Chicken or Egg Dilemma Tiktok Discussion

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ORIGINAL REQUIREMENT: ow has the platform addressed the chicken-or-egg dilemma that is characteristic of platforms? Has the platform achieved positive network effects? If so, how did it manage to accomplish them, and has it been able to capture value from those effects? If not, what would you recommend it to do?

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Lecture 2
Part 1. Chicken-or-egg dilemma: The story of PayPal
Part 2. Chicken-or-egg dilemma: Conditions
Part 3. Chicken-or-egg dilemma: Solutions
Lecture 2
Part 1. Chicken-or-egg dilemma: The story of PayPal
Part 2. Chicken-or-egg dilemma: Conditions
Part 3. Chicken-or-egg dilemma: Solutions
Chicken-or-Egg Dilemma: Definition
When trying to build a multi-sided platform in which all sides are equally essential,
which comes first? And how do you attract one without the other?
Chicken-or-Egg Dilemma: PayPal
1999: Peter Thiel and Max Levchin developed PayPal, online payment system that works through email
? What are the market sides of PayPal?
– Merchants and buyers
Chicken-or-egg dilemma is particularly acute in online payment platforms. Why?
Without sellers who are willing to accept the new form of payment, buyers won’t adopt it. But if buyers
don’t adopt it, sellers won’t invest time, effort and money in systems to accept it.
How did PayPal tackle this dilemma?
How do you launch an online payments platform when neither group has a reason to join without other?
Chicken-or-Egg Dilemma: PayPal
1. Simplicity: PayPal made it simple to send and receive payments, and reduced frictions typically
involved in online payments. Only required email and credit card. No multiple rounds of verification
to discourage early users. User-friendly and simple nature attracted significant initial base of buyers.
BUT: Not enough buyers for sellers to join.
2. Incentives: New customers got $10, existing got $10 for referrals. PayPal dramatically grew user base.
Incentive payments made joining feel riskless & guaranteed active users, to spend their $10.
àThis growth created positive feedback loops. Once buyers experienced PayPal convenience, they insisted on
using it, encouraging new sellers to sign up and spreading word to friends. In response, sellers started
displaying PayPal logos, which encouraged more buyers to sign up.
BUT: Burnt through cash reserves quickly, needed VC backing.
Chicken-or-Egg Dilemma: PayPal
3. Piggybacking: Piggybacked on eBay, realizing this was PayPal’s key distribution platform. Most
sellers had no way to accept credit cards, so became popular payment method; later acquired.
Focused efforts here. Gave sellers $10 referral subsidies.
4. Simulate (fake) demand: In January 2000, created a bot (a script that could spider eBay
looking for certain types of auctions) that bid on items, insisting to pay with PayPal. Apparent
growth in demand led sellers to sign up, which made PayPal more attractive to buyers.
BUT: How did they convince sellers to accept PayPal?
Chicken-or-Egg Dilemma: PayPal
Answer: Charity Bot
“Within a day we figured out how to convince eBay sellers [to accept PayPal] – the bot would
bid on items for charity. We’d have our charity robot identify itself to sellers before it placed a
bid, sending an e-mail saying it was collecting goods that would be donated to the American
Red Cross, but it could only pay with PayPal. If sellers replied favorably, the bot would
automatically place a bid. We thought most sellers would accept this offer since it was a winwin for them — bids from the robot would allow them to participate in a charitable cause,
while also ensuring that their auction price went higher. From our perspective, even if our bot
didn’t win the auction, at least sellers would have been exposed to PayPal.”
In 3 months, user base grew from 100,000 to 1 million. Now, roughly 180 million.
Lecture 2
Part 1. Chicken-or-egg dilemma: The story of PayPal
Part 2. Chicken-or-egg dilemma: Conditions
Part 3. Chicken-or-egg dilemma: Solutions
Chicken-or-Egg Dilemma
Four industry conditions under which this is particularly
challenging for a new platform:
1. Strong network effects
2. High multi-homing costs
3. Limited differentiation
4. Other high barriers to entry
1. Strong Network Effects
What are strong network effects?
Network effects are strong if each new user brings a lot of value to existing users.
? Why do industries with strong network effects create an acute chicken-or-egg dilemma?
A critical scale of users is required for network effects to kick in and give value to new users.
Before scale is reached, convincing users is challenging, since they may be doubtful that scale
will be reached, or may want to wait. Most platform industries have strong network effects.
? What are some examples of platform industries with strong network effects?
2. High Multi-Homing Costs
What are multi-homing costs?
Costs for users to participate in multiple similar platforms at the same time.
? Why do high multi-homing costs create an acute chicken-or-egg dilemma?
