Self Help

Matchmakers The New Economics of Multisided Platforms - David S. Evans & Richard Schmalensee

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Matheus Puppe

· 45 min read

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Here is a summary of the key points in the book’s table of contents:

  • Introduction: Explains that many of the biggest and most exciting companies today are “matchmakers” that connect groups of customers. These businesses operate differently from traditional companies and require a new understanding of economics.

  • Part I - Economics and Technologies: Discusses the unique economics of matchmakers, which depend on interactions between different groups of customers. New technologies have enabled an explosion in matchmaker businesses.

  • Part II - Building, Igniting, and Operating Matchmakers: Explores strategies for creating, launching, and managing matchmakers, which face distinct challenges like reaching critical mass.

  • Part III - Creation, Destruction, and Transformation: Examines the rise of new matchmakers, decline of old ones, and transformation of traditional businesses into matchmakers.

  • Conclusion: Recaps key lessons from the book about the past, present, and future of matchmaker businesses.

  • Multisided platforms are businesses that help different parties find and transact with each other, reducing transaction costs. Though this business model has existed for thousands of years, it has exploded with modern technologies.

  • In 1998, reservations were difficult for both restaurants and diners. Chuck Templeton started OpenTable to solve this problem by getting restaurants to adopt software to manage tables and take reservations online.

  • OpenTable initially focused on signing up restaurants and offering a consumer website for making reservations. But there were too few restaurants at first to attract many consumers.

  • Even after raising venture capital and expanding to 50 cities by 2001, OpenTable struggled to achieve critical mass - enough restaurants in any one city to reliably serve consumers.

  • They resorted to subsidizing restaurants and consumers to bootstrap the marketplace. Finally in 2005, OpenTable achieved critical mass in San Francisco and was able to charge restaurants for value created.

  • The story illustrates the challenges of multisided platforms in solving the “chicken and egg” problem of getting both sides on board. OpenTable overcame this with persistence, subsidies, and focusing on a single city.

  • OpenTable is a multisided platform that connects restaurants and diners. It struggled initially because it didn’t have enough restaurants or diners signed up to attract the other side.

  • OpenTable focused on signing up restaurants in a few key cities like San Francisco and New York. Once it reached critical mass there, it ignited growth as more diners attracted more restaurants and vice versa.

  • Multisided platforms like OpenTable have existed for a long time, such as matchmakers and credit cards like Diners Club.

  • The economics of multisided platforms is complex and counterintuitive. Unlike traditional businesses, it can be optimal for them to offer services for free or even pay some customers.

  • In 2000, economists Jean-Charles Rochet and Jean Tirole recognized the common economic structure behind diverse multisided platforms. This launched the study of the unique economics of these businesses.

  • Traditional economic formulas don’t work for analyzing multisided platforms. New economic models are needed to understand their pricing strategies and challenges.

  • Many dot-coms in the 1990s followed the advice to “grab all the eyeballs you can” and not worry about revenue at first. This led many of them astray and contributed to the dot-com crash.

  • This advice stems from a misunderstanding of network effects - the concept that adding more users makes a platform more valuable.

  • Traditional economic analysis of industries with network effects was too simplistic. It focused only on one side of the platform (the users) and ignored the other sides (e.g. restaurants for OpenTable).

  • Following this one-sided logic, many dot-coms focused solely on amassing users quickly, thinking revenue could come later.

  • But for multi-sided platforms, all sides need to be considered together. Just having lots of users is not enough - you need participation from the other sides too.

  • OpenTable almost failed by following the “grab eyeballs” approach initially. It needed restaurants as well as users.

  • The new economics of multi-sided platforms, developed starting in the late 1990s, provides a more nuanced framework for understanding businesses like OpenTable.

  • This framework shows the flaws in the simple “grab eyeballs” view and explains why many dot-coms failed as a result. Considering all sides of the platform is critical.

  • Early work by economists on network effects laid the foundation for later research on multisided platforms. Jeffrey Rohlfs’ research on landline telephones established the concept of direct network effects, where the value of a network increases as more people join it.

  • In the 1980s-1990s, economists applied network effect theories to high-tech industries like VCR standards. They concluded these were “winner-take-all” markets where small leads compound, so first-movers have an advantage.

  • However, French economists Rochet and Tirole realized most markets with network effects actually have two distinct sides that interact through a platform. The value comes from indirect network effects between the two sides.

  • Indirect network effects are important in two-sided platforms like OpenTable, which connects restaurants and diners. The simple one-sided network effect theories were misapplied to businesses with multiple customer types.

  • The standards war between VHS and Betamax videocassettes was misanalyzed as a one-sided market. In fact, it was a two-sided platform connecting consumers and content providers. VHS won by attracting both sides, not just gaining a consumer lead.

  • One-sided network effect theories led to the 1990s dot-com view of building market share quickly. But this overlooked indirect network effects in multisided platforms. Rochet and Tirole showed network effects are more complex in multisided markets.

  • Indirect network effects were far more pervasive and complex than initially thought. Many businesses operate multisided platforms that need to get multiple groups on board.

  • Traditional network effect theories like first-mover advantage and winner-take-all were flawed. Platforms can differentiate themselves and attract users even if they weren’t first.

  • Participants often multi-home, using multiple platforms, which enabled later entrants. Complete domination by one player is less common than believed.

  • The strength of network effects varies across industries based on how easy it is for users to switch platforms.

  • Direct and indirect network effects can be negative as well as positive, impacting business incentives and strategies.

  • Network effects depend on getting the right users on both sides, not just more users overall. Platforms need to ensure adequate “thickness” in relevant matches.

  • Rochet and Tirole made a key insight into optimal pricing strategies for multisided platforms to balance the needs of multiple interdependent customer groups.

  • Traditional businesses rarely find it profitable to price below the incremental cost of providing a product. Multisided platforms, however, often find it optimal to price below cost or even provide rewards on one side of their platform (the “subsidy side”) in order to get enough participation on that side.

  • Many multisided platforms, such as video game consoles, operating systems, newspapers, TV networks, credit cards, shopping malls, real estate brokers, stock exchanges, online marketplaces, job sites, and search engines have a subsidy side that pays little or nothing or even receives rewards.

  • The subsidy side pricing is not just a temporary gimmick but a permanent strategy to maximize profits by balancing the demands of different platform sides.

