Marketplaces are the quintessential type of business that can profit from network effects: The greater the number of buyers who join one, the more attractive it becomes to sellers, and vice versa. Indeed, marketplaces such as Amazon, Booking.com, and Apple's App Store have achieved some of the strongest competitive positions imaginable. That's why entrepreneurs are seeking to build, and venture capitalists are seeking to invest in, the next Airbnb, Uber, or Twitch. But not all marketplaces have the potential to realize strong network effects-the kind that make a marketplace defensible against wannabe competitors. Differentiation among sellers, fragmentation of the seller and buyer bases, the value added by discovery and transaction services, and the importance of seller ratings are all decisive in determining whether a marketplace can flourish. That's why it is extremely important, both for new and established companies trying to build marketplaces and for their potential investors, to dig deeper into those factors. Drawing on their more than two decades' worth of research and their own experience as angel investors in some 40 marketplace start-ups, the authors offer a comprehensive list of questions that anyone thinking of launching a marketplace should explore.
By making it vastly easier and cheaper to improve or create products and services that previously required significant human labor and creativity, generative AI has the potential to disrupt or even commoditize many businesses. Some companies will be able to gain an edge by leveraging publicly available generative AI tools better or faster than their competitors. But that advantage will be only temporary, and using the tools will soon become table stakes. This means established companies will have to rethink their business strategies and find new ways to add value to their offerings. In this article, the authors consider which types of businesses have the greatest potential to gain competitive advantage from generative AI and which are most likely to be disrupted. They also offer guidance for implementing AI across three levels of sophistication that correspond to an increasingly powerful advantage.
Large digital multisided platforms (MSPs) such as Amazon, Alibaba, and Apple's App Store have made it much easier for sellers to reach new customers, but as thousands of companies large and small have discovered, conducting business on them carries significant risks and costs. MSPs sometimes exploit sellers' dependency on them in various subtle and not-so-subtle ways. They raise fees. They change their recommendation algorithms to put more emphasis on price. They require sellers to advertise to maintain visibility in search results. They compete against sellers by imitating their products. They impose restrictions on the prices sellers can set outside of the MSP. And they change their rules and design in ways that weaken sellers' relationships with their customers. But all is not lost, say the authors. Sellers can employ four strategies to build viable businesses on platforms. They can develop and invest in direct channels, use platforms mainly as showrooms, go deep with highly specialized offerings or go broad with many different offerings, and wage public relations and lobbying campaigns to curb platforms' power.
Many executives assume that customer data can give you an unbeatable competitive edge. The more customers you have, the more data you can gather, and that data, when analyzed, allows you to offer a better product that attracts more customers. You can then collect even more data, repeating the cycle until you eventually marginalize your competitors. But this thinking is usually wrong. Though the virtuous cycles of data-enabled learning may look similar to those of network effects--wherein an offering increases in value to users as more people adopt it and ultimately garners a critical mass of users that shuts out competitors--they are not as powerful or as enduring. Nevertheless, under the right conditions, customer data can help build competitive defenses. It all depends on whether the data offers high and lasting value, is proprietary, leads to improvements that can't be easily imitated, or generates insights that can be quickly incorporated. Those characteristics do give firms an advantage. And when learning from one customer rapidly improves an offering for others (think Google Maps), people will care about how many other people are adopting it, and it will enjoy those sought-after network effects.
Five of the 10 most valuable companies in the world today--Apple, Alphabet, Amazon, Facebook, and Microsoft--derive much of their worth from their multisided platforms, which facilitate interactions or transactions between parties. Many MSPs are more valuable than companies in the same industries that provide only products or services: For instance, Airbnb is now worth more than Marriott, the world's largest hotel chain. However, companies that weren't born as platform businesses rarely realize that they can--at least partially--turn their offerings into one, say the authors. And even if they do realize it, they often wander in the dark searching for a strategy to achieve this transformation. In this article, Hagiu and Altman provide a framework for doing so. They lay out four specific ways in which products and services can be turned into platforms and examine the strategic advantages and pitfalls of each: (1) opening the door to third parties; (2) connecting customers; (3) connecting products to connect customers; and (4) becoming a supplier to a multisided platform. These ideas can be used by physical as well as online businesses.
In many ways, online marketplaces are the perfect business model. Since they facilitate transactions between independent suppliers and customers rather than take possession of and responsibility for the products or services in question, they have inherently low cost structures and fat gross margins. They are highly defensible once established, owing to network effects. Yet online marketplaces remain extremely difficult to build, say Andrei Hagiu of Harvard Business School and venture capitalist Simon Rothman of Greylock Partners. Most entrepreneurs and investors attribute this to the challenge of quickly attracting a critical mass of buyers and suppliers. But it is wrong to assume that once a marketplace has overcome this hurdle, the sailing will be smooth. Several other important pitfalls can threaten marketplaces: growing too fast too early; failing to foster sufficient trust and safety; resorting to sticks, rather than carrots, to deter user disintermediation; and ignoring the risks of regulation. This article draws on company examples such as eBay, Lending Club, and Airbnb to offer practical advice for avoiding those hazards.