When high, they lock in users to one platform at a time, and users will require higher minimum
benefits from another platform in order to join it and compensate their costs.
? What are examples of industries with high multi-homing costs?
Social media, app development (Android/iOS), game development (developers reluctant to create
games for new console platforms such as VR as costs of creating new infrastructure are high).
? Industries with low multi-homing costs?
Ridesharing, food delivery apps.
3. Low Differentiation
What is differentiation?
The extent to which users can be separated into segments with different preferences.
? Why does low differentiation create an acute chicken-or-egg dilemma?
Niche entry strategies, targeting specific customer segments, are most powerful for new
platforms. But when user tastes are uniform, such strategies are ineffective.
? What are examples of industries with low differentiation?
Ridesharing (drivers/riders are difficult to separate into niches within a geography, so
platforms can’t target one segment at a time, they need to capture the entire region).
4. Other High Barriers to Entry
What are other common high barriers to entry?
Supply-side economies of scale and regulatory barriers.
Economies of scale, such as engineering resources and data, allow larger platforms to build
superior products at a lower cost or to predict customer behavior.
? Why do these barriers create an acute chicken-or-egg dilemma?
Before platform operates at scale, it may struggle with infrastructure to service well.
? What are examples of industries with high barriers to entry?
Video streaming platforms. New platform would struggle without data.
Lecture 2
Part 1. Chicken-or-egg dilemma: The story of PayPal
Part 2. Chicken-or-egg dilemma: Conditions
Part 3. Chicken-or-egg dilemma: Solutions
How can platforms solve the chicken-or-egg dilemma?
A Financial Solution?
In theory, dilemma could be overcome if platforms give
users enough financial incentives to join.
For startups, this means raising outside capital.
à Meta chicken-or-egg dilemma:
Investors won’t invest if platforms have not solved this
dilemma, but solution requires investment.
“Entrepreneurs are in a “double-bind” because investors want to
put money into a company only after it has shown at least a hint
of traction, but proving [this] requires hefty capital.”
Peter Thiel (PayPal co-founder, Founders Fund founder)
?
Lack of capital significant contributor to early failure rate.
Eight Strategies for Solving Chicken-or-Egg Dilemma
1. Follow-the-rabbit strategy
Definition: Use a non-platform project to demonstrate and model success. Then, turn project
into platform, and attract users through project’s proven infrastructure. This strategy increases
perceived value of joining, and once enough users join, the actual platform benefits are enjoyed.
Amazon Marketplace:
? Dilemma?
Without merchants, why would buyers join? Without buyers, why would merchants join?
? Solution: As a successful online retailer, it was successful at using online product listings to
attract consumers. Once it had a strong consumer base, it converted itself into a platform by
opening its system to third-party merchants: Amazon Marketplace.
2. Single-side strategy (i.e. stand-alone value)
Definition: Create separate, stand-alone value for a single side. Then convert to a platform by attracting
other side(s) that want to engage with the first side.
OpenTable (restaurant booking platform):
?
Dilemma?
Without restaurants, why would patrons join? Without patrons, why would restaurants join?
?
Solution: Provided booking management software to restaurants to manage seating inventory. With
enough restaurants, patrons became attracted, which led to more restaurants joining.
Trulia (real estate platform):
?
Dilemma?
Without real estate listings, why would buyers/renters join? Without buyers/renters, why would
agents join and list their properties?
?
Solution: Offered to digitize and index real estate companies’ properties if they joined the platform.
Many agents were interested in this service, providing inventory. Once enough joined, buyers came.
3. Seeding strategy (i.e. filling in one side)
Definition: Provide value that will be relevant to at least one side, which then attracts others.
§ Two ways: Create true value or simulate (fake) value
1. CREATE TRUE VALUE
Apple iOS:
?
Dilemma?
Without iPhone users, why would developers make apps? Without apps, why would users join?
?
Solution: Apple acted as a first producer, launched iPhone with a few in-house high-quality apps, which
attracted users. This initial user base attracted developers, filling out app store with apps.
Android OS:
?
Solution: Competed with iOS by offering $5 million in prizes to developers who came up with the best
apps. Winners became market leaders and attracted customers.
3. Seeding strategy (i.e. filling in one side)
2. SIMULATE (FAKE) VALUE – This creates the impression that there are more users, which
increases perception of value. If enough real users join, they can start interacting to create true value.
PayPal:
?
Dilemma?
Without buyers, why would merchants join? Without merchants, why would buyers join?
?
Solution: Created bots to make eBay purchases with PayPal, attracting sellers.
Quora:
?
Dilemma?
Without answers, why would askers join? Without questions, why would answerers join?
?