  • Nevertheless, some multisided platforms do charge both sides, so below-cost or free pricing is not universal.

  • Platforms must make many design decisions, like how many sides to have and how to balance different sides’ interests, to maintain balanced participation needed for platform viability.

  • Powerful new information and communications technologies have enabled the explosive growth of multisided platforms by dramatically reducing the costs of connecting platform sides.

  • Six key technologies have turbocharged the platform model: more powerful computer chips, the Internet, the World Wide Web, smart mobile devices, software platforms/apps, and Big Data/machine learning.

  • Chips have become much faster and smaller, enabling powerful smartphones and mobile devices.

  • The Internet enabled global computer networking using common protocols.

  • The World Wide Web allowed easy publishing and access of content over the Internet using browsers.

  • Smart mobile devices like smartphones and tablets leverage these chip and networking advances for global connectivity.

  • Software platforms and downloadable apps enable new services to be built on top of devices and operating systems.

  • Big Data and machine learning allow platforms to gain insights from user data to improve and customize their services.

  • Together these technologies have massively reduced the costs and frictions of connecting platform users to each other and to content/services, turbocharging the platform model.

  • Six key technologies enabled the rise of Internet-based platforms: microchips, programming languages/operating systems, the Internet/web, broadband communications, the cloud, and mobile broadband connections.

  • Microchips and programming languages made it possible to write complex software and operating systems. The Internet connected networks of computers globally. Broadband connections and the cloud provided speed, capacity, and computational power. Mobile broadband allowed mobile access.

  • These technologies enabled two foundational platforms - Internet Service Providers (ISPs) and operating systems.

  • ISPs connect users to the Internet and content providers very cheaply, enabling platforms to achieve huge network effects without much investment.

  • Operating systems like iOS and Android provide the platform for app developers to create apps and for users to access them.

  • Platforms powered by these foundational platforms can reach billions of users worldwide at low cost, as evidenced by the growth of platforms like Facebook and Tinder.

Here is a summary of the key points about how multisided platforms create value by finding and reducing transaction costs:

  • Multisided platforms reduce frictions and transaction costs that prevent mutually beneficial transactions from occurring. They make it easier for groups to get together and realize gains from trade.

  • Zhang Wei’s factory in China struggled to find customers for the toys he manufactured. Alibaba’s Taobao marketplace reduced search costs and enabled him to easily connect with buyers worldwide.

  • Platforms reduce different types of transaction costs: search costs to find other parties, negotiation costs to reach agreement, and enforcement costs to ensure proper behavior.

  • Platforms utilize technology like cloud computing and mobile devices to reduce these costs. Rating systems and reputation mechanisms help reduce uncertainty about counterparties.

  • Payment systems within platforms lower negotiation costs by establishing standardized terms. Dispute resolution systems handle enforcement costs.

  • Reduced transaction costs lead to a virtuous cycle - more participation, which improves matching, further reducing costs and attracting more users.

  • Lower costs allow beneficial transactions to occur that otherwise would not have due to high frictions. Platforms unlock latent supply and demand and increase welfare.

In summary, by finding and reducing various transaction costs, multisided platforms make it easier for different groups to get together and realize mutually beneficial gains from trade.

  • Wei ran a small plastic sheet factory in China in the late 1990s when the economy was transitioning to a more market-based system. However, infrastructure like phones, roads, and courts were underdeveloped, making it hard for small businesses to expand beyond local markets.

  • In 1999, Jack Ma founded Alibaba as an online B2B marketplace to connect Chinese sellers with global buyers by reducing communication frictions. It enabled sellers to create free webpages and post offers, and provided email and chat tools.

  • Friction is key - multisided platforms need to reduce substantial frictions to create enough value to sustain the business. The value pie must be big enough to attract all sides while still making a profit.

  • Alibaba sought to reduce the high communication costs for Chinese SMEs to find and connect with trading partners inside and outside China. By 2001, it had over 1 million members, demonstrating the demand for reducing these frictions.

  • Alibaba succeeded by identifying and reducing frictions that limited markets for Chinese SMEs, such as limited geographic reach, fragmentation, lack of communication channels, small scale, and lack of trust mechanisms.

  • It launched the B2B sites and to connect SME buyers and suppliers in China and internationally. Features like company profiles, messaging, forums, and TrustPass helped build trust and communication.

  • For the consumer market, there were frictions like lack of retail stores and online trust issues. Alibaba launched Taobao for small online merchants and Alipay escrow payments to build consumer trust.

  • By the late 2000s, Alibaba had evolved into interconnected B2B and B2C platforms, along with related services like logistics, payments, and marketing.

  • It had over 350 million active buyers, 100 million daily visitors to Taobao, and $370 billion in gross merchandise value in 2014. It had the largest NYSE IPO ever.

  • Alibaba is customized to solve China’s unique market frictions. Similar B2B markets in the US collapsed around the same time Alibaba was growing.

  • In the late 1990s and early 2000s, many companies tried to create online B2B exchanges in the US, hoping to facilitate transactions between business buyers and sellers.

  • Investment and hype around these B2B exchanges was enormous, with estimates that they would handle trillions of dollars in transactions by the mid-2000s.

  • However, by 2005, virtually all of the US B2B exchanges had failed. They went down soon after the 2001 dot-com bust.

  • The reason for their failure was that there simply weren’t major frictions or problems in B2B commerce in the US that these exchanges solved. Businesses could already connect easily by phone, fax, email, EDI, and trade shows.

  • In contrast, B2B exchanges thrived in China because they helped overcome major information, logistics, and trust issues stemming from underdeveloped infrastructure and institutions.

  • The few US B2B exchanges that survived, like Ariba, focused on solving specific back-office friction points around procurement, invoicing, and payment processes.

  • They failed to achieve critical mass and ignite growth because the market and problems they addressed were too small. The chicken-and-egg problem of buyers and sellers could not be solved.

  • Multisided platforms like YouTube face a “chicken-and-egg” problem in getting both sides on board initially. They need critical mass on both sides for the platform to work.

  • YouTube’s founders tried various tactics to drive initial traffic, like posting their own videos, paying people to upload videos, and enabling video embedding on MySpace and blogs. This helped create momentum.

  • As they got more videos, YouTube added features like video recommendations, comments, ratings, and view counts to improve the viewing experience. This helped attract more viewers.

