules will be equal for all parties and ensure that no player reaches an unfair advantage like faster access information, preferred service listings or lower standard obligations. The participants will keep themselves in balanced and well-informed, which are the two main characteristics of efficient markets.
The more market dominant the platform providers become, the more the market participants should review the situation and evaluate if a blockchain or DLT business model could not lead to better market mechanisms and prevent them strategically from new intermediaries and gatekeeper. Of course, this would require investments in the definition of common technical standards, business workflows and a legal framework. And all parties, or at least a leading crew of market participants, would need to agree on common algorithms to validate all transactions and ownership transfers of products, services, rights, and assets in the network. Either way, markets would be sustainably more efficient and effective in the long run.
