Tag: business

Why platform and infrastructure products make great businesses

not investing advice, obviously…

Across every industry, investing in platforms and infrastructure is a proven area for substantial, secure returns.

Here’s what that looks like:

What to we mean by platform, infrastructure, and application?

Infrastructure: Infrastructure is like tools and equipment. Infrastructure tools are what enable more things to happen, or be built.

During westward expansion and the California gold rush, infrastructure companies – those that made the picks and the gear – were the most profitable entity.

Think about the companies building the mining gear and equipment, transportation such as railroads, and those that laid the groundwork.

Although individual applications may fail, infrastructure create economies and positive feedback loops, lowering costs of those tools so that more people can do the thing or embark on the journey and hence enable them to thrive.

Infrastructure doesn’t go away in the near-term.

Although it may become less popular (and can be quite un-sexy), infrastructure continues to exist long after the applications taken root.

Infrastructure continues to thrive, as well as evolve with the industry.

Platform: the platform is the base of which something is built.

In software, this hardware and software architecture that acts as foundation or base upon which other applications, processes, or technologies are developed. [1]

Similar to infrastructure, platforms tend to survive for the long term.

Think about it – the foundation of buildings like those at Gobekli Tepe from over 11,000 years ago still exist.

While the remains of everything else is gone, the platforms on which buildings, homes, and churches were built has not been demolished.

Application: applications are businesses that use both tools and existing foundations. Whereas platforms and infrastructure serves application developers, applications serve the end consumer, the individual.

Application businesses can be wildly successful too, no doubt.

The best and most long-term successful application businesses transition into being a platform and infrastructure business.

Because applications are more risky, the most successful companies search for any opportunity to pivot and become a long-term monolithic, ossified entity in the industry.

Infrastructure can be compared with the analogy of a garden. The dirt, the fertilizer, the water, all the tools and equipment used to build, grow, and maintain a garden.

The applications are like seeds… in an ideal world, every seed will grow to become a mature plant or a bush or a tree.

And as we know, not all seeds will grow to become flowers.

Some seedlings will die, just like some applications never make it big time. This is why applications are riskier than infrastructure… just look at how many apps there are in the iOS app store.

The apps we hear about are the successful ones – but there are millions that never survive and their story is all but forgotten.

As the few seedlings become flowers, the garden grows stronger and more valuable.

WHY platform and infrastructure products make great businesses:

As we covered, infrastructure is the tools that enable future products to be created.

These tools can often be sold or licensed to other businesses.

Businesses that sell products or services business products tend to make great companies because their customers (other successful businesses) typically have a large budget and are willing to pay a lot for a good product or service.

As more products are created, the infrastructure becomes fine tuned and improves over time to better need the needs of application developers, gardeners, etc.

The infrastructure is what leads the direction of the industry as it evolves into the future. New types of infrastructure allow innovation to happen.

The infrastructure defines what can be done, how cheap it will be, etc. It is the launchpad and defines the starting point for future apps.

Sooner or later, many companies and projects depend upon this infrastructure to meet their needs. In the best case, people simply can’t survive without it.

Examples of Platforms and Infrastructure in Businesses

Platforms for Mobile Apps:

We’ve talked about the Apple App Store so let’s dive deeper.

Apple knows and understand that what they built was first and foremost a tool and a platform.

Apple fights tooth and nail to try to maintain their position as the defacto industry platform for apps.

Apple makes a significant portion of revenue from its App Store serving as the platform from which iOS apps are built.

Google Play exhibits a similar model, as does Facebook with their robust suite of apps built into their website.

Regardless of the debates on whether or not this is an ethical practice (yes, debates exist, and result in many lawsuits).

The fact that developers are willing to build applications in these places is telling of the value that platforms bring.

Programming Language

Another example of infrastructure is a programming language.

Oracle owns the open-source programming language called Java. Although its old today, at one time it was the hottest thing.

But Oracle couldn’t directly sell the rights to use the programming language… aside from being counter productive, it would also

What Oracle did was build on top of Java. Oracle built platforms and tools that use Java so that developers and businesspeople that are already familiar with the Java language would be more likely to want to purchase Oracle software.

Marketplaces

Marketplace platforms enable thousands of people with products or service to reach prospective customers.

However, these platforms are more profitable and generate more revenue than even the highest earning individual on any given marketplace.

Take OpenSea, for example.

NFTs are the hottest thing recently in the world of Blockchain and web3. But the companies and individuals making the real money are the ones that power the NFT craze.

OpenSea is the #1 website where people can buy and list NFTs for sale. The owners of OpenSea make a percentage of every single NFT that sells.

And given that any single product could have up to hundreds of ETH worth of NFTs traded over the span of a few days, OpenSea is likely SUPER profitable.

We can also look at more traditional internet companies to use as examples.

Etsy enables artists to list their creations online and sell them.

Ebay lets people sell used goods and collectible items (usually non-new stuff or collectibles).

Amazon started out as a book marketplace, but now anyone can sell pretty much anything.

Airbnb lets people list their house or apartment for rent.

Do you think the users on these platforms are making a lot of money? Perhaps some of them are.

But I guarantee you that Etsy, Ebay, Amazon, and Airbnb make way more money than any individual seller makes.

This is the platform effect.

While these platforms likely sustain hundreds and thousands of individual sells and allow them to make a respectable income, the platform that is the marketplace itself is the single most profitable entity in the entire picture.

Tesla:

The robotic factories that build the cars are infrastructure that the company will one day be able to license out to others manufacturing companies.

The manufacturing platform that Tesla has built is arguably their most valuable asset. The tools and technology and the skillset needed to build electric cars at scale are more difficult to build than the car itself.

But the value of building this infrastructure around the product itself means that the company doesn’t have to focus as much on every single car that it makes… the robots do 80% of it for them.

The company can then dedicate resources to working ON the business, instead of IN the business. This enables Tesla to focus on the end-to-end electrical power grid.

This includes installing charging stations across the world so that future customers have a way to easily charge their car in any city or town.

It includes developing the dojo supercomputer to enable artificial intelligence and neural network training and data costs to drop dramatically.

sources:

  1. Software platforms https://www.geeksforgeeks.org/types-of-software-platforms/
  2. Transportation during the gold rush https://publishing.cdlib.org/ucpressebooks/view?docId=ft758007r3&chunk.id=d0e10615&toc.id=d0e10615&brand=ucpress
  3. Ruins and Remains of Gobekli Tepe https://www.smithsonianmag.com/history/gobekli-tepe-the-worlds-first-temple-83613665/