  • Allowing easy sharing via email and embedding helped fuel viral growth. Videos like “Lazy Sunday” and music videos went viral and brought in millions of views.

  • Reaching critical mass on both sides - video uploaders and viewers - was key to YouTube’s ignition strategy and overcoming the chicken-and-egg problem facing multisided platforms. Momentum and viral growth accelerated this.

  • YouTube experienced rapid growth in 2005-2006, going from a few videos a day to 30,000 a day by May 2006. This was driven by increasing both video uploads and video views through positive feedback effects.

  • An economic model shows how two-sided platforms like YouTube need to reach a “critical mass” of participants on both sides in order to ignite growth. Below this level is an “implosion zone.”

  • YouTube followed a “zigzag strategy” - pushing participation on both sides simultaneously to reach critical mass. Other platforms may use a two-step strategy focused first on one side, or a commitment strategy with guarantees to attract investment.

  • Tactics YouTube used include “self-supply” of content, recruiting “marquee” content creators, and upgrading features to attract more users.

  • YouTube experienced massive growth in 2005-2006 before being acquired by Google. The growth was driven by interlocking positive feedback effects between video uploaders and video viewers.

  • Long-haul trucking is a massive industry that relies on truck stops for fuel, food, rest, etc. Truck stops are an important part of the system.

  • Fleet card platforms like Comdata connect truck stops and trucking fleets, enabling drivers to pay for services at truck stops and allowing fleets to track spending.

  • These platforms need to balance the needs of both sides - truck stops and fleets - to be successful.

  • Pricing is an important balancing act. Platforms initially subsidized one side to attract participation, then shifted prices to profit from the side that valued the platform more.

  • Comdata and others focused first on subsidizing and recruiting fleets. Once they had a critical mass, they raised fleet prices and lowered prices to truck stops.

  • This balancing act of pricing between the two sides continues even after platforms pass the ignition point and achieve critical mass. It is key to driving ongoing platform value and profits.

In summary, successfully igniting and operating a multisided platform requires constantly balancing the needs of the different sides through pricing and other strategies, even long after the platform has launched. Pricing in particular is a powerful lever platforms must use skillfully to manage participation and profitability.

  • Fleet-card companies like WEX and EFS provide cards that truck drivers can use to pay for fuel, maintenance, and other services at truck stops. These cards allow trucking companies to track spending and control where drivers make purchases.

  • Fleet-card companies earn revenue from both truck fleets and truck stops in each transaction. They typically earn more from the truck stops (around 75% of revenue) than the fleets.

  • Pricing for fleet-card companies involves a delicate balancing act between the two sides of their platform. They need to set prices low enough to attract both fleets and truck stops, while still being profitable.

  • Larger truck stop chains typically pay lower fees per transaction than smaller truck stops, because they bring more total business to the platform.

  • Fleet-card pricing is more complex than single-sided pricing (like for BMW cars), because the platform has to account for indirect network effects between the two sides. Raising the price on one side affects demand on the other side.

  • Companies like WEX and EFS have managed to strike a balance with pricing that keeps both sides on board and lets them operate profitably, facilitating thousands of trucking transactions daily.

Here is a summary of the key points about pricing for multi-sided platforms:

  • Multi-sided platforms have to set both an overall price level and a price structure - how much to charge each side relative to the other. Often they have a “tilted” pricing structure where one side pays more.

  • Platforms can have a “money side” that provides most of the revenue, and a “subsidy side” that they lose money on or even pay to participate. This helps attract the other side. Examples are search engines (advertisers pay, search is free) and credit cards (merchants pay, cardholders get rewards).

  • Platforms often charge an access fee to join the platform, as well as a usage fee for interactions. This provides additional pricing levers. Examples are OpenTable (restaurants pay both) and American Express (cardholders pay access, merchants pay per transaction).

  • Getting the prices right is critical for platforms to reach critical mass and make profits. Platforms have to balance the demands of both sides, not just set prices based on customers’ willingness to pay like single-sided firms. The interests of the two sides are interdependent.

  • Platforms often use subsidies, negative prices, and even zero prices for one side as part of their overall pricing strategy. This isn’t new, but the Internet has enabled more platforms to adopt “free” models by reducing costs.

  • Pricing structure and subsidies should be set based on the value each side provides to the platform and their price sensitivity. The side that risks losing valuable customers if prices increase should be subsidized.

  • Monitoring costs also matter - it may be better not to charge per usage if monitoring is difficult.

  • Pioneering platforms may lack competitive models to follow, so pricing decisions are crucial upfront. But pricing balance often needs adjustment over time as market conditions change.

  • Newspapers have had to rebalance pricing as online competition grew. Advertising revenue declined, so subscription prices rose to compensate, but this can spur a downward spiral.

  • Before choosing a pricing model, platforms must decide how many sides to have and whether to be a matchmaker at all. Apple initially approached the iPhone as a single-sided business but later opened it up.

The key is to balance pricing across sides to maximize value, but this balance is dynamic as market conditions evolve. Pricing decisions both at launch and ongoing can make or break platforms.

  • Smartphones had primitive operating systems and apps compared to PCs. Most developers had given up on apps due to the challenges.

  • Carriers operated walled gardens and developers needed their permission to put apps on phones. Deals with hundreds of carriers globally were required for broad distribution.

  • Apple and Google saw the dysfunction and set out to reduce friction to nurture the mobile ecosystem in 2005. Though with different approaches, they applied the same principles.

  • Platforms depend on their broader ecosystem for success. Ecosystem encompasses all the external factors like businesses, institutions, etc. that enable value creation.

  • Platforms must understand their ecosystem and provide incentives for participants to benefit the platform. Or solve problems themselves without waiting on the ecosystem.

  • Businesses must decide whether to be single-sided with control or multi-sided as a matchmaker, giving up some control.

  • Single-sided have more control but lack indirect network effects. Some start single-sided to attain critical mass, then open up.

  • Apple and Google took different approaches to reducing friction and enabling their mobile ecosystems, but succeeded in getting their operating systems on most phones.

  • Entrepreneurs often have businesses that blend single-sided and multi-sided models. Microsoft operates Windows as a multi-sided platform connecting developers, users, and PC makers. But it also has profitable single-sided businesses like Office.

  • Amazon operates a marketplace platform connecting buyers and third-party sellers, but also has its own retail business where it buys and resells merchandise directly to consumers.

