The Beauty of Marketplaces

Having been involved with a number of businesses that are reliant on concentrated and powerful suppliers, I can tell you that it’s never fun.

Chris Dixon has a great post on this topic yesterday as it relates to the video business and dealing with the Hollywood supply chain, which was ultimately Joost’s undoing.

This point applies more broadly to all markets with concentrated supply.  Suppliers will hold up distributors every chance they get and almost always struggle to embrace today’s necessary digital ubiquity, fearing erosion of their business rather than recognizing the power of massive distribution.  And they will always make your life difficult.

To be clear, this does not mean that the Joost/Hollywood example is ultimately instructive and successful businesses cannot be built in markets with concentrated and strong suppliers.  They absolutely can.  They are just fundamentally tethered to and limited by that supply.

Examples of businesses I’ve been involved with in this vein include Ticketmaster in ticketing and Interval in travel.  Everyone is familiar with Ticketmaster, but Interval is a fantastically successful timeshare membership and exchange business.

Interval is a very instructive example as its business is made up of two parts:

1. The first requires them to secure deals with timeshare developers that allows them to acquire members to their program.

2. The second is an exchange for members that allows them to exchange their allotted time with other members, thereby increasing the flexibility and value of the owned inventory for the vacationer.  So for example, if you own a week in Miami in December you can trade it for a week in Beaver Creek in December.

Interval’s marketplace business is beautiful and drives pure margin.  But it is limited by the supply contracts it has with timeshare developers.  It is not a truly open marketplace.

On the other hand, open marketplace businesses have scale potential that is only limited by the size of the market in which they play.  And the web is perfectly suited for these kinds of businesses.

Examples include , BountyJobs, ServiceMagic, HomeAway, StubHub (& SeatWave in Europe), Match and of course .  They all operate independent of these supply constraints, and are better off for it.  As long as there are technicians, recruiters, home contractors, home inventory, tickets outstanding, single people and folks that use the phone respectively, these businesses can play.

Newer business models are taking advantage of these dynamics as well, like Kickstarter in fund-raising.

Some of these businesses are P2P like Skype & Match, others are B2C like ServiceMagic and HomeAway and others are B2B like OnForce and BountyJobs.  Markets and supply in these businesses differ – for Match it’s people, StubHub tickets, ServiceMagic contractors and OnForce techs.  Some charge on one side of the transaction and others like Match charge participants on both.

All of these factors need to be considered when evaluating these businesses.  But the basic principle is the same – no one person or entity can hold you over a barrel.  And when you get a lot of folks participating, watch out.  Growth tends to be explosive.

The trick with marketplaces is getting them started, and there are a number of ways to help grease the skids in different marketplace concepts. That’s fodder for another post, but one key thing to remember is who your supply *really* is.

In most marketplaces, supply is the end-user or provider of services rather than the purchaser of services.  Remembering this and building around it will go a long way towards ensuring success.

I have long been compelled by marketplace businesses and continue to be so.  If you’ve got one or are building one, I’m keen to hear about it.

Tagged: #Investment Thesis #Marketplaces
  1. reblogged this from mokoyfman
  2. mokoyfman posted this