Why the Businesses That Platforms Actually Disrupt May Not Be Who You Think

The companies most in danger from new platform-based enterprises are slightly older tech companies because the economics of being an intermediary favor the increased speed and convenience they offer. JL

David Evans and Richard Schmalensee report in Harvard Business Review:

The businesses most at risk from platforms powered by rapidly improving online technologies aren’t traditional businesses that sell products and services to consumers. They’re matchmaker businesses operating platforms for connecting different groups of customers. Apple’s and Google’s mobile operating systems whacked the sale of Windows-based PCs. (And) also toppled AOL, once worth $165 billion, and Yahoo, once worth $128 billion. Verizon bought both companies for less than $5 billion each in the last year.
Platforms are all the rage these days. Powered by online technologies, they are sweeping across the economic landscape, striking down companies large and small. Uber’s global assault on the taxi industry is well known. Many platforms, some household names and others laboring in obscurity, are doing the same in other sectors.
Surveying these changes, you might conclude that if your business isn’t a platform, you had better worry that one is coming your way. Everyone from automakers to plumbers should count their days as traditional businesses. And maybe you should jump on the platform bandwagon too. If it worked for Airbnb, why not you?
Based on our research into the wave of online platforms that have started in the last two decades, we don’t necessarily disagree. Traditional businesses should worry, and maybe they should think about platform strategies. But we think these conclusions are overwrought — and miss what’s really going on.
The businesses most at risk from platforms powered by rapidly improving online technologies aren’t, in fact, traditional businesses that sell products and services to consumers. They’re “traditional” matchmaker businesses that have been operating platforms for connecting different groups of customers.
After all, platforms, including disruptive ones, are nothing new. Village matchmakers started making their living organizing marriage markets millennia ago. And many platforms today, such as 50-year-old MasterCard, were started back when a browser was someone thumbing through magazines at the local newsstand.
The evidence is striking that these existing matchmakers, rather than traditional firms, have so far experienced the greatest disruption from new platforms.
We identified significant platforms based on three different measures of importance: the five largest publicly traded ones by market cap; the five largest nonpublic startups by most recent valuation; and the five largest by web traffic. Two online platforms appear in both lists, so we have 13 online platforms. All but one of these new matchmakers directly disrupted an existing platform industry. Airbnb is the one exception. It has mainly disrupted the hotel chains, which are not platforms, but it may well disrupt online booking sites, which are.

These empirical findings make sense. Existing matchmakers have already identified situations in which a platform can create value by helping to connect members of different groups that could benefit from getting together. But they also face significant risk from startups that use new technologies to operate more-powerful, more-efficient, and more-scalable platforms.
Microsoft Windows, for example, has been the dominant platform for users, developers, and hardware makers for more than 25 years. Using new technology and business models, Apple’s iOS and Google’s Android mobile operating systems whacked Microsoft hard enough that the sale of Windows-based PCs fell. As this happened, Windows lost its developer mojo, as developers shifted to mobile, and that doesn’t portend well for its long-run future. Meanwhile, people who used to only look at Windows screens now spend most of their time outside of work — and of course at work — looking at mobile screens based on mobile operating systems. Microsoft knew it was at risk from mobile but just couldn’t compete with the new kids on the block.
Taxis are a more mundane, and maybe surprising, example. In many cities, taxi companies really aren’t any different from ride-sharing companies, except they do a lousier job of connecting drivers and riders. They operate dispatch services based on a central switchboard, often hire drivers as independent contractors, and connect the drivers with people looking for rides. (To get a flavor of their operations, you can watch Danny DeVito and Judd Hirsch in reruns of the television show Taxi.) In the cities that have taxi medallions, their prices are plummeting, reflecting investors’ views that these old matchmakers don’t have a bright future. Uber and the other ride-sharing companies have disrupted them.

Google and Facebook didn’t upend traditional businesses either. They used new technology to hammer ad-supported media. Some of the victims were stodgy print newspapers and magazines that were still operating much like they did a century before. But these ad giants also toppled two internet kings that ruled at the turn of the century: AOL, once worth $165 billion, and Yahoo, once worth $128 billion. Verizon bought both companies for less than $5 billion each in the last year.
Some new matchmakers do send traditional industries into a tailspin. Personal computer operating systems, with third-party software developers, helped destroy the minicomputer business and took a big dent out of the mainframes with proprietary apps. And general-purpose payment cards, which consumers could use at many merchants, sent the store card business into steep decline. So far, though, online matchmakers haven’t been the scourge of traditional businesses.
Any business whose value comes from serving as an intermediary between different groups of customers — and that is not harnessing and keeping pace with relevant technology — does, however, have a target on its back. If you are thinking about starting a matchmaker, the best place to look is at platform businesses that haven’t kept up.
That includes all the successful online platforms that dominate the market cap listings and headlines today. The technologies that have been behind the recent wave of matchmakers aren’t standing still. They continue to improve at an amazing pace and to spread around the globe.
The inertia of existing platforms creates opportunities for entrepreneurs to one-up the last generation of online platforms. Rapid technological change has compressed the time between when a new platform is established and when it faces a threat from an even newer platform. Yahoo will not be the last of the internet giants to be cut down to size.