  • Adding more sides to a platform can increase positive network effects but also increases complexity.

  • Facebook provides an example of steadily expanding sides over time - starting as a two-sided network for students, adding advertising, apps, brand pages, etc.

  • Symbian illustrates how a multi-sided mobile platform can fail due to conflicting interests of the different sides (handset makers, carriers). This created friction that hindered innovation.

  • Apple and Google entered the smartphone space hoping to create healthier ecosystems by exerting more control over the platform.

  • Software developers had difficulties making apps for Symbian phones, even developers working for mobile carriers. Symbian’s dysfunctional ecosystem made it hard to nurture a healthy app marketplace.

  • Apple initially took a single-sided approach with the iPhone, making the hardware, software, and core apps itself. It had exclusive carrier deals but maintained control over the user experience.

  • Google was concerned mobile phones would disrupt its core search ads business which depended on PCs. It acquired Android and took a multisided platform approach, creating an open source mobile OS.

  • Google organized the Open Handset Alliance to maintain a standard Android version to avoid fragmentation. It attracted carriers and handset makers by making Android free and open.

  • Apple eventually shifted to a multisided platform too, allowing third-party developers to create iOS apps. It maintained control through its App Store approval process.

  • Both Apple and Google realized that reducing friction and enabling healthy ecosystems was key, in contrast to Symbian’s dysfunctional ecosystem. A multisided platform approach proved most effective.

  • Successful platforms are designed to create “thick” markets - with enough buyers and sellers to enable transactions. Stock exchanges rely on market makers to ensure sufficient liquidity.

  • Platforms must account for heterogeneity among participants and their changing interests over time. Each participant needs enough options to find a good match at any given time.

  • Platforms often choose between a larger, more inclusive design or a smaller, more exclusive one. Some recruitment sites are open to all, while others focus on specialized matching.

  • Smaller, curated platforms can provide better matches by screening participants. But larger platforms offer more options. There are tradeoffs between size and thickness.

  • Platforms use tools like reputation systems, recommendation engines, and search to help participants find good matches. These reduce search costs.

  • Well-designed platforms make it easy for participants to find each other and interact. They balance thickness on both sides to maximize value. Interior design shapes platform activity and success.

  • Platforms need to design their systems to attract the right participants on each side. Just getting a lot of participants doesn’t necessarily create value.

  • Platforms may limit participation to create a focused, relevant group of users. Screening users or targeting specific groups can improve match quality.

  • Platforms facilitate interactions through standards, search tools, and signaling devices. These help participants connect efficiently.

  • Some platforms match up reluctant participants, like advertisers and consumers. They create value by compensating the reluctant side while still profiting from the eager side.

  • Overall, platform design involves balancing these tradeoffs around participation, screening, matching, and managing cross-side externalities. The goal is to enable beneficial interactions between sides.

  • Platforms like Facebook act as online communities and need to govern participant behavior to maintain a positive environment.

  • Facebook has extensive operations dedicated to policing content and misbehavior, banning fake accounts, offensive content, harassment, hate speech, etc.

  • Platforms have an incentive to moderate content and behavior because it affects the value they provide - a rude, hostile environment will drive participants away.

  • Platforms make rules that prohibit certain types of speech and behavior, enforce those rules by deleting content and banning users, and use tools like AI to detect violations at scale.

  • Some platforms crowdsource moderation by allowing users to report offensive content.

  • Platforms face challenges balancing openness with safety, and weighing free speech concerns when restricting content.

  • Bad behavior like fraud, scams and fake reviews also need to be policed to maintain trust in the platform. Reviews and ratings systems are particularly vulnerable.

  • Overall, governing participant behavior is crucial for platforms to cultivate healthy, vibrant communities that provide value to all stakeholders. But they must strike a careful balance when setting and enforcing community rules.

  • Facebook and many other platforms have rules that participants must follow, and will remove those who violate the rules. Lindsay Lohan is one example of someone kicked off a platform for breaking the rules.

  • Participants on platforms can impose positive or negative “behavioral externalities” on each other through their actions. These are distinct from the network externalities arising simply from more participation.

  • Negative behavioral externalities like harassment, fraud, and offensive content reduce the value of a platform. Platforms have incentives to limit bad behavior to maintain the value of their communities.

  • Platforms use various tools to deal with negative behaviors, like banning users or requiring identity verification. In some cases platforms can act faster than governments to curb harmful behaviors. However, platforms lack some governmental powers like search warrants.

  • Overall, successful platforms aim to encourage positive behavioral externalities among participants and minimize negative ones, particularly by discouraging bad conduct through their rules and enforcement mechanisms. This helps maintain the value of the platform.

  • Platforms create value by devising and enforcing rules to reduce negative externalities and encourage good behavior. This enables transactions that otherwise would not occur due to lack of trust.

  • The London Stock Exchange was created in 1801 with membership fees and rules to monitor and punish fraudulent behavior, enabling stock trading to flourish.

  • Many platforms have extensive rules and policies to maintain a safe, fair environment. Apple has strict app guidelines and can reject or remove apps that are low-quality, boring, or unethical.

  • Platforms use tools like ratings systems and suspensions to police behavior. They have “bouncers” who can eject members for rule violations, like OpenTable canceling accounts of frequent no-shows.

  • Getting the right rules is critical but not always obvious. Enforcing them through monitoring, warnings, suspensions, and ejection of members is key to reducing bad behavior on platforms.

Here is a summary of the key points about assessing whether a new multisided platform business will succeed:

  • Multisided platforms face chicken-and-egg problems in getting both sides on board. They need to reach a critical mass to ignite growth.

  • There is a checklist of key factors that predict whether a platform will reach critical mass and succeed or not:

    • The strength of indirect network effects - are they powerful enough to propel growth after critical mass?

    • Friction - is there high friction that the platform can reduce to bring sides together?

    • Platform differentiation - does the platform offer unique value?

    • Scaling ability - can the platform handle growth technologically?

    • Rules - does the platform have the ability to cultivate good behavior?

    • Pricing - does the pricing scheme appropriately balance demands?

    • Investment - is there enough investment to reach critical mass?

  • The odds of success depend on how many of these factors the platform has working well. The more factors in its favor, the more likely the platform will ignite and grow.

  • Platforms should continually evaluate these factors to see if adjustments are needed to improve their chances, or if the outlook is bleak and they should pivot or abandon their plans.

