A paradigm shift in our field: Platform-dependent entrepreneurship
(posted on behalf of @Andrew Nixon, 2021 PhD Representative)
The following is an excerpt of my interview with Dr. @Donato Cutolo and Dr. @Martin Kenney. Donato is a Post-doctoral Research Fellow in the Department of Management at the University of Bologna and Martin is a Distinguished Professor in the Department of Human Ecology at the University of California, Davis. I have been fascinated with their recent work exploring how technology platforms influence entrepreneurship and shape competition. Considering the outpouring of attention from the business press and government agencies on these issues, I felt an interview exploring their work would be timely.
For anyone who has not yet come across their work, Cutolo and Kenney firmly believe that for entrepreneurship studies and teaching entrepreneurship, understanding how the power of platforms (i.e., Amazon, Google, and Facebook - colloquially known as Big Tech) is necessary to properly guide entrepreneurs and businesses populating their ecosystem. They argue that the power imbalance in the relationship between entrepreneurs and winner-take-most platform-owning firms creates a set of conditions and risks that suggests a fundamentally different understanding of entrepreneurship from the traditional paradigm. To capture this change in the conditions for entrepreneurship, they have coined the term “platform-dependent entrepreneurs”. Our interview discusses larger themes than the specifics within their articles, so for more detail, I highly recommend checking out their in-press AMP article “Platform-Dependent Entrepreneurs: Power Asymmetries, Risks, and Strategies in the Platform Economy” and also their Sloan Management Review article co-authored with Andrew Hargadon “Competing on Platforms”.
This interview has been edited for conciseness and clarity. You can look forward to hearing more of our conversation on a future This Month in Entrepreneurship podcast episode!
Andrew: I was hoping you could start with talking about what first alerted you to this problem? I'm not sure if we can call it a phenomenon, but maybe give me your perspective on that - how did you first decide or what kind of signals were you getting and what were you seeing that made you want to start researching this?
Donato: Well, first of all, I was conducting research on Etsy, which was the setting of my study on the importance of narratives for entrepreneurs who do not comply with contextual standards. And as I was trying to better understand the context, I was talking to Etsy sellers and what struck my attention was that the positive depiction—this image of platforms as opportunity enablers—was quite at odds with what these Etsy sellers were discussing about their concerns on how the platform actually treated them. So, I started thinking about that and when serendipity intervened and I met Martin, we started discussing this issue. Martin, he was studying online platforms and theorizing on their larger implications from very early on, and actually it was quite fun since in the paper that I wrote to enter my Ph.D. program, I was citing Martin because he was actually the only one talking about the platform economy and the important role that the platforms had in changing the nature of work and the nature of entrepreneurship. So, we started talking about that and decided to frame this idea of platform entrepreneurship from a different angle, discussing not only the positive aspects, but also the challenges and the risks, and how entrepreneurship studies should be aware of and acknowledge the important role that platforms play in competitive scenarios.
Martin: So, in 2014, I started writing about platforms and the platform economy because I'm a political economist, not a management scholar in that sense. In my work with John Zysman, we were concerned about the labor side of this which, of course, was the Uber driver at the time. We could see already that the power relationship within which an Uber driver and a taxi driver work were very different, though both were gig economy labor. But once I understood that there was one Uber and say a million Uber drivers, and then I started studying Amazon, and there was one Amazon and a million Amazon sellers, I started to think about elevating this to the societal level instead of focusing solely on the platform. With John, we started to see that the real story here for the overall political economy is not the platform, but the economy that it was creating. Consider, for example, Google which has 100,000 employees. However, there are tens of millions of websites that may or may not be businesses and entrepreneurs, but they are dependent upon Google to be found.
When Donato sent me an email in 2017 and we started to talk on the phone, we quickly came to a conclusion—which was already starting to enter the public and academic consciousness catalyzed by Lina Khan's great paper on Amazon—that all businesses would be integrated into and have to sell through platforms or manage their businesses in a platform organized world. So from my perspective, that’s the history of my interest in what we've now called platform-dependent entrepreneurs, which increasingly is almost every business anywhere in the developed world.
