Warren Buffett, the supreme value icon, has often flirted with the fact that he understands nothing about new technologies and therefore keeps his hands off them. Recently, however, the 'Oracle of Omaha' has outed himself as a fan of Apple. His holding company Berkshire Hathaway now owns Apple shares with a total value of well over 100 billion US dollars, making it the largest single shareholder in the iPhone company from Cupertino, California. Apple shares now account for around 50% of its huge equity portfolio. Online platforms are now among the most valuable companies. The stock market ranking reflects this.

Monopoly position

Warren Buffett coined the term moat for monopolistic companies. Using the example of Coca-Cola, he illustrates this vividly with the following question: What would it cost to rebuild Coca-Cola on a greenfield site? The answer is very difficult, the price is very high. But Buffett's answer is that there are, after all, competitors like Pepsi.
There is even less competition in the digital sector. In the USA, there is only one dominant smartphone manufacturer (Apple), one dominant social network (Facebook), one dominant search engine (Google), one dominant e-commerce department store (Amazon) and one dominant operating system manufacturer(Microsoft). Together, they occupy 2nd to 6th place and have a combined market capitalization of USD 5,379 billion.

The digital ecosystems

These are all companies that have developed into digital platforms. What are the underlying strategies and characteristics of these companies that dominate the financial markets?

The historical business development and stock market valuation of Microsoft and Apple are very clear examples of this. In the 1980s, Apple was the innovator in the PC sector. Graphical user interfaces and multimedia functions were already standard at the company from Cupertino, California, at a time when Microsoft was still using cryptic command line interfaces via its MS-DOS operating system. Apple was briefly the star of the stock market. But Microsoft had an important strategic trump card: the openness of its platform allowed third-party developers to provide a unique selection of software for the Microsoft operating system. Microsoft developed into the leading PC platform and a PC ecosystem emerged that Apple could not compete with due to its closed approach.

Steve Jobs realized his mistake and opened Apple up to third parties. It was not the iPhone itself that brought Apple the gigantic success of recent years and a phenomenal share price performance, but Jobs' visionary decision to open up the Apple App Store to third-party developers, thereby creating app innovations and a gigantic app marketplace. Apple thus became the i-platform and therefore the most profitable and valuable app ecosystem in the world. This was precisely the motivation for legendary investor Warren Buffett to invest in Apple. He sees Apple not as a hardware manufacturer of devices such as the iPhone or iPad, but as a unique platform and app ecosystem. The figures prove Buffett right in several respects: with a margin of over 60%, the digital services are far above the already excellent 35% of the hardware division. The stock market has also taken Apple's transformation into a digital company into account with a higher valuation of the share with a P/E ratio of over 35.

Platform companies are so successful because they follow the "winner takes it all" formula. As described above, there is usually only one or a maximum of two winners in the respective industry segment that generate the main sales and profits.

Technologically coherent unit required

Thomas Rappold is a financial/stock market expert, author (Silicon Valley Investing) and founder of numerous Internet start-ups.

© Thomas Rappold

But is the platform economy also a role model for mechanical and plant engineering? As part of its Industry 4.0 activities, China has long since recognized what really matters; in the future, mechanical and plant engineering will be digital. China has already successfully practiced these technological quantum leaps on several occasions: Landlines have been leapfrogged by mobile communications and bank accounts by mobile payments. Consequently, Jack Ma and his colleagues also speak of 'intelligent manufacturing' and mean nothing other than what Elon Musk has implemented with his Teslas: Rethinking hardware in software. Tesla's exorbitant valuation is not the result of its ability as a car manufacturer, but rather as a digital technology company that constantly updates its cars 'over the air' via software updates with minimal maintenance.

"Platform companies generally achieve well above-average margins - exactly what stock market players love"

German companies in particular must learn that future value creation and appreciation on the international capital and export markets no longer lies in hardware, but in software combined with big data, analytics, AI and quantum computing. The digital platform economy makes it imperative that German industry, with its decentralized, small-scale structures, unites to form a coherent technological unit. Size, standardization and 'think big' are the order of the day. In the future, it will no longer be enough to say "we are proud to have the most 'hidden champions'".

Dominate the market - here's how!

So what are the specific success factors that characterize the most successful platform companies and can therefore serve as a role model for German industry?
For a platform company to dominate a market, it must at least partially fulfill the following four characteristics:

Proprietary technologies
Such technologies are quasi-standards. This means that the technology has such a strong position that it has a very broad base in the market. Examples include Microsoft's operating systems for desktop computers, as well as Apple's iOS and Google's Android mobile operating systems.

Network effects
Successful digital platform providers such as Amazon, Facebook, LinkedIn and Paypal are gaining more and more customers thanks to the attractiveness of their platform. Additional customers make the platform even more attractive and enable it to provide ever better offers. The added value of the network increases with each new customer. Very often, network effects are created through a self-sustaining upswing (virality).

Economies of scale
Economies of scale always come into play with high fixed costs and low marginal costs. Amazon, Alibaba and Mercadolibre are prime examples in the digital world and Walmart in the traditional retail business. They achieve additional efficiency gains with further growth. Amazon, Alibaba, Mercadolibre and Walmart are taking full advantage of this for their further growth. The four are price leaders and also have strong pricing power.

Brand
Apple, Amazon, Alphabet/Google, Facebook, Microsoft and SAP, as well as Alibaba and Tencent, are now among the most valuable brands in the world as digital platforms with great appeal. A brand is a product that is not interchangeable for customers and for which they are prepared to pay more. Real brands are difficult to identify, but one thing is clear: if you manage to build a brand, you have created a monopoly. Successful platform companies are often brand leaders.