Many years ago, I worked in tech for an online betting exchange. If the exchange betting model is new to you, the rough idea (in a sentence), is that the there is a platform that hosts markets where customers can set the odds and bet against one another. e.g I could offer £10 at even’s for Team A to beat Team B. The service would then hold (aka ringfence) my funds and enable me to bet against 5 others for £2 each, who are prepared to back Team B to beat Team A at those same odds (or worse — but that’s detail!). Ultimately, the revenue model, is that the company charges commission (typically 2%) on the winnings of the victor.
My opinion is likely skewed here, but it’s an efficient and great model for all involved. Minimal capital outlay and risk for the platform, customers are able to set whatever odds the market will bear, and all subsidised from the winners winnings. Initially, many of the high street bookmakers were watching to see how the online exchange sector (and associated regulation) would play out, without directly competing in the market. Nonetheless, there was still great apprehension in the office when a new startup would join the fray. What was their plan to disrupt the industry ? what innovations would they use to lure customers away ?
Ultimately, most concerns would be dismissed within minutes of a competitor opening their kimono. Similar product. Similar UX. What about their brand strength and market liquidity (i.e. did all the markets they have on offer have money to match my bet?). These factors were always key. Being an online first/only business, especially one who was trying to break new ground in a sector as naive (a decade ago) as online gambling, we knew there were a handful of things that were vital to be done right. The first was having liquidity in the markets. Markets without liquidity are like bricks and mortar shops with empty shelves. The next ingredient was brand strength. This was especially key given we were an online business not backed by a physical presence, (such as a shops on the the high street etc), which could be used to increase consumer confidence. The final point worthy of mention is that the gravitational effect that companies who leverage liquidity and brand strength experience as they grow. Likely the exemplars cases of this are companies like Google and Ebay. Once they have won consumers trust, as being the primary source of truth for their market, they attract content directly, hence widening the gap between first and second place.
Anyway, I was reminded of these observations over the weekend when trying to reply to the question of why Uber is a winner-takes-all model. To this point, Uber is providing a platform to connect people. Hence the marginal costs are minimal. In fact, what Uber bring to the party here is liquidity of drivers and the trust relationship with the consumer. Conversely a company like Hertz, has a significant high street presence (so likely higher marginal costs), and have no discernible differentiators to their competitors. Furthermore, Uber have a model which is disruptive as they act as the trusted facilitator, whereas many of the traditional high street service providers fail to capitalise on a significant market penetration as leverage to push disruptive, low marginal and consumer cost, strategies to succeed in the winner takes all model.
In essence, a business model with no-to-inverse marginal costs (i.e. unit cost is low-to-reduced as volume increases) and are a perfect fit for a digital winner-takes-all market. This doesn’t mean all is lost for other supplier to market. Either through innovation, disruption or ability to execute better than the competition can triumph, but in business which leverage a ‘connectivity’ platform, the window for competition is narrow. Other products (such as niche/boutique goods) should survive single player dominance, due to the inherent nature of those models eschewing single player dominance, and giving the consumer a sense of value in the esoteric (i.e. consumers of such brands gain pleasure in the hidden knowledge of obscure suppliers).
Just some observations and conclusions from experience in the field. Likely open to challenge and refutation, but thought it was worth more than 140 chars!