Andrew: I’m glad you mentioned Lina Khan's paper! She wrote this paper in the Yale Law Review called “Amazon's Antitrust Paradox” when she was still in law school and now she’s the FTC Commissioner. So how much of this is a story of monopoly power, which is something that Lina Khan has really animated the progressive movement on antitrust or competition reform in the U.S.? I wonder if this phenomenon of platform-dependent entrepreneurship would be possible if tech companies weren't as dominant. It seems that the progressive movement is taking aim at a lot of the concerns or risks that are highlighted in your paper on platform-dependent entrepreneurship, so could you talk about that connection between competition policy/antitrust reform?
Martin: Lina Khan's article, obviously, was a key article in the United States. The Europeans, through the EU, and particularly the German competition authority and a little bit the French competition authority, were already sort of uneasy about this but it was 2016 and this was still seen as an unalloyed good—many still called it the “sharing economy.” I think by the time Donato contacts me by late 2017, Lina Khan's article…I don't know if it had yet been published but it had been circulated widely, and I got a very early copy of it, and you know, so boom! When I saw it, I said, "Well, she's got it." The Europeans were mostly focused on privacy. But as popular press articles and academic research started to be published, I started to ask the question, "Well, what does this really mean?" At the time, I think Uber was really attracting attention, not Amazon! In these first real concerns, they hadn't focused on platform-dependent entrepreneurs because they were still trying to reclassify Uber drivers as employees, right? Uber becomes the concern where everybody is seeing the exploitation of workers, people are not yet thinking about Amazon as an exploitation of the sellers.
Lina Khan's article is really not quite about that. In fact, it's much more about Amazon being able to acquire competitors and set prices but she had not really conceptualized this in the way that we did as platform-dependent entrepreneurs. But as Amazon comes into the picture, people became more worried. Initially, Lina Khan’s article really did not get a lot of traction except with people like Donato and I and others. In the business schools, there was no traction at all at the time, right? That traction comes later as people start to understand that Amazon and its Marketplace had captured 40%, 45% of the whole online market, and it's basically rolling up sector after sector.
Today, you've got to sell on Amazon or you can't sell anywhere, and then you have markets like Etsy where you see similar things going on but on a smaller scale. With Google Maps, if you're not on the map, you don't exist. Google Search, if you can't be found or you have to go to the second or third page, you don't exist. So, this whole complex set of issues comes into awareness in about 2018 or 2019. Business school scholars become somewhat aware of it perhaps with Feng Zhu and his colleague's vitally important body of work, where he looks at Amazon sellers in his SMJ article and what really happens to a vendor if Amazon, Apple, or Google through the App Store enters your marketplace.
However, Zhu does not put it into a political economic perspective. He just looks at it from a strategic perspective. But basically, beyond him, most of the management literature is “you can become a platform also”! Right? Of course, we now know this is completely untrue because these are winner-take-most or winner-take-all markets and how many firms can actually become platforms? Though now, of course, they're all trying to do this because they see the ability to extract value from the data. Even John Deere is trying to become a platform through its tractors and software so it can extract value from the data which, of course, in the end means extracting value from either one side, the consumer, or the farmer. Because they are the weak links, they are the large populations within which these intermediaries—choke points if you want—can then extract value.
The other thing to think about, if we accept the fact that platforms have sides, and the basic economic observation by Rochet and Tirole that the platform can extract value from any side, the true question is why would they not decide to extract the maximum value possible from all sides? Consider today, Amazon no longer necessarily provides access to the cheapest product on the market anymore—why should it? It has captured most of the market. Now it is starting to extract value from the other side, the consumer side—why not, it controls the market. So, Amazon took basically no profits for years, subsidized their e-commerce site to capture the user, the buyer's side, the consumer side. The original Rochet and Tirole articles discussed how you would subsidize one side of the market to extract value from the other side of the market. However, once you become the platform, you can extract value from all sides of the market. That's the key! What's now happening is the consumer side of the market in Amazon is starting to have value extracted from it by no longer having the lowest price. The vendor in the Buy Box, is not the lowest price anymore, it's the one that will advertise, i.e., shift further value to Amazon. People have not considered this aspect sufficiently.
Andrew: I want to bring up what Martin mentioned about how the U.S, had a kind of fundamentally different view of this problem than the EU did at the time. Donato, as an Italian Ph.D., you were looking at this from a different angle. Also, Martin's a political economist and you’re an entrepreneurship scholar and a management scholar, so how did you see this differently and what did you want to bring to the entrepreneurship field by talking about this problem?