  • Investors and potential partners can also use this checklist to evaluate the prospects of a new platform and whether it is worth supporting.

The chapter discusses these factors in the context of analyzing Apple’s launch of Apple Pay, a new payments platform. By evaluating Apple on each factor, it assesses Apple’s chances of getting Apple Pay to succeed.

  • There is no step-by-step guide for creating a successful multisided platform, but there are 6 key questions that platform entrepreneurs and their backers should consider:
  1. What’s the friction, how big is it, and who benefits from solving it? Identifying and quantifying the friction is critical.

  2. Does the platform design reduce friction, balance interests, and do it better than others? The design needs to be truly superior.

  3. How hard is the ignition problem, and is there a solid plan for achieving critical mass? Solving the chicken-and-egg problem is very challenging.

  4. Do the prices allow for ignition, growth, and profitability? Pricing must balance multiple demands.

  5. How will the platform work with the broader ecosystem? External dependencies need to be managed.

  6. Is the entrepreneur ready to modify strategies quickly based on reactions? Agility and flexibility are imperative.

  • Platform pioneers must convince many people to believe in their vision and invest time/money in the platform.

  • Warning signs include failing to reach critical mass quickly enough before money runs out or reputation is damaged. Continual adjustment is key.

  • Apple launched Apple Pay in 2014 as a new mobile payment system, working with major card networks and banks. Users link their existing credit/debit cards to Apple Pay on their iPhones.

  • Adoption was limited at first because it required the new iPhone 6, and most merchants didn’t have terminals that could accept Apple Pay. Only about 10% of the top retailers could take Apple Pay initially.

  • Early signs showed trouble - on Black Friday after launch, only 9% of iPhone 6 users had set up Apple Pay, and of those, only half used it when at a store that accepted it.

  • Apple had adopted a “go broad/go shallow” strategy - available nationwide, but with limited usage due to need for new iPhones and merchant terminals. This led to many thin markets but no thick ones.

  • After a year, usage remained low - only about 5% of iPhone 6 users with Apple Pay had used it in the prior 7 days. Adoption was hindered by limited locations accepting it.

  • Apple and partners tried various strategies to increase adoption, like rewards and marketing campaigns. But after the first year, Apple Pay was still struggling to reach critical mass and ignite.

Here are the key points from the passage:

  • Apple launched Apple Pay in 2014 as a new mobile payment system, but adoption was low. Only about 17% of iPhone 6 users had tried it after a year, and only around 5% were using it regularly when they could.

  • One reason for the slow adoption was limited merchant acceptance. Only around 10% of retail transactions could be done with Apple Pay after a year, as most merchants didn’t have NFC terminals.

  • Apple Pay required new technology - iPhones and NFC terminals - on both the consumer and merchant side, making it hard to reach critical mass. There wasn’t enough early adoption to incentivize merchants to invest in the technology.

  • In contrast, Starbucks’ mobile payment system took off much quicker as it worked with existing smartphones and barcode scanners in stores.

  • Over time, as more consumers get new iPhones and merchants install NFC terminals, Apple Pay adoption could increase. But its initial design made it hard to get the positive feedback loop going between consumers and merchants.

  • Apple Pay could still gain momentum, but its slow start shows the challenges of igniting a new mobile payments platform. Competitors could potentially gain advantage during this slow growth phase.

  • M-PESA is a mobile money platform in Kenya that has enabled millions of people, including many poor and rural inhabitants, to send and receive money using their mobile phones.

  • Before M-PESA, moving money around Kenya was difficult, expensive, and dangerous due to lack of banking infrastructure and long travel distances.

  • M-PESA allows users to convert cash into e-money on their phones, send it to recipients via SMS, and enables recipients to withdraw cash from agents.

  • Building the platform required solving two chicken-and-egg problems: getting senders and receivers to use mobile money, and getting a network of cash-in/cash-out agents in place.

  • Igniting both sides of these platforms in a poor country with limited infrastructure was very difficult initially.

  • But once the platform reached critical mass on both sides, growth took off exponentially.

  • M-PESA leapfrogged the traditional banking system by providing key financial services via mobile phones without the need for bank accounts or infrastructure.

  • The success of M-PESA shows how multisided platforms, if designed and ignited properly, can transform industries and provide services to underserved populations.

  • M-PESA is a mobile money platform in Kenya that allows people to transfer money via mobile phones. It faces a tricky coordination problem - it needs senders, receivers, and cash-in/cash-out agents all using the platform, but none have incentive to join without the others already on board.

  • M-PESA solved this by leveraging Safaricom’s existing network of stores selling airtime to also serve as cash-in/cash-out agents. It expanded the agent network in tandem with growth in senders/receivers to maintain sufficient incentives and fees for agents.

  • M-PESA focused marketing on solving the “send money home” problem to attract initial users. Registration and transactions grew rapidly after launch. By 2015, nearly all Kenyan adults were registered and transactions were 45% of GDP annually.

  • Once the platform was established, M-PESA added additional services like bill pay and savings/loans by partnering with banks. This increased the value to users and helped drive further growth.

  • M-PESA overcame the tricky launch coordination problem and achieved remarkable scale in Kenya. Its success was enabled by thoughtful design around agent incentives, marketing, and expanding services after gaining critical mass.

  • Brick-and-mortar retail stores are facing declining foot traffic and sales as consumers shift some shopping online. Many chains are closing stores, shrinking store sizes, and struggling to attract customers.

  • However, the decline of physical retail is not solely due to consumers shifting purchases online. Online shopping still only accounts for about 6-7% of total retail sales.

  • Instead, consumers are visiting fewer physical stores per shopping trip. They rely more on online research beforehand to decide where to go. This allows them to be more targeted and efficient with their in-store shopping.

  • Multisided platforms are a major force driving these changes in consumer behavior. Platforms like Amazon provide product reviews, price comparisons, recommendations, and easy online purchasing. This reduces the need to visit as many stores just to browse and research.

  • Social media platforms also influence consumer preferences and steer shoppers toward certain retailers. Retailers are having difficulty competing for consumer attention.

  • Brick-and-mortar retailers need to adapt to this new retail landscape shaped by multisided platforms. Successful retailers will embrace technology, focus on better in-store experiences, and integrate online and offline shopping.

