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Not All Platforms Are Created Equal

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Summary


  • Social media platforms can grow quickly and reach a large audience due to the presence of network effects and a lack of costs for users.

  • Entertainment platforms appear to grow more slowly and are less profitable than social media platforms due to the high bargaining power of content creators.

  • Ride sharing platforms appear to grow at an intermediate speed but reach a smaller audience than social media and entertainment platforms due to the physical nature of the service.



Comparing the growth and profitability of online platform businesses can give insights into the attractiveness of each business model and its prospects. Based on an assessment of growth and profitability, I believe social media platforms are a more attractive business model than entertainment platforms, which are more attractive than ride sharing platforms. Netflix (NFLX), Twitter (TWTR) and Uber (UBER) appear overvalued while Spotify (SPOT) and Facebook (FB) appear undervalued.


User growth on platforms like Facebook, Netflix and Uber can be modelled using a Gompertz function. The Gompertz function is an s-shaped curve which has been used to model phenomena like the spread of a virus through a population. This approach generally yields a close match with past growth behavior, but estimates of future growth are highly uncertain as growth can be erratic and it is unknown at what level user numbers will plateau. The Gompertz function is still a useful framework though, as it can give insight into likely growth behavior and allows comparison across platforms.


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