Donato: The interesting thing is that it's both challenging but also fascinating that the platform economy is a truly multi-disciplinary phenomenon. And this happens particularly in Europe where I realized that scholars from different fields, from different communities, can really integrate their knowledge, their perspectives, to talk about platforms, to talk about how to regulate platforms, and how to get the best out of this model. But from an academic perspective, I have to say that it was a bit complex to me to find my reference point at the beginning because as I said, with my studies I was interested in looking at platforms as a transformative agent, not only from a positive perspective but also as a negative, so what are the consequences of this new business model, this disruptive business model? And I couldn't actually find anything in the academic literature.
On the other side, I must say that the EU is more active than the States from this perspective, in that it started earlier with this consideration about what are the implications for the businesses that create value in the ecosystems. And going back to your previous question, this idea of monopolies, the interesting thing is that, at the beginning, one of the problems of monopolies was considered from a sort of competition perspective in the sense that Amazon was too powerful compared to other marketplaces, to other potential competitors. Then they realized that this competition is not only between actors, but also within the marketplace and these new competitive arenas that platforms create. So, actually, Europe started looking at this problem of ensuring fair competition within this platform marketplace—acknowledging the important role that these big platforms such as Amazon and all the other marketplaces, even Etsy, play in creating opportunities for business, while also recognizing that their control over these marketplaces generates novel risks for firms. So, it was easy for me to get to the political perspective because Europe was more concerned with the consequences for entrepreneurs and businesses.
I really tried to bring into the management and entrepreneurship literature the idea that platform power carries important implications for businesses and entrepreneurs that populate platform ecosystems. If you're a business, you have to have platforms in mind since day one of your lifecycle. You might want to use a platform to collect funds, so you want to resort to crowdfunding platforms. You want to use platforms to reach your customers, to advertise your products, so you're going to go to social media. You can use platforms as channels, so you go to Amazon. So, platforms generate plenty of opportunities and they are not only opportunities, sometimes, they are necessities for entrepreneurs and businesses. Given this fundamental state of dependence, it's important to consider all the strategic implications that running a business on these platforms entails. So, that was my take, using these multiple perspectives that come from law, come from political economy, and bring into this picture of what does it mean to be an entrepreneur, to have a business, in the age of platforms.
Martin: I think Donato is really a leader in thinking about platform-based entrepreneurship, which is all entrepreneurship today except perhaps in the biomed fields? But all other entrepreneurs today are platform-based entrepreneurs. So, what one needs to study in entrepreneurship today is platform entrepreneurship which is, of course, as Satish Nambisan correctly points out digital, but it's not just digital. It is navigating your business, navigating a world using the power of these platforms to advertise on Google, or if you want to use an influencer on Facebook. But also to navigate this world to create a sustainable business. Now I'm not talking about ecologically sustainable, but sustainable in this world of platforms where the giants are so large, they can roll over and crush you. Of course, on the other hand, the reach and the power and the resources that they provide, very inexpensively at the beginning, allow you to build a business at very low cost. All businesses are going to have to navigate platform-organized markets. And I think here, Donato is one of the leading thinkers on this and I'm getting little gray in the hair. So, I believe entrepreneurship scholars, if they're not talking about platforms when they're training entrepreneurs in their MBA programs, are simply teaching ancient history.
Andrew: That was one of the questions I was going to ask, I'm glad that you brought it up and it's a good plug for someone to hire Donato! We definitely want to see him in a position where he can continue this research program. I wanted to ask is what would be top of your list for what's next for management scholars and entrepreneurship scholars to study related to platform-dependent entrepreneurship?
Donato: Well, as Martin said, we discussed this many times and I think that at the education level, it is really important to start talking about framing this concept of platform-dependent entrepreneurship in a more structured manner. Talking about the positive, the upside, and the downside, talking about all the resources. Putting together the concept that comes from the early studies on platform entrepreneurs, like Satish Nambisan’s work on digital entrepreneurship. So, the fact that you can start from scratch and go basically wherever you want, there is scalability. You can start with the oldest content that is central in platform entrepreneurship and then start moving toward what are the risks, what are the challenges, what are the strategies that you can put in place to actually reap the benefits of using the platforms while also protecting and reducing this dependence that may try to also kill your business. So, I think that from an education perspective, it is important to start acknowledging that many businesses won't be platforms, but they will be successful, they will be extremely prosperous business operating on platforms.
