What Uber, Netflix, Kindle, Playstation, Amex, Spotify, and eBay have in common?
Short and Simple: they are all operating in two-sided markets!
There are huge opportunities in those markets and some interesting characteristics that I’d like to explore in this article.
Two-sided markets are economic platforms having two distinct user groups that provide each other with network benefits. Let’s see some examples:
Uber connects people who want a ride with drivers;
Monster.com connects companies to employees;
YellowPages connects advertisers and consumers;
Video-game consoles connect gamers and game developers;
Recruitment sites connect job seekers and recruiters;
Search engines connect advertisers and users;
eBay connects buyers and sellers;
TaskRabbit connects service providers and service consumers;
Tinder connects two people who want to date each other;
Operating systems connects end-users and developers;
And the list goes on and on…
Credit cards connect cardholders to merchants. In fact, it all started connecting customers and restaurants. Dinners Club, the first independent credit card company in the world started in 1949 in New York City when Frank McNamara was dining with clients and realized he had left his wallet in another suit, and he then thought of a multi-purpose charge card as a way to avoid similar embarrassments. In the beginning, it was a cardboard charge card and a signature. In 1951, Diners Club had 20,000 members and was charging seven percent and billed cardholders $5 a year.
One important aspect of all Two-Sided Markets is Economies of Scale. Consumers prefer credit cards honored by more merchants while merchants prefer cards carried by more consumers.
The chicken-and-egg problem
A famous example is a competition between VHS and Betamax, two different videotape formats. Similar to what happened with the BlueRay and HD-DVD later, people waited to buy the format that offered more movie options and producers would wait to see the format that would have more customers.
Subsidize one size to get the Other
The same happens in the Video Games Industry; Game Developers prefer to develop games for the platforms that have more players and players prefer to buy Video Games that offer more Games.
That’s why Video Games Manufactures subsidize the development of games to get more interest of game players. In fact, there is evidence that the video games are sold with a zero-margin (or even a negative margin — bellow cost). Since the console manufacturers also paying for the development of the first games, in the first year the companies operate at a loss to get profit in the future by charging royalties every time a game in sold on their platform.
Nowadays, on the internet, it is very common to see “freemium” strategies where one user group gets free use of the platform to attract the other user group.
Why the Winner takes it all?
One for the most important reasons is the Multihoming Problem that happens when users affiliate with more than one platform. Being part of two platforms increases costs. Also, there are switching costs.
For example, if you buy some of your e-books on Amazon Kindle and other books on Apple iBooks, you usually can not take your books from one platform to the other.
Your information such as notes and highlights can’t be migrated from one to the other, and if you decide to change your e-reader from an Apple iPad to an Android Tablet, you can read your books anymore.
If we take Spotify and Rdio for example, you also probably won’t pay for the two subscriptions services, you most likely choose one of them. Since you will spend time finding your favorite songs, creating playlists, training the system for recommending songs you like and making it yours in many others ways, you probably won’t change to easily from one to the other.
Not always the best quality product wins the battle. There is evidence that Betamax was better than VHS, for example. But whoever gets the majority of the market first has a great advantage over the others even if the others have a better quality because the size of the network is usually more important to get new users.
Conclusion
Many of the most successful companies in today’s market operate in Two-Sided Markets, learning more about the characteristics of those markets can leverage you potential of success in your business endeavors.
If you want to know more, I recommend the Harvard Business Review article “Strategies for Two-Sided Markets” by Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne. Special thanks to Professor Chris F. Kemerer, who introduced me to this concept.
This article was first published on LinkedIn.