Simon Rothman had recently been promoted from executive-in-residence to Partner at esteemed venture capital firm Greylock Partners and placed in charge of managing a $100 million early-stage fund commitment dedicated to online marketplaces. In Greylock's view, 2014 was a special moment in time for online marketplaces, the beginning of a boom in the space that was being catalyzed by mobile technology and social identity. Rothman was the right man for the job. An early eBay employee, he had founded eBay Motors and turned it into a multi-billion dollar business and also advised several successful online marketplaces such as Lyft, Wanelo and TaskRabbit. For his first investment as Partner, Rothman was particularly interested in the food delivery space, which was ripe for disruption by online marketplaces. Rothman had five food delivery startup options to choose from, a philosophy on how to analyze marketplace businesses, and a few weeks to make his first ever investment as a Partner at Greylock.
As these examples illustrate, MSPs include some of the largest and fastest-growing businesses of the past decade. Why? Successful MSPs create enormous value by reducing search costs or transaction costs (or both) for participants. As a result, MSPs often occupy privileged positions in their respective industries; most other industry participants revolve around and depend on MSPs in important ways. This article begins with a description of how MSPs work and why they can erect such high barriers to entry for new participants. It then offers an analysis of four fundamental strategic decisions and associated trade-offs that set MSPs apart from other types of businesses and that every MSP entrepreneur and investor should carefully consider. These challenges are as follows: •the number of sides to bring on (deciding whether to bring on two or more); •design (ensuring the interests of the different platform sides are not in conflict with each other or the MSP); •pricing structures (determining which platform side or sides should be charged more, based on the groups'relative value from interacting with each other); and •governance rules (regulating the participation and activities undertaken by the various platform sides to ensure a high level of quality, or outsourcing that function to users through ratings systems).
This note offers an analysis of four fundamental strategic decisions and associated tradeoffs that set MSPs apart from other types of businesses (e.g. product firms) and that every MSP entrepreneur and investor should carefully consider. In the last section I also discuss an important boundary condition: when is the MSP business model dominated by related - but distinct - business models?
This case focuses on the challenges and opportunities faced by a successful incumbent organization attempting to transform a large portion of its business from a traditionally product-centric operating mode to a platform-based one that leverages network effects to create durable competitive advantage. Strategic questions include the extent to which the organization should invest in platform initiatives, the appropriate resource allocation among various product and platform offerings, and the most beneficial business model for each of a few candidate multi-sided platform initiatives.
Lured by the success of marketplaces such as eBay, many companies have tried operating as multisided platforms, which let buyers and sellers transact directly with one another. But resellers--which acquire and then resell products and services--often fare better. To determine the right position on the continuum between pure reseller and pure multisided platform, companies must consider four factors: 1) Scale effects. Amazon draws on its formidable scale economies as a reseller for high-demand items but serves as a multisided platform for low-demand products. 2) Aggregation effects. Resellers can extract value from buyers by bundling products and exploiting complementary relationships between them, as Apple has with its iTunes-iPod combination. 3) The buyer and seller experiences. As Zappos realized in its early days as a multisided platform, some buyers do not want to deal with multiple sellers. And individual sellers might have a better experience selling to a reseller than to a buyer in a marketplace. 4) Market failures. Many multisided platforms have avoided collapse by using mechanisms that keep buyers and sellers honest. It can take more than one move for a company to reach its optimal position: Companies that should ultimately be multisided platforms sometimes need to start out as resellers and vice versa. And as the competitive landscape changes, managers must be diligent about reevaluating their position.
In 2012, GREE was one of the world's most profitable mobile social gaming companies. Its success in Japan was due both to its in-house games and to the development platform that it offered to third-party game developers. Its biggest challenge was to replicate the success of this two-pronged strategy in international markets, where it had to contend not just with many other game developers (e.g. Zynga), but also with the mobile platform providers themselves (e.g. Apple's iOS and Google's Android).
Since the creation of the first videogame systems in the 1970s, the videogame industry has undergone numerous transformations as new technologies and market entrants fundamentally changed the gaming experience of customers. In the early 21st century, customers began accessing games without the use of a physical gaming console, either through their mobile devices, or increasingly, through the "cloud" where customers could play videogames through specially enabled devices without the need for a physical game console or game disk. How might the cloud impact the dynamics of the industry?
Brightcove, a technology and services provider to content owners in the Internet television field, aimed to become a media distribution company in its own right. On October 30, 2006, it relaunched its Website-and, in effect, its business. With its new, consumer-facing home page, and with new offerings for advertisers and affiliates as well as video publishers, Brightcove sought to build a four-sided business (or "platform") around the rapidly expanding online video industry. Simultaneously, CEO Jeremy Allaire was completing a major funding round that would enable the company to make strategic investments in some or all of several categories: technology, media distribution infrastructure, international expansion, and acquisitions. As Allaire and his fellow executives weighed those options, they confronted competitive threats in multiple quarters, but particularly from YouTube, a hugely popular video-sharing site that online search giant Google had recently acquired. Covers Brightcove's vision for its multi-sided business, its technology offering and early business model, its efforts to shift to a new model based on media distribution, and its chief competitors in that market space.
Nintendo faced huge difficulties in July 2011. Sony's PlayStation and Microsoft's Xbox had caught up with the innovative motion-sensing controllers of the original Wii. And the new Nintendo 3DS handheld console had experienced a very disappointing start. Moreover, videogame consoles (particularly handheld ones) were facing increasing substitution from online and mobile games played on social networks and/or mobile phones (e.g. Zynga's Farmville). First, could Nintendo come up with a novel and innovative console once again (a Wii Encore) in order to escape head-to-head competition against its two larger rivals (Sony and Microsoft)? Second, how could Nintendo fend off the new substitutes, which were competing for a large portion of its customers?