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How Platforms Disrupt Different Industries

Through a cursory glance at the different internet platform companies, we see that although platforms permeate all industries, some industries are more disrupted than others. Certainly, platforms are superior to pipelines in some aspects, but the advantage does not persist equally in all industries. What makes certain industries more vulnerable to be disrupted by platforms? There are a few common elements: information intensiveness, non-scaleable gatekeepers, high fragmentation, high information assymetries, and low cost of failure.

Information Intensiveness

Given the fact that IT stands for information technology, it should come as no surprise that information is fundamental in technology. This is particularly true for internet platforms, as opposed to other hardware or software. The core competencies of internet platforms over its pipeline counterparts include cost and scalability, which rely on automation with data.

Scanning through different industries, we can see that information light sectors such as mining, infrastructure, or energy, have not been disrupted in any major way. The companies that dominated these sectors, Vale, Union Pacific, and Exxon Mobil, have not lost significant market share to new entrants. In these industries, data is difficult and expensive to obtain, interpret, and use. Once obtained, they are closely guarded, Vale will not share the data their geologists collected on what makes for a good mineral deposit. In comparison, sectors such as media or travel, where data is both abundant and easy to collect, Blockbusters and Marriott have lost significant market share to Netflix and Airbnb.

Non-Scalable Gatekeepers

Traditionally, suppliers of goods and services have used a variety of gatekeepers, that decide what to supply to the consumers based on market signals. We talked about how laborous this process is and how difficult it is to scale, thus industries that rely heavily on these gatekeepers are more prone to disruption. In platforms, these gatekeepers are automated away with data and algorithms, therefore this condition is contingent upon the presence of high quality data in the industry.

Some examples of gatekeepers are editors in the media industry and buyers in the retail industry. Rather than someone making sure the contents of the media outlet is relevant and of high quality, a voting system combined with a recommendation engine allow Netflix to push the right content to you at the right time. Similarly, Amazon predicts what goods might be popular through the data it collects from millions of transactions, and sources them accordingly.

High Fragmentation

Highly fragmented industries are those with many small suppliers rather than a few big suppliers. The degree to which an industry is fragmented is usually measured by the market share of the top X players. More fragmented industries naturally lend themselves to platform disruption, as the platform’s role of market aggregation generates the most value. Additionally, fragmented industries are less likely to fight back against disruption, through lobbying or price competition. Fragmented industries are also easier to negotiate with, when platforms seek to monetize from suppliers.

Some example of highly fragmented industries are restaurants and real estate. Yelp and Dianping were able to quickly establish dominance, partly due to the fact that independent restaurants were too small to market themselves in any meaningful way. The gatekeepers in the space, critics and rating systems such as Michelin were also very difficult to scale. Prior to platforms like Zillow, the real estate industry was composed of a mishmash of independent and franchised agents. By leveraging and aggregating data, the platform was able to provide all the relevant information for home buyers and renters in one place. Note that highly concentrated industries such as retail and travel are not necessarily resistant to disruption. Despite companies like Walmart and Marriott dominating their respective industries, there is abundant hidden, fragmented supply that platforms like Amazon and Airbnb unlocked. The boundaries of the industries are not merely direct competitors but also substitute products and services.

High Information Asymmetries

When one thinks of information asymmetries, used car salesmen come to mind. The supplier has significantly more information about the goods than you: its history, its problems, and its true value. By strategically withholding these pieces of information, the supplier can benefit at the expense of you. This phenomenon is particularly prevalent in industries where some expertise are required, and the transactions are infrequent and of large value, as the suppliers would be able to benefit the most under those circumstances. Platforms that bridge the information gap would therefore also be of high value in these cases, however, this would be dependent on the platform’s ability to gather these difficult to get data points.

The car and real estate industries are naturally great examples of information assymetric sectors. Autotrader looks to aggregate used car transactions and provide details on price based on make, model, age, and other relevant details. Similarly, Zillow aggregates transaction information across the US to allow users to better value homes based on location, size, and age of the property. However, both platforms are still limited as to the fact that they cannot provide data on what they don’t have, and sellers are still able to selectively withhold information.

Regulations and Cost of Failure

Regulations and cost of failure are also important factors in platform disruption, and these often go hand in hand. In industries where the goods or services delivered are critical, and the cost of failure to deliver are high, it is more difficult for platforms to replace pipelines. This is due to the main weakness of platforms, in its inability to fully control for quality. The typically quality control system in platforms, the rating system, is not as stringent as six sigma in highly efficient processes. Typically, these are also industries where regulations are in place to protect consumers and enhance quality of goods or services.

Healthcare comes to mind when we think of critical services, where cost of failure is death or injury. Thus, platforms only supplement healthcare services with back office support like data management or communication. Although many smart people are working on the problem of automating drug discovery, diagnosis, or treatment with big data platforms, it remains to be solved. Capital markets are also a place where cost of failure is high. If the valuation of a acquisition target is off by a few percent, that could easily be hundreds of millions of dollars lost for shareholders. Hence, we do not see investment bankers being replaced by a Zillow for corporates anytime soon.

Sources: Platform Revolution, internal analysis

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