How Service Marketplaces May Be Changed By the COVID-19 Pandemic
The COVID-19 pandemic has forced us to think about how viruses are transmitted in sometimes painful detail. Behaviours are changing as a result of our new-found understanding of transmission. Humans are now hyper-conscious each time they touch a foreign surface. As a result, sharing economy service marketplaces (eg AirBnB, Postmates, etc) will be forced to evolve their platforms to provide more trust around hygiene, heath and potentially other consumer concerns. If they fail to impart such confidence, third-parties will step in to do this for them.
The team at Andressen Horowitz have written some great coverage of marketplace businesses. Andrew Chen, Jeff Jordan, Li Jin and team have so much experience backing and running these types of businesses, and lucky for us they like to share their wisdom. Across the A16Z coverage, one of the key themes they often refer back to is the evolutionary stages of service marketplaces.
The original service marketplaces (ebay, Yelp, Craigslist) took the category from 0 to 1, providing market access that was inefficient or difficult to find in an offline world. If you were interested in 18th century Russian poets in the early 2000’s it was really difficult to find others with the same passion. The obscure nature of your interest was also directly related to the value you realised in finding others who were equally interested. This was a lesson learned in USENET brought to the web.
The second wave of marketplaces is often referred to as the unbundling of Craigslist, taking on a single vertical segment. Booking.com, Zillow and YouTube built focused platforms fora specific action — travel, home buying or finding video entertainment — thus serving and shaping consumer behaviour and creating an attendant ecosystem in a vertical market.
The third era ushered in the creation of the “Uber for X,” model. These are specialised, mobile-first platforms that deliver a tailored experience to both sides of a market. Deliveroo, Treatwell, and Urban have successfully created third-wave service marketplace businesses. Where the second wave businesses aggregated existing demand and supply, the always-on, pervasive nature of these third-wave businesses unlocked or shifted latent demand. Food deliver existed before JustEat, Deliveroo and UberEats however these companies turned delivery into a multibillion dollar industry.
A16Z suggest a fourth era in which a managed marketplace brings additional trust and safety to bear for buyers and sellers. Opendoor and honor are managed marketplaces in the home selling and nursing care sectors — two industries in which trust is paramount. This marketplace framework argues that there will soon be a fifth phase of service marketplaces.
The consumer effects of the COVID-19 pandemic point towards this fifth evolution, the rise of the bonded marketplace. A bonded marketplaces goes beyond offering trust to buyers and sellers because trust is no longer enough, bonding provides certainty.
Where Bonded Marketplaces Began
Bonded marketplaces have a long history in the offline world going back to prestigious auction houses and local consignment shops. Brands such as Sotheby’s were built upon certifying the quality and provenance of the goods they offered. Such bonded marketplaces arose in high-end luxury goods due to the elevated expectation of customers and cost associated with bonding. Bonded services guaranteed items were legitimate and certified their condition.
In the shift to the digital domain, old problems around proof of title and authenticity were compounded by a lack of verified identity. The seller could be anyone and no one. The primary challenge then for first evolution of online marketplaces was the basic transaction itself.
The first episode in season 3 of Halt and Catch Fire (“Valley of the Heart’s Delight”) portrays this challenge for early online services really well.
How could a platform ensure a buyer was going to pay for a good or service or whether a seller was going to deliver said goods? The first answer was the creation of Paypal. Paypal was designed to sit between buyers and sellers and mediate their transaction. Paypal was a big first step towards trust, but we soon found out Paypal itself could be gamed. After Paypal came a number of other e-wallets and payment service providers which ultimately led to services like Stripe Connect which allows marketplaces to verify the transaction and directly funnel funds to sellers’ individual merchant accounts based on business rules.
Ensuring buyers get what they are expecting is another matter.
Bonding Goes Digital
Stubhub had an early solution for this problem with their FanProtect guarantee, promising buyers would get the tickets as advertised or get their money back. This worked for a while but ran into trouble when a buyer had travelled to an event at their own expense and were only getting made whole on the amount they paid for tickets. This promise also required Stubhub to create on-site operations for many big events and even take inventory when sellers had an economic incentive to leave closed orders unfilled at a hot event. FanProtect was a half-measure for buyers that added a lot of complexity and cost for Stubhub.
The big change for Stubhub came in the development of e-tickets which removed the need for physical media. Electronic tickets could verify provenance with a live connection to the box office and be uploaded in advance of sale. Digital tickets have become a large part of the events industry, unfortunately they have not become a large enough part to eliminate the cost associated with moving bits of paper containing printed bar codes, from one person to another.
The Fourth Evolution
The next evolution of service marketplaces brought companies like StockX, Cazoo, and Watchfinder. These businesses reverting back to the pre-digital practice of taking physical possession of goods, verifying their provenance, in some cases servicing items and then shipping them to the buyer. As they were for Sotheby’s these bonding programmes are cash consumptive and mostly work for higher priced products that carry raised consumer expectations and fat rents.
