“It’s Saturday morning in the summer of 1998. Julie Templeton’s mom and dad are coming into town the next weekend. She and her husband, Chuck, want to treat them to a gala restaurant weekend in San Francisco, with dinners out Friday, Saturday, and Sunday nights. Julie starts dialing for reservations. No answer. She leaves a message. She keeps calling, restaurant after restaurant. Some don’t have anything on the evenings she wants. One she wants to go to on Sunday isn’t open. Almost four hours later, after a lot of calling and juggling, she’s got the weekend planned. Back then, making dinner reservations was hard. Taking them was, also. Most restaurants still took reservations over the phone. Someone wrote them down with a pencil, on paper, in a notebook. Often, tables went empty if the phone didn’t ring enough. Restaurants had no way to let people know when they had tables available. Julie Templeton’s persistence paid off. Most people, though, just aren’t willing to work that hard to get a restaurant reservation. As a result, in 1998, on a typical Saturday night in San Francisco, there were unhappy couples sitting at home, perhaps having takeout pizza, who had given up trying to get a table for their date night, and unhappy restaurant owners with tables sitting empty, not making ends meet in a tough business. The market for matching up diners with tables at restaurants wasn’t working very well. Restaurants and diners spent a lot of resources—time and effort—getting together, and even so tables went empty and diners stayed home. That’s the sort of problem that an important, but until recently overlooked, type of business sets out to solve by helping parties who have something valuable to exchange find each other, get together, and do a deal. With these words Evans and Schmalansee - in their book Matchmakers - tell the genesis of one of the most famous platforms born in the late '90s: Open Table. During the following year, 1999, Julie and her husband Chuck Templeton decided to put an end - or at least give an alternative - to what had happened the previous summer. It doesn't make sense for people to spend time looking for a restaurant that is waiting to be called...while the restaurateur is hoping to be called. Identifying this friction - the fact that two economic players are looking for each other and struggling - is the starting point for the creation of Open Table. The promise is simple: help people make restaurant reservations and...help restaurants fill empty tables as well. The initial solution was a website that would allow people to search and book a restaurant, totally free of charge. It was the dawn of the new millennium and finding funding for a website was easy...even though the dot com bubble would soon burst. Convincing restaurants was more complex, for various reasons: many did not have a computer and it was difficult to convince them to buy an untested service. Julie and Chuck solved it by creating a table management system offered to restaurateurs with an installation fee and a monthly rental fee. Initially they focused on a few cities like San Francisco, Chicago, New York and Washington...but by the end of 2001 they were close to bankruptcy, only to go public in 2009 with a market cap on day one of $626 million. The platform was then sold to Priceline in 2014 for $2.6 billion dollars. This brief history brings up a number of key points about the world of platforms in its simplicity: you don't need particularly brilliant or complex ideas to create a platform, the everyday problem such as booking a restaurant that inspired Julie makes that clear. The first solution may well be very simple, like the website and table management system...but more often than not it won't work as is...and anyway they had already thought of the table management system to obviate the operational problems of one of the clients. It seems simple to identify the need of both customers - people who are looking for the restaurant and restaurateurs who don't want empty tables - everything is very rational...but convincing both of them to get on the platform is anything but simple. Often on platforms not all players pay, as in this case, only restaurants pay, while end-users receive a free service Within a few years, the evaluation has reached very high figures...but after requesting the bankruptcy. These observations allow us to clearly define the playing field on which platforms are created and grown. First point: transactional platforms aim to reduce transaction costs, so the identification of the two sides – and therefore the two sets of customers - and of a first value proposition - linked to the transaction itself - is very simple. Second point: the idea of the transaction is not enough to convince both sides to join the board, two value propositions are needed, articulated, complementary, in support of the transaction...but oriented to the single side. As evidenced with the creation of the table management system to give more value to the most reluctant restaurateurs. Third point: the value of the platform depends on its diffusion....the value for the end customers depends on the other side, in this case the restaurateurs and vice versa. As the number of people searching for a restaurant increases, the value for restaurants to use the platform increases and vice versa, ....exemplifying the concept of cross-side network externalities. Point four: it is precisely those triggered externalities that lead to the scalability of the platform, its ability to grow rapidly and attract many funds. Precisely on this last point we make a reflection. Platforms have been able - in some cases - to gather a particularly high level of investors’ attention around them, on the strength of their ability to scale in a very short time by rapidly opening up dozens of markets and gathering millions of users. Often scalability is enabled by a structure based on zero marginal costs. In these cases, having a new customer does not increase costs because the platform simply needs to create a direct link between customers who are on two different sides. In other words, having a new restaurant or end-user for Open Table does not result in higher costs, only more revenue in the case of the restaurateur. Nevertheless, this situation is only achievable if the first 3 points of our list have been successfully crossed: having defined the market friction to overcome, having designed two convincing and valuable value propositions for both sides...and then having successfully activated network externalities. At that point, scalability will be a big and welcome consequence. But to get to that point, the platform provider's job is anything but simple. The platform looks like a matchmaker - and in the end it is - but its job is significantly more complex than creating the match between the two sides.