One thing that we struggle a little bit to communicate is that platform-dependent entrepreneurs are not the people selling stuff from their garage, like the early eBay sellers making very little money. Many of them are successful companies or powerful influencers. They are companies with millions of dollars and euros of income. So, it is a relevant economic phenomenon. So, we're talking about real businesses. So that's the important aspect that we would like to emphasize. And in terms of research, I can talk a bit about where we are going at this moment. We are discussing the systemic implication of this dependence because, so far, we looked at how the relationship between platform and entrepreneurs works, called them complementors, and what are the implications of this power asymmetry. And we actually conceptualized the platform dependency. Now, we are looking again at the ecosystem, the complex set of actors that revolves around the platforms and the complementors, and the user, and we are trying to expand it to build upon this idea of dependence and clarify the dynamics of the interaction between the different actors.
Martin: I think the other thing that one thinks about when considering platform dependence is the role of the state. In our little story in our SMR article, they wanted to remove the section where we discussed complementors coming together to push the state to create a more equal playing field upon which they, as platform-based entrepreneurs, play against the platform. And this has become very important because the pressure that's making governments react is actually the pressure from platform-dependent entrepreneurs who feel that the situation is unfair and are beginning to organize to level the playing field. In many respects, this reflects what Karl Polanyi termed the “double movement” of reaction.
Andrew: That's a great segue into the next thing that I've been thinking about which is: what are the challenges for management scholars, or particularly entrepreneurship scholars in critiquing these systems of power and market dominance? Like you just said, it comes to the role of the state. Lina Khan's article didn't get a lot of play in business schools when it first came out. It took a lot of time for the traction to move into the management academic world, and it really took your work and what Feng Zhu's been doing to call attention to this, and in my perspective, business schools are often pro-business where we're trying to train the next leader of the next big firm and the next disrupter. So how do we bring that conversation to point out the dangers of the current consolidated market structure that we have?
Martin: So, the point here is that if you're pro-entrepreneurship, you should not support the formation of just a few monopolies; you should support increasing competitiveness because you will have more businesses and not fewer businesses. Right? And you will have dynamic businesses that can grow to scale. Most business schools around the world are not training the next CEO of Amazon. They're training the next entrepreneur that builds a good business, because there aren't going to be that many CEOs at Amazon, Google, Facebook, Microsoft, and those few giants. So, if you're pro-business, you're actually, pro-antitrust, and your pro-competition, and that means that the platforms have to be controlled to create a very healthy ecosystem. And you even see Mike Cusumano and Annabelle Gawer in a recent paper arguing that platforms need to self-regulate. Of course, they won't self-regulate - but what is the point? These leading scholars recognize that there's a serious problem and, of course, they are sort of the progenitors (laughs) of the whole platform argument. So, I see it, actually, as pro-competition and pro-entrepreneurship to regulate the platforms so that one can have healthy ecosystems because I don't think platforms will self-regulate.
Donato: Yeah, I just want to add that what I realized through interacting with future platform owners, entrepreneurs who are interested in developing platform business models, what actually, arises is that they have in mind the idea of creating a sort of fair ecosystem, so this is growing. So, the awareness that something is going wrong with, you know, all the Epic and the Apple dynamics that are in the news every day. There is this idea that there is something wrong with this enormous power that a few platforms have. My feeling is that we are going toward this increased awareness that is important for platforms to self-regulate. So, that's why also management scholars are discussing this option, not only for existing platforms. And I totally agree with Martin that existing platforms won't self-regulate because, actually, it's still a war.
It's a competitive war, so they need those profits to stay in the game because, as Martin said, Uber is not getting profit. Uber is still not sustainable, so reducing even the little margin or the power over drivers and complementors would make the business more unsustainable. And a lot of VC and now public money went into the company, so they need to stay alive. So, my idea is that we are getting there. Hopefully, also, the next generation of platforms will be naturally embedded within this mindset, and so probably they will be better. But as Martin said, it is a winner-take-most, winner-take-all world, so, we're going to have to see whether this new equitable form of platform is going to be able to overtake the existing giants that control the market and the economy at this time. From a research perspective, we need far more studies of how online platform-dependent entrepreneurs navigate the business environment within which they exist and must succeed.