COVID-19
The COVID-19 pandemic has forced us to think about how viruses are transmitted in sometimes painful detail. Across the world behaviours are changing as a result of our new understanding of transmission. Knowing a virus can live on a surface for hours and people can shed the virus days before symptoms appear changes our basic model of human interaction. Surgical masks are now like AirPods. The first few people you see wearing them look odd and then suddenly everyone is wearing them.
As consumers we access dozens of real-world services via digital marketplaces. The sharing economy is explicitly based the many re-using the same physical items. As our world re-opens post lockdown, we will reassess how much we want to interact with shared goods. Changes brought about by the awareness of pandemics will necessitate changes to service marketplaces beyond wondering about the last time your delivery driver washed their hands.
How Marketplaces Will Change — Trust And Verify
Service marketplaces deliver across two main dimensions: atoms and bits. Marketplaces that deliver atoms provide access to a physical, real-world experience or thing. The marketplace itself may be completely digital but the good we interact with is ultimately physical. AirBnB apartments, Postmates deliveries, and Tinder dates may be digital in the planning but how consumers access their result rests upon a real-world experience often delivered by a third-party. Marketplaces that deliver only bits like Mixcloud for music, Gigster for remote teams or Discord communities operate solely in the digital realm. These bits may be naughty but they never touch.
Marketplaces that deliver atoms will be forced by changes in consumer sentiment to shift in one of two ways: a shift from delivering atoms to delivering bits and/or a shift from being un-bonded or semi-bonded towards offering a fully-bonded service.
How Might These Shifts Then Playout?
“Think accelerations, not changes”
— Professor Adam Tabarrok, George Mason University
This pandemic will likely finish off paper-based event tickets. There’s little consumer benefit in them and the media itself, passed from hand to hand, is a constant reminder of our vulnerability to disease. Major sporting bodies, promoters and venue operators should eliminate physical tickets once and for all. Moving to 100% digital tickets can address consumer worries by ensuring provenance, digital connections to the box office bring resale cashflows into event economics, and e-tickets are more convenient. A ticket on your phone is never left on your dresser at home. Such a change will move the Stubhub and Vividseats businesses into bits *and* allow them to provide a bonded service that goes beyond a refund by guaranteeing authenticity.
[NOTE: As of the publication date there are rumours circulating that Stubhub and its parent company viagogo are headed for bankruptcy. Despite this possibility, marketplaces for the resale of event tickets will continue on as long as there are live events happening.]
For marketplaces like Postmates and AirBnB, a different type of shift is required by the physical proximity endemic to their services. The Postmates delivery-person *handles* your purchase. You will *sleep* in the same bed as another traveler within 24 hours.
These platforms will require bonding — certainty that they are disease free and safe. Health inspections and adherence to licensing used to be the role of government, but the shrinking of the western state since the Great Recession and the sheer volume of transactions require a market-based solution.
Safety could mean a criminal-records check or a digital certificate for verified antibodies to COVID-19. Properties on AirBnB might require a form of sanitary bonding, the software equivalent of the toilet bowl seal in a motel room.
Over time we might demand other forms of certification, like observed CO2 emissions from cars, planes and trains that we ride in or the chain of custody for the food we eat. When lives are at stake and trust is in question, consumers will demand certainty.
The extant behaviour of many service marketplaces demonstrates that such a level of certainty is beyond their economic interest. Postmates, Uber, and Instacart have perverted local regulations to pay their workers less than the legal minimum wage, passing on lower than market costs to consumers. AirBnB has largely ignored local licensing laws that seek to limit the number of nights any unit can be offered on a short let. AirBnB and Uber manage fraud to KPI — a percentage of revenue or a point at which their NPS moves below a threshold. Given such behaviour it’s unlikely service marketplaces will voluntarily pay for bonding.
Consumers are about to raise the stakes. When we do it’s likely that third-party companies will emerge to certify service marketplaces with software that provides bonded status in real-time. The next generation ‘Good Housekeeping Seal of Approval.’ Once consumers come to expect such assurance all marketplaces will be compelled to participate or risk consigning their services to unacceptable risk.
Air quality monitors in AirBnB apartments could transmit the composition of particulate matter room-by-room or the body temperature of the most recent occupant. Travellers will want to know who stayed in the bed last night or at the very least that they demonstrated positive antibodies for COVID-19. In China we are already seeing the body temperature of delivery riders posted to customers. This is just the beginning.
What amazes me about marketplace businesses is that they behave as a living organism does. Changes to the inputs work their way through the system and often create unintended consequences that can boggle the mind. Marketplaces also adapt to the wants and needs of customers and our wants and needs are changing faster than we can understand. History has taught is that such changes provide opportunity for innovation and the evolution to the next phase of growth.
