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BigTechCo 1 - Paying the Platform Tax


BigTechCo #1 - should you pay the platform tax?

Over the years, you see the same patterns pop-up in any sizable tech company. I thought it’d be fun to talk through some lessons learned on dealing with a few of these. Like any abstraction, every situation will be different - the intent here is to provide some fundamental questions that come up often.

“We have a product with sizable adoption. To get real scale, we need to go through another large tech company’s distribution platform which requires certain “taxes.” We are “frenemies” with them - we compete on some things and partner with others. Should we pay their platform tax or not?”

This first piece was inspired by a chat before I started at Twitter with a product exec at a major tech company. This person was dealing with the problem of “platform taxes.” In a world dominated by Aggregation Theory, a few large players own large vectors of distribution. Mobile? You can’t work around Apple and Google. Search? Can’t work around Google.

If you’re one of these large companies and you have a product that needs distribution through a competitor, you face a choice: do you pay a potential competitor their ‘rake’ - in whatever form that takes - or do you go it alone?

This decision almost always results in a bunch of endless internal exec reviews where the VP of the product that needs distribution has to argue with the VP of the product that is competing with the other BigTechCo with the CEO having to play tie-breaker. Here are a bunch of examples I can think off the top of my head where this discussion would have played out. (I’ve avoided any where I’ve been involved)

If you’re a product or business unit leader faced with one of these discussions and the accompanying complex negotiations, here are a few factors to think through.

Defining your core business

When you see these discussions spinning out of control, a common underlying reason is a lack of clarity of what your core franchise business is and what are the underlying structural/reinforcing loops that power it. A surprising (at least for me) number of these discussions get stuck in this primary debate - what is your core business? What job do you serve?

Once you clarify what your business actually is, you then get to define who gets protection and who has to face competition. One framework you could apply: working with a competitor that cannibalizes a supporting, or new & unproven business is acceptable but one that risks a core business is a no-go.

For example: Xbox and Xbox Live. The core business is to sell consoles and games, not to sell subscriptions. In this framework, it wouldn’t make sense for Xbox Live to support games on iOS/Android which compete with their core business. In an alternate universe where Xbox One was only one console with Xbox Live support, things might play out differently.

Listening to your customers

Here’s a platitude that happens to be true: Not only do you need to know what business you’re in but you also need to know who your customers are and what they want. I’ve seen innumerable companies “out-strategerize” themselves by losing emotional intuition with them.

The tricky part is to actually figure out how to do this. Your most vocal customers may not be representative of your core customer base or your future customers. They will often be resistant to change and want things to be the way they’ve always been. They also don’t know your future roadmaps; they may not know of all the awesome stuff you can build out, say, when you own the vertical stack (see last 15 years of Apple).

For example Fitbit and Apple Health. Fitbit resists working with Apple Health for a very straightforward reason. Fitbit is in the health hardware/ecosystem business and wants to build a moat around the data and partnerships they have. However, Apple Health commoditizes health apps/hardware (probably because Apple is not a market leader in it) and levels the playing field. You can see why Fitbit resists some very vocal customer requests to build Apple Health support - they probably believe doing so will only let Apple compete with Fitbit faster. Are they right? Highly dependent on what happens with Apple Health in the long term.

Forecasting ‘NPV’ of future events.

The trickiest task of all is to predict the long-term impact of handing over some essential data/access to a competitor - the “NPV” of future usage of data or customer access and optionality you get. Not only does this need crystal-ball forecasting of how industry trends shape up, but you also need to think through first and second order implications of future events.

For example, let’s assume you’re a media company making great content. You get an email from Amazon one day - they want to bundle you in their Prime offering instead of you having to build a VOD app/service.

Should you get access to Amazon’s customers and in return let Amazon have your customers’ email addresses and control your access to them? Do you build a streaming app/service and fight the customer acquisition battle? Do you do both through some smart segmentation strategy and hope not to cannibalize each other? Does not having direct access to your customers stop you from being able to build adjacent and complementary services down the line? Does it let Amazon compete with you in the longer term for talent and move into your core business? Do you even have a choice?

One-way vs. two-way doors.

What are you signing up for going down this path with a partner? Can you undo this without much effort? Can you constrain it to a limited test and see what you get? Is this an irrevocable decision that will be hard or impossible to reverse?

I’m a big fan of Bezos’s Type 1 vs. Type 2 decision making as a framework for most business/product decisions. What’s more subtle is how to structure an irreversible decision into one that gives you an out/option value in the future.

Do you have a realistic option?

Last but not least, it’s possible that you don’t have an option at all. Given the network effect/winner-take-all nature of a lot of tech, you may have no choice but to work with someone to get access to customers. Or to make your QoQ revenue growth, you have no choice but to take a strategic hit to generate cash flow. What is hard is to know when you’re in one of these situations and to recognize it early - you can then reap the early mover advantage of these platforms.

Sadly, this, like everything else here, is easier said than done.