In summary, multisided platforms are transforming retail by changing consumer shopping habits and taking away foot traffic from physical stores. Retailers must evolve to survive in this new competitive environment.

  • Online shopping has reduced the need for people to visit physical stores to browse, compare prices, and research products. They can do this online via search engines, review sites, online retailers’ sites, and smartphone apps.

  • Smartphones have enabled on-the-go access to these online shopping tools, so consumers don’t need to be at a computer to research and make purchases. This reduces impromptu visits to physical stores.

  • Three waves of retail disruption driven by multisided platforms are impacting physical retailers: fixed broadband connecting households to e-commerce sites, mobile broadband enabling smartphone access to these sites, and integration of online/offline via location-based apps.

  • Physical retailers face potent threats when competing against the subsidized side of a multisided platform, like free online content. They are hit with superior offerings, different pricing models, network effects, and global reach.

  • In the face of platform disruption, retailers can try to pivot like American Express did from travelers cheques to charge cards, or partner with platforms like banks did by joining the Mastercard and Visa networks. But sometimes the only options are milking assets or inevitable exit.

  • Video rental stores like Blockbuster have been decimated by the rise of online video streaming services like Netflix. Blockbuster missed the opportunity to pivot to a streaming model and went bankrupt. Smaller video stores had no way to compete with national streaming platforms.

  • Shopping malls, especially mid-range ones, are declining as anchor stores close and shoppers move online. This creates a downward spiral as fewer shoppers come to the mall, forcing more stores to close. Malls can enter a “death spiral” that is difficult to recover from.

  • However, physical retail is not going away entirely. Many consumers still prefer to shop in stores for certain activities like browsing and trying on products.

  • Retailers are responding by integrating their physical and online operations into “omnichannel” strategies. Examples like Macy’s and Burberry show how retailers are blending online and in-store experiences.

  • The key for retailers is reinventing themselves to leverage the strengths of both physical stores and online platforms. Companies that fail to adapt face extinction like Blockbuster. But retailers embracing change have paths to survival.

  • Matchmakers have existed for thousands of years, facilitating transactions and enabling sharing of excess capacity. The ancient Athenian emporion matched traders, shipowners, and lenders over 2000 years ago.

  • Renaissance-era cities sponsored fairs that served as matchmakers between merchants. These fairs offered incentives like tax breaks to attract participants and build trust.

  • Although today’s sharing economy platforms use modern technology, the basic concept of matching underutilized assets is quite old. Airbnb is akin to newspaper classifieds for spare rooms.

  • What’s new is that advanced IT and communications tech have turbocharged multisided platforms, greatly reducing transaction costs and frictions.

  • History suggests continued waves of innovation in matchmaking, with new entrants disrupting incumbents. But this happens gradually over decades, with sporadic bursts of rapid change.

So in summary, matchmakers are ancient but have been massively empowered by modern tech. We should expect ongoing transformation of industries by new matchmakers, sometimes slowly and sometimes in spurts. The future will likely bring exciting new matchmakers we can’t foresee today.

  • Multisided platforms that match different groups of users have existed for centuries, from village matchmakers to medieval marketplaces. New technologies have allowed modern platforms like Airbnb and Uber to turbocharge these matchmaking abilities.

  • Many of today’s multisided platforms are enhanced versions of traditional matchmakers. Classified ads connected home renters and owners long before platforms like Airbnb. Shopping malls and Renaissance fairs were early versions of e-commerce sites.

  • While new platforms are transforming industries rapidly, history suggests changes will play out over decades, not years. Other major innovations like electricity took 50+ years to transform industries.

  • We are likely still in the early days of multisided platforms. Better matchmakers will emerge and have their own disruptive effects. The current platforms, while impressive, are unlikely to be the end point.

  • Multisided platforms will grow increasingly important in the global economy. Their influence will expand as existing platforms grow and new ones emerge. But the full effects will unfold gradually over many years.

  • Economists and business strategists did not understand multisided platforms as a distinct business model before 2000. Now there is much more insight into how these platforms work.

  • To understand a multisided platform, you need to ask questions about the different groups participating, how the platform creates value for them, how it facilitates interactions, how it uses pricing, whether it has subsidy sides, what rules and standards it imposes, how it encourages the broader ecosystem, and how it solved the chicken-and-egg problem to achieve ignition.

  • These issues are critical for multisided platforms but not for traditional businesses. Entrepreneurs should have good answers before starting a platform.

  • Multisided platforms are now vital in most economies and are driving major innovation through creative destruction. The insights into their economics will have impacts for decades to come.

  • The glossary defines key terms for understanding multisided platforms, including access fees, anchor tenants, behavioral externalities, critical mass, death spirals, direct and indirect network effects, ecosystems, friction, governance systems, ignition, implosion, and more.

  • Multisided platforms like OpenTable, Uber, and Airbnb help different groups connect and interact. They solve the problem of getting all sides on board.

  • Multisided platforms reduce frictions and provide value by enabling new kinds of interactions. They rely on network effects.

  • Igniting a new multisided platform involves overcoming chicken-and-egg problems of how to get both sides on board. OpenTable used subsidies and self-supply to attract restaurants before securing diners.

  • Multisided platforms go by many names like two-sided markets and matchmakers. The key is facilitating interactions between two or more distinct sides.

  • They differ from traditional businesses by having multiple customer groups, indirect network effects between the groups, and challenging chicken-and-egg problems in starting up.

  • This book focuses on the business strategy issues of multisided platforms, especially ignition and expansion.

Here is a summary of the key points from the excerpt:

  • Platform businesses like Uber, Airbnb, Visa, and Apple have grown to be among the most valuable companies globally.

  • The digital revolution, beginning in the 1970s, enabled the creation of platforms by dramatically increasing computing power, connecting people through the internet, and spurring the development of software and web services.

  • Key developments include personal computers, broadband internet, html and http, and programming languages, which enabled more complex online platforms.

  • The number of internet users has grown massively, from around 20 million in 1995 to over 3 billion today. Mobile phones now outnumber people.

  • Platforms leverage these connectivity advances to match producers and consumers, create value, and capture some of that value by charging fees on transactions.

  • The scale and impact of platforms like Uber and Airbnb demonstrate how digital changes have enabled new platform business models and disruption of traditional industries.

Here is a summary of the key points from the article:

  • The article discusses the early history of Alibaba, a major Chinese e-commerce company founded in 1999.