Solution: Personnel asked and answered questions to simulate activity. Once users started asking
questions, editors continued to answer, demonstrating use. Then, users took over the process.
! Fake users can be value-destructive, platform can appear spammy, and regulatory/ethical concerns.
4. Piggyback strategy
Definition: Connect with another platform’s existing user base and show value to recruit them.
PayPal:
? Solution: Piggybacked on eBay’s online auction platform, getting eBay sellers to use PayPal.
YouTube:
? Dilemma?
Without viewers, why would producers join? Without producers, why would viewers join?
? Solution: Piggybacked on MySpace, which was growing in the early 2000s as a way for indie
bands to showcase their music. YouTube provided more powerful video tools to attract them.
Then, YouTube adoption grew virally. By 2006, YouTube’s reach grew past MySpace’s.
5. Big-bang adoption strategy
Definition: Get a high volume of concentrated attention. This attracts users by inflating appearance
of number of users and engagement, making the platform seem more valuable than it is.
Twitter:
? Dilemma?
Why would users join if there are no other users?
? Solution: Given real-time activity on Twitter, realized they need concentration of people. At 2007
South by Southwest Festival, installed large screens that published live tweets from festival à
Gave impression that many festival-goers use Twitter, making it attractive. Use tripled after.
6. Micromarket strategy
Definition: Start by targeting a small, localized market, to provide effective matchmaking characteristic
of a large market, even in the platform’s early stages.
Facebook:
?
Dilemma?
Why would users join if there are no other users?
?
Solution: Started exclusively with Harvard students (socially and geographically concentrated), then all
students, then wider population. Maximized local network effects & prevented bad experiences.
Grubhub:
?
Dilemma?
Without providers, why would consumers join? Without consumers, why would providers join?
?
Solution: Launched in one city (Chicago) in 2004, then San Francisco/New York in 2007, slow expansion, only
when confident that new regions had enough supply and demand to prevent low-quality experience for users.
Stack Overflow (Q&A community):
?
Solution: Started out for programming topics (category focus). Later expanded into cooking and others.
7. Producer evangelism strategy
Definition: Design platform to attract producers who can get their customers to become users.
Crowdfunding platforms (Indiegogo, Kickstarter):
? Dilemma?
Without users, why would creators join? Without creators, why would users join?
?
Solution: They targeted creators who need funding and provided them with infrastructure to host and
manage campaigns on platform, connecting them with their userbase, which then brought more users.
Online learning platforms (Skillshare, Udemy):
?
Dilemma?
Without teachers, why would students join? Without students, why would teachers join?
?
Solution: They signed up well-rated teachers, allowing them to easily host online courses and
prompting them to get their students on board, which attracted more users from both sides.
8. Marquee strategy
Definition: Provide incentives to attract influential members of a key market side onto platform,
ones so important as to make or break the platform, through cash payment or special benefits.
Gaming consoles:
? Dilemma?
Without users, why would developers join? Without games, why would users join?
? Solution: Xbox, PlayStation and Wii provide very favorable partnership deals to entice EA to
develop or adapt games to be ready for release when new platforms are unveiled.
Timing: Onboard one side first or all simultaneously?
There may be important timing effects to consider. Some conditions require platforms to onboard
one side first, while others require a more simultaneous onboarding process.
? If one side is more reliant on another, platforms should onboard the reliant side first.
– LinkedIn: Recruiters are more reliant on existence of professionals than the other way
around, since professionals also get value from interactions with each other. Thus, focused
on gaining traction with professionals first, before expanding to recruiters.
? If sides are equally reliant on each other for getting value from a platform, platforms should
consider simultaneous onboarding, as no side may enjoy sufficient benefits otherwise.
– Payment systems such as PayPal provide referral subsidies to both merchants and buyers.
Strategies may work differently for different platforms
Vimeo: Late mover. Focus on
producers, competing with
YouTube. Key was to create a set
of higher-quality tools for
producers, superior video hosting
infrastructure.
Single-side (stand-alone value)
strategy.
YouTube (2005): First video hosting
platform to gain traction. Focus on
producers (content creators):
piggybacked on MySpace, giving
superior video editing tools; contests
incentivizing them to upload videos;
allowed them to embed videos offplatform; gave them share of ad
revenue à Seeded YouTube, leveraged
producers to bring consumers, and
created large producer followings.
Piggybacking, seeding strategy.
Megaupload: Late mover. Focus on
consumers, seeding the platform
with content internally, in niche
categories like pirated videos that
were policed on YouTube. Gained
traction by addressing underserved
needs of consumers. (Later led to
lawsuits and eventually shutdown.)
Seeding, micromarket strategy.
Thank you and see you next time!

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