Networks. Sharing and Business Models- Whats Next?

I was intrigued the other day by a post from Venture Capitalist Fred Wilson

Future Friday: OpenBazaar and OB1

and particularly the following statement:

“So OpenBazaar is a decentralized open source marketplace protocol that allows trade to happen between parties without a central marketplace operator and without a take rate.

There is a real question about how one can make money doing something like this. And there is a real question about how you avoid bad people doing bad things in a marketplace like this.”

There has been a lot of buzz and discussion in the last couple of years around platforms and marketplaces, especially around what is euphemistically called the sharing economy. Well known examples such as Airbnb and Uber create a platform that connects buyers and sellers of services and I am a avid user of both services, as an active buyer and seller.

For services that purport to be disruptive (and they are) scaling of the size of the networks that are associated with them rapidly moves them to the position of incumbents, and because of network effects that is a powerful position. If you want to book shared travel accommodation will you go to Airbnb with 1.2 million listings in more than 34,000 cities worldwide, or will you try and find the plucky startup challenging their model? This means despite the fact they are supposed to be a disruptive distributed platform power quickly accrues to the centre.

This power is somewhat restricted by platform economics. The platform does not work if the suppliers are unhappy with what they receive and similarly if the buyers are not happy with prices and service. A platform marketplace only works if the suppliers and buyers both stay and the whole business model, power, and valuation rapidly collapses if people start leaving. This sort of relationship lends itself to looking at the model from the point of Porter’s Five Forces Model

porters-five-forces-model from notesdesk

From: http://www.notesdesk.com/notes/strategy/porters-five-forces-model-porters-model/

Logically the platform would equip itself to reduce the power of buyers and suppliers in the marketplace in order to maximise its own position. For instance:

  • Attracting more supply reduces the power of suppliers.
  • Financing cars for suppliers to use (Uber) helps their suppliers with financing and cost structures but also has the Machiavellian effect of locking people into capital structures and therefore more likely to maintain supply arrangements. That reduces their choices and therefore their power.

Logical actions like this tend to concentrate innovation into the process of consolidating power and revenue to the platform rather than innovating just to delight customers. Centralised innovation tends to also limit innovation as compared to innovation on open platforms.

The sorts of actions that come with maximising the value of the platform in order to reward the founders/owners have a logical flow to them and a sense of inevitability. If you can adopt a defensive market position that give you a strategic structural competitive advantage then why wouldn’t you?

The principles around OB1 appear to be vastly different. While Fred Wilson and Union Square Ventures are likely to be holding some information back on how they plan to approach their investment for prudent financial and strategy reasons it seems they are looking to contribute to the core platform/ecosystem while opening up themselves up to out and out competition on the platform as their way of creating value for customers and investors.

A number of services could be envisaged on top of the platform that help buyers and sellers in the market place. These include search services, trust services, premium advertising services, Bitcoin hedging services, etc. However if my assessment is right OB1 will only profit if they produce the services on the platform that produce the best value for customers (buyers and sellers) and therefore they will be exposed to ongoing and relentless competition.

I see that as a fantastic thing for customers. The jury is still out as to whether such a system can compete with a more systematised and heavily capitalised platform such as eBay. On the plus side open source has proven itself again and again to be commercially competitive with companies competing on the service supply side. On the negative side simple systems that just work and employ existing standards that people are used to and trust are big winners in mass markets.

Union Square Ventures and A16Z who have also invested are smart players in this space. That does not mean they are right because they are venture capitalists who depend on the big wins to get the returns they are looking for. That means that individual bets tend to be high risk. However this is very much a space to watch

If this interests you then I suggest you read:

What is OpenBazaar?

Introducing OB1

The next post will continue on this theme and look at networks as marketplaces rather than simple paltforms

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