  • It describes how Alibaba’s founder Jack Ma started the company to help small and medium enterprises (SMEs) in China connect with global suppliers and buyers online.

  • In the late 1990s, China had very low GDP per capita, limited fixed phone and mobile phone penetration, and underdeveloped transportation infrastructure. This made it hard for SMEs to grow their businesses.

  • Alibaba’s first site launched in 1999 as an online business-to-business marketplace connecting Chinese SMEs to overseas suppliers. It grew quickly to over 1 million members by 2001.

  • Alibaba focused on building trust, offering supplier verification services, and providing value-added tools for online transactions that were lacking in China at the time.

  • By 2007, Alibaba served over 19 million registered users with over 5.4 million suppliers listed on its sites. It went public in 2007 and has since grown to be one of the world’s largest e-commerce companies.

Here are concise summaries of the key points from each of the cited sources:

World Bank Report (15):

  • The number of adults without a bank account (“unbanked”) dropped by 20 percent globally between 2011 and 2014, to 2 billion adults. This is attributed to increased mobile money accounts, especially in Sub-Saharan Africa, and new technology that expanded access to financial services.

Retailer Interview (27):

  • An online retailer of dresses discusses her experience selling through her own website vs. a multisided platform like eBay. She feels she gets more control over the customer experience with her own site, but multisided platforms offer a larger customer base.

Domain Name Article (28):

  • Alibaba owns a large portfolio of domain names related to its brands and businesses, reportedly over 3,000. This helps strengthen its brand names online and prevent counterfeiting or cybersquatting.

Alibaba Financials (29):

  • Alibaba had $12 billion in revenue and $3.7 billion in net income for the 12 months ending June 2015. It facilitates $248 billion in annual gross merchandise volume on its platforms.

Alibaba 20-F Filing (30-31):

  • Alibaba estimates it has 350 million annual active buyers and 10 million annual active sellers on its platforms. In 2014 it facilitated $298 billion in gross merchandise volume, earning $10.5 billion in revenue from commissions and fees.

B2B Exchange Theory Articles (32-33):

  • Analysts predicted that B2B e-commerce would be dominated by independent exchanges, but most failed. Exchanges need to balance competition and cooperation between suppliers; vertical integration is often better.

Ariba Case Study (34-38):

  • Ariba was the most successful B2B exchange, earning $180 million revenue at its peak. But revenues dropped sharply when the tech bubble burst. It shows the challenges faces by broad horizontal B2B platforms.

YouTube Ignition Case (1-20):

  • YouTube’s growth took off rapidly after it solved the “chicken and egg” problem. Enabling technologies, funding, and partnerships allowed it to launch with lots of content. viewers flooded in, attracting more content, fueling exponential growth.

OpenTable Ignition Case (19-20):

  • OpenTable seeded restaurants in each city by paying for hardware. This established a critical mass of restaurants to attract diners, who then attracted more restaurants. This ignited city-by-city network effects.

PayPal Case (21-25):

  • PayPal subsidized early adoption by consumers by offering $10 for new users and $20 for referrals. This attracted enough consumers to then attract merchants and ignite growth.

Google Video Failure (26):

  • Google Video failed to reach ignition despite Google’s resources. It could not attract enough content to in turn attract viewers and advertisers. A chicken and egg problem.

Brightcove Case (27):

  • Brightcove achieved ignition by using funding to provide free video services to both content providers and viewers. This attracted both sides to fuel growth.

  • Short-haul trucking involves day trips, while long-haul trucking involves overnight trips across multiple states.

  • Federal regulations limit how many hours truck drivers can drive continuously before taking a break.

  • Truck drivers make frequent stops at truck stops to refuel, rest, eat, and take showers. Major chains like Love’s and Pilot Flying J operate hundreds of truck stops nationwide.

  • Truck drivers historically paid for expenses in cash or with Comdata paper vouchers. This was inefficient.

  • Fleet card companies like WEX now enable drivers to pay electronically at truck stops. WEX charges truck stops a percentage fee on transactions.

  • WEX makes most of its revenue from truck stops through these payment processing fees, not from the fleets and drivers. This is an example of a platform subsidizing one side to attract the other.

  • Credit card networks similarly charge merchants a percentage fee on transactions while subsidizing consumers with rewards. This builds volume on both sides.

  • Platforms often subsidize one side to attract the other when getting both sides onboard is critical. But the subsidized side isn’t always the end user - it depends on the dynamics of each platform.

Here is a summary of chapter 6 from Innovation and Transform Industries:

The chapter discusses the economics of shopping malls. It explains how shopping malls act as two-sided platforms, bringing together consumers and retailers. Shopping malls reduce search costs for consumers by aggregating many stores in one location. This benefits retailers by giving them access to large numbers of consumers.

The chapter discusses how shopping malls set rules and prices to get both sides on board. Malls charge rent to retailers to access consumers. They may offer variable rent rates based on foot traffic to different parts of the mall. On the consumer side, malls try to provide a pleasant shopping experience with amenities like parking, seating, and clean facilities.

The economics of multi-store retailing are analyzed. Comparison shopping across stores reduces consumers’ search costs. Having multiple similar stores also intensifies competition between retailers. However, there are also benefits to retailers from multi-store agglomeration such as shared marketing costs and drawing in more consumers.

The chapter discusses the challenges malls face from online shopping. While online shopping also reduces consumer search costs, malls provide experiential benefits. Mall operators adapt by using new technology and data analytics to enhance the mall experience. Overall, the chapter provides an economic perspective on shopping malls as platforms that reduce search costs and match consumers and retailers.

Here is a summary of the key points from the n-costs-benefits.pdf document:

  • Platforms can help match providers and consumers efficiently, reducing search costs. However, they also incur various operating costs.

  • Platform costs include screening participants, monitoring transactions, resolving disputes, enhancing protections through insurance/guarantees, and preventing illegal behavior.

  • Benefits of platforms include thicker markets, reduced search costs, building trust, mitigating risks, and preventing illegal behavior.

  • Platforms must balance costs and benefits when designing tools for governing user behavior. More intense screening and monitoring increases costs but may improve quality.

  • Reputation systems help build trust and mitigate risks without high direct costs, but users can game these systems, so platforms still need oversight.

