Platform Businesses Are Just as Vulnerable as Brick-and-Mortar to Economic Stressors of Pandemic

By TAP Staff Blogger

Posted on September 15, 2020


In just three months, … COVID-19 and the resulting economic shock have challenged platform models –like all businesses— to prove their grit and resilience. Can the disruptors pivot as quickly as they began? Which will grow, and which may not bounce back? Is this the time for incumbents to ramp up platform capabilities?
- from “Pandemic Stress-tests Platform Power” by Peter Evans, Geoffrey Parker, and Marshall Van Alstyne


Platform business models use technology to connect people, organizations, and resources in an interactive manner. Airbnb, Uber, eBay, Pinterest, Instacart, and Amazon are just few examples of disruptive platforms that connect sellers and buyers, hosts and visitors, shoppers with consumers, and drivers with passengers.


As with the majority of companies and organizations, online-based businesses have been significantly impacted by the social distancing and shelter-in-place orders brought on with the coronavirus pandemic. Some businesses found their services no longer sought after (e.g., travel and concerts), some experimented with shifting gears in order to provide different services (e.g., creating online events to keep customers engaged who would normally attend a conference in person), and a few businesses found their products and services in high demand (e.g., online videoconferencing).


In a recent article, Professor Geoffrey Parker, Dartmouth College, Professor Marshall Van Alstyne, Boston University, and Peter Evans –all co-chairs of the MIT Platform Strategy Summit, share insights from their work studying and working with platform-based businesses. “Pandemic Stress-tests Platform Power” shows that “neither products nor platforms are exempt from the laws of supply and demand.” However, the authors note, “some of the economic pain was matched by newfound strengths allowing platforms to adapt when demand collapsed.”


“Resilience,” the authors say, is a key component “that will keep platforms ascending and growing.”


Below are a few takeaways from “Pandemic Stress-tests Platform Power.”


Our research shows that platforms are definitely not immune to extreme demand fluctuations, but there are bright spots. Specifically, we see three general patterns emerging among the demand shocks:


Demand Implosion


Platforms such as Uber, Airbnb, and Eventbrite saw demand evaporate, and they could not easily pivot. Their transportation, hospitality, and conference services required too much human contact to endure social distancing and shelter-in-place mandates. Both Uber and Airbnb attempted to diversify as logistics providers — Uber Eats, for example, and Uber experiences — but both firms saw revenue largely vanish. Uber laid off more than 6,700 employees (about 25% of its workforce) in an effort to save $1 billion in costs since the COVID-19 pandemic hit. Airbnb also cut its workforce by 25% percent, about 19,000 employees, as travel ground to a halt.


Quick Pivots


Meanwhile, other platforms that saw demand evaporate quickly shifted gears and jumped into adjacent markets. In the simplest cases, demand pivots are successful when executives can shift the business from one demand model to another. Nimble platforms can quickly detect changes in demand and can better match their supply and demand sides, even in the face of disruption.


In the case of Bandsintown, the platform successfully transitioned from a physical presence to a digital one. The concert platform — with 58 million users and more than two million events listed each year — created new digital experiences to help music fans connect with their favorite artists while they quarantined.


Another example of a quick pivot occurred in the lunch-truck market. The online platform Best Food Trucks, which matches trucks with customer locations, shifted supply by moving from one geographic location to another. The platform wasn’t always welcomed by truck operators because it added an intermediary between customers and delivery and operators had to pay the platform. Once COVID-19 hit, however, the traditional office lunch business collapsed and Best Food Trucks quickly offered a new market: Suburban diners.


Demand Explosion


A third group has seen surging demand and thriving operations during the pandemic. Before the COVID-19 crisis, Instacart had about 130,000 full-service shoppers and 12,000 in-store shoppers to fulfill online grocery orders for same-day delivery or pickup. In April, when consumers were forced to shelter-in-place, Instacart moved to hire 250,000 more personal shoppers — beyond the 300,000 hired in March — to help meet skyrocketing demand for grocery delivery.


That meant Instacart expanded its shopper community to more than 500,000. At the time, it reported that order volume had jumped more than 500% year-over-year, with the average customer basket size growing 35%. Instacart raised $225 million in new financing amid an “unprecedented surge” in consumer demand since the COVID-19 outbreak.


Concluding Thoughts


Despite setbacks, we believe that platforms will become even more resilient, especially compared with standard incumbent firms, because of their ecosystem strategy. One reason is that their production takes place largely outside of the firm (what we call the “inverted firm”), which makes them adept at working with a diverse set of changing partners. This built-in agility allows them to more swiftly switch to new partners and customers, should the need arise. And as we now know, that can happen very abruptly!


Read the full article: “Pandemic Stress-tests Platform Power” by Peter Evans, Geoffrey Parker, Marshall Van Alstyne (Medium, July 1, 2020).


Geoffrey Parker is Professor of Engineering at the Thayer School of Engineering at Dartmouth College where he also serves as Director of the Master of Engineering Management Program. He is also a Visiting Scholar and Research Fellow at MIT’s Initiative for the Digital Economy. Professor Parker has made significant contributions to the field of network economics and strategy as co-developer of the theory of “two-sided” markets. His current research includes studies of distributed innovation, business platform strategy, and technical/economic systems to integrate renewable energy.


Marshall Van Alstyne is the Questrom Professor in Management, Professor of Information Systems, and Department Chair of Information Systems at Boston University's Questrom School of Business. He is one of the leading experts in network business models. Professor Van Alstyne conducts research on information economics, covering such topics as communications markets, the economics of networks, intellectual property, social effects of technology, and productivity effects of information. As co-developer of the concept of “two sided networks” he has been a major contributor to the theory of network effects, a set of ideas now taught in more than 50 business schools worldwide.


Peter Evans is the Managing Partner at the Platform Strategy Institute and co-chair of the MIT Platform Strategy Summit.