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Why Online Platforms Lose Sleep Over Disruption

· August 10, 2017

A new paper by economist David Evans takes aim at the notion that Internet platforms are, in the words of some commentators, “unstoppable.” Evans differs from these implausible declarations, identifying several aspects of online platforms that lead to many a “sleepless night,” as cutting-edge platforms worry about disruption by existing rivals or new entrants. (DisCo has covered some of Evans’ scholarship before; he also co-authored the 2016 book Matchmakers on the subject.)

To start, what’s a “platform?” As I noted in a paper last year, few Internet terms are used with such imprecision as “platform.” In fact, as both Evans and other DisCo writers have observed, many traditional businesses have online presences that are indistinguishable from major online platforms. Evans uses the term “platform” specifically, in order to indicate a “businesses that connect two or more different types of users,” or what scholarly literature has called “multi-sided markets.”

Evans identifies several features of online platforms that result in leadership being less durable than other sectors, some of which will be familiar to regular DisCo readers. Platforms tend to be characterized by (1) rapid innovation in inter-firm competition; (2) disruptive innovation that moots the relevance of existing industries; and (3) the fact that users can “multi-home”, or use multiple competing services between which they can easily switch.

Platform competition is characterized by rapid innovation

Because online platforms are largely software-driven, Evans notes, it is easy to rapidly deploy new features. In addition, because software development does not require large capital infrastructure at start-up, new entrants can field services that rival established firms with ease. The rise of Myspace, for example, quickly inspired rival social-networking alternatives from AOL, MSN, and Yahoo between 2003 and 2005. None of these succeeded in dislodging Myspace, however, and yet all were ultimately eclipsed by a new generation of services in the form of Facebook, LinkedIn, Pinterest, and Twitter. Even today, complacency by these firms invites being upset by new entrants.

Platform risks of disruptive innovation

Evans also observes that platforms are uniquely at risk from disruptive innovation, pointing to Yahoo leapfrogging AOL, and Apple’s iPhone leapfrogging BlackBerry, Microsoft’s mobile efforts, and Symbian. As a previous DisCo post on the disparate fates of AOL Instant Messenger and Tencent observed, insurgents have an advantage: established market actors may struggle to adapt to change, but attackers bring no baggage, and no preconceived business models to defend. Consider whether the fate of BlackBerry might befall current leaders as voice-activated assistants overtake the Internet in the market for answers.

Multi-homing and switching costs

Arguments about the durability of Internet platforms’ leadership often invoke network effects — the idea that as more people use a service, the more valuable it grows. The telephone network, for example, becomes marginally more valuable with each new person you can call. But if switching services means foregoing access to that existing network, then switching costs will be higher.

An often-overlooked aspect of online services is that users tend to “multi-home”, utilizing many competing services at once. (As one webcomic observes, sometimes, too many options.) In short, nothing says Tinder users can’t also use Match.com. As Evans explains, users

can conveniently switch back and forth depending upon which they prefer for which purpose. It is also easy for people to try a new alternative online platform and decide whether to keep using it or not. The same is true for business users on online platforms, such as advertisers and gig-economy workers. Large advertisers often use multiple online platforms, including ones in the same narrow category such as search, and switch advertising budgets between them. Drivers for ride-sharing apps can, and many do, use more than one app. Multihoming is so prevalent among online platforms that it is hard to identify exceptions.

If switching users don’t forfeit the value of the established network, there is little cost to trying competing options — a lesson Myspace learned the hard way.

Dow 40,000 and Other Inevitabilities that Weren’t

Evans’ article underscores the survivor bias that often characterizes commentary on tech competition. Ten years ago, commentators pronounced Myspace to be an unbeatable “natural monopoly” with a “rosy future.” BlackBerry similarly went from “dominant” to “downfall” in a few short years. Other firms that remain prominent have nevertheless been ousted from leadership positions in certain segments, such as Microsoft in browsers and mobile. What distinguishes those firms that haven’t been leapfrogged is a commitment to R&D, and providing new, innovative services that consumers want. Predictions of dominance by leaders who soon stopped innovating have repeatedly proved false, as firms resting on laurels were ousted by those who didn’t. As Evans’ paper reminds us, the missed predictions of yesterday — the “Dow 40,000”s of tech punditry — can be easily forgotten. Except, perhaps, by BlackBerry investors.

Read the full paper here.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.