  • Platforms use a combination of ex ante screening, monitoring transactions, ex post sanctions, and other tools to govern behavior. The optimal mix depends on tradeoffs.

  • Regulations also shape platforms’ governance choices. Regulatory compliance has direct costs, but regulations may address market failures and increase user trust.

Here is a summary of the key points from the excerpt of ney-2011-5:

  • Apple Pay is a mobile payment system launched by Apple in 2014 that allows users to make purchases in stores using their iPhones.

  • For Apple Pay to succeed, Apple needs to get both consumers and merchants on board. On the consumer side, Apple Pay is available to those with newer model iPhones which account for about 15% of iPhone users in late 2014.

  • On the merchant side, only about 3% of point-of-sale terminals were equipped to accept Apple Pay at launch. This limited adoption by retailers is a key challenge for Apple.

  • Early surveys showed only around 30% of consumers with iPhone 6 phones equipped for Apple Pay had tried using it for purchases when the terminal accepted it. So consumer activation is another challenge.

  • The excerpt discusses how Apple Pay faces the classic challenges of a two-sided platform in needing to get both sides on board to reach critical mass. It highlights the initial limited merchant acceptance and consumer activation as key obstacles Apple faces.

  • Retail foot traffic has been declining in recent years. Data from analytics firm RetailNext shows declines of 6.5-10% in store visits during holiday and non-holiday periods from 2012-2015.

  • E-commerce is likely contributing to this decline, as consumers shop more online. E-commerce sales as a percentage of total retail sales have been increasing steadily.

  • Mobile commerce in particular is seeing rapid growth, with sales more than doubling from 2013 to 2014. Smartphones make impulse online purchases easier.

  • Stores are trying various strategies to combat this trend and draw customers back, including improving in-store tech and experiences. But the shift towards online shopping will likely continue.

  • Some major retailers, like Sears and Macy’s, are closing many stores due to declining sales. But other brands are still opening new locations, believing physical stores are still valuable.

  • Overall, retail is undergoing a major transition as shopping shifts online and stores adapt to new consumer behaviors and technologies. Foot traffic declines are expected to continue as e-commerce grows.

Here is a summary of the key points from the passages:

  • In ancient Greece, the emporion was a central marketplace and port that facilitated trade and commerce. Traders would dock their ships, display goods, make deals, and access financing there.

  • In medieval Europe, fairs served a similar role as centralized places for trade and commerce. The Earl of Warwick held a large fair in 1469 where many merchants gathered to buy and sell goods.

  • New technologies like the printing press increased the reach of advertising and expanded trade. By the 17th century, weekly newspapers carried many ads for products and stores.

  • Industrialization and transportation advances in the 19th century enabled the rise of department stores in urban areas. Stores like Macy’s offered a wide array of goods under one roof.

  • Mail order catalogs in the late 1800s, followed by chain stores in the early 1900s, further expanded consumer access to products. Stores were no longer constrained by geographical proximity to customers.

  • The internet has been the latest revolutionary technology, providing consumers access to a huge variety of products online. Many traditional retailers have declined, while e-commerce has rapidly grown.

  • Omnichannel retailing, integrating physical and digital channels, is now imperative for major retailers to meet shifting consumer expectations. Companies are adapting their business models to new technologies and shopping behaviors.

Here is a summary of the key points from the chapter:

  1. The chapter comes from a book titled “Matchmakers: The New Economics of Multisided Platforms” by David S. Evans and Richard Schmalensee, published in 2016.

  2. It cites a quote about matchmakers from the ancient Chinese text Book of Songs by Confucius (p. 12-13).

  3. The chapter discusses economic concepts like network effects, demand interdependence, pricing, governance, and ignition strategies in the context of multisided platforms such as OpenTable, YouTube, M-PESA, and Alibaba (pp. 7-20, 69-83, 174-178).

  4. It analyzes how platforms reduce frictions and create value, using examples like online marketplaces and mobile payment systems (pp. 55-68, 164, 167-181).

  5. The history and future of creative destruction through new platforms and business models are discussed, comparing retail then and now (pp. 183-196, 199-206).

  6. Design principles for successful platforms are covered, like building critical mass, managing cross-side network effects, and minimizing downsides (pp. 121-133).

  7. The chapter emphasizes assessing multi-sided markets and tailoring strategies over time as environments evolve (pp. 151-156).

In summary, the chapter provides an overview of economic concepts and business strategies relevant to understanding and building successful multisided platforms, using historical examples and analysis.

Here is a summary of the key points from the excerpt:

  • The excerpt discusses different companies that operate as multi-sided platforms, connecting different groups of customers. Examples include OpenTable, shopping malls, Xbox, YouTube, and others.

  • Multi-sided platforms face challenges like building critical mass and ignition, pricing across different sides, reducing friction, and governing interactions between groups. Strategies like subsidized pricing, marquee users, and pricing sensitivity are important.

  • Technology has turbocharged multi-sided platforms, with the growth of the internet, mobile phones, apps, and related infrastructure. This has enabled new digital platforms and transformed traditional retail.

  • Key concepts covered include direct vs indirect network effects, thick markets, pricing structure decisions, ignition strategies, friction reduction, attracting marquee users, and the role of technology enablers.

  • Overall, the excerpt provides an overview of multi-sided platforms, key concepts and strategies related to them, and examples of traditional and digital/technology-enabled platforms. It highlights the importance of economic considerations like network effects, critical mass, pricing, and friction reduction.

  • The authors thank Jean-Charles Rochet and Jean Tirole for sharing an early draft of their pioneering paper on multisided platforms, which has been a source of inspiration.

  • Many other economists have made important contributions to the literature on multisided platforms since 2000. In particular, the authors thank Andrei Hagiu and Glen Weyl for their brilliant theoretical work and enlightening discussions.

  • Karen Webster, CEO of Market Platform Dynamics which the authors co-founded, has provided valuable insights on platform strategies through joint work and advising companies.

  • Howard Chang reviewed the manuscript and provided valuable edits and comments. Alexis Pirchio coordinated the research effort.

  • Amanda Depalma created many of the figures based on the authors’ drawings.

  • Literary agent Lisa Adams and copyeditor Jane Gebhart improved the exposition through edits and guidance. Tim Sullivan at Harvard Business Review Press shaped the book through close collaboration.

  • Finally, the authors thank their wives for love, encouragement and support.

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About Matheus Puppe