MyLearnings

Matchmakers by David S. Evans, Richard Schmalensee

Platform economy is a bussiness model where the “company” provides an avenue for one or different kinds of market participants to interact. An example of a platform that allows only one kind of market particpant is a telephone network. All particpants of this market are the same. A platform with multiple kinds of particpants is an Operating system which provides avenues to application developers as well as application consumers to do business with each other.

Some advantages of a platform business model -

1. Network effect means that if growth happens then it is exponential
2. As a platform one need no develop resources of their own but just regulate what is being made available.

Some challenges of a platform business model -

1. Since it runs on network effect onboarding all kind of participants and ensuring that they stay becomes key to survival and requires very careful incentive engineering.
2. As the products are not under one’s control, quality assurance becomes difficult plus you might be liable for someone else’s bad product or behaviour.

Notes from the book -

1. Matchmakers come into picture to alleviate the firction between participants of a market. Eg. Uber connects people looking for a ride to people who have a vehicle and are willing to take you on a ride for a fee. A club which provides ambience for people to meet and have a good time. Zomato that makes it easy to find and browse restaurants for customers and allows restaurants to be discovered by new clients. Before matchmakers it is either very difficult or impossible for two participants to meet and engage.

2. Matchmakers rely on network effect i.e. the platform becomes valuable as more and more people join. So a telephone network grows when more people start using the service. However that is a simple example with just one kind of market particpant. When there are more than one kind of participants it starts getting complicated. Now the platform not only needs more participants it also depends heavily on the balance of participants. If the balance is off then no matter how many participants are there on one side, the whole thing will collapse. Therefore a simple strategy of acquiring more and more customers of one kind will not work, in fact such a strategy ended up in the dot com bubble burst of 2000s. Matchmakers should try to grow all sides of their platform together or as closely as possible. Disproportionate growth on one side might either cause too much capital drain or will lead to a lack of observed utility as there are not enough serivce providers on the platform to serve all the service consumers.

3. A good strategy to ensure balanced growth is to start with a niche set of customers that are not being served by any competitor yet and then grow as the name of the brand grows.

4. All most all platforms have a money side and a subsidy side. Moneny side is the set of market participants who pay the platform for using it where as subsidy side is the set of participants who are incentivzed by the platform for using the platform. Platforms make money based on the difference between the ammount earned from the money side and the amount spent on the subsidy side. The incentive received by the participants in subsidy side may either mean free usage of products, or enjoying the product offerings at a lower price than cost (below cost). One great example of belo cost subsidy is news papers and magazines. The reader is on the subsidy side where they pay less than what it costs to print the news paper or magazine whereas the advertisers are on the moeny side of the operation where they pay the published for publishing their ads. The publisher makes their money from the difference of amounts received by the advertising entity and the amount of subsidy given to the reader.

5. Building a matchamker or a platform is all about balance. If it off then no amount of growth can prevent impending doom. Every matchmaker has to think on these critical lines -
   1. The matchmaker will grow if it is very painful or outright impossible for market participants to interact. Anything less than too painful will not present a good opportunity e.g. B2B ecommerce did not grow in US but boomed in China because US had well developed transportation and money tranfer infrastrucuture making the model a mild discomfort rather than an impossibility as was the case in underdeveloped China.
   2. The matchmaker business will work only after it has acquired the critical mass of users on all sides. If any side falls short of this number then the matchmaker business is not viable.
   3. Matchmakers need to ensure they charge the right price to their customers, on all sides, so that they are able to take off and remain profitable once they have established themselves.
   4. Multisided platforms are situated inside a matrix of outside actors such as governments, society and regulatory institutions. They need to ensure smooth interfaces with all these external entities.
   5. These platforms provide a virtual or physical location for participants to interact.
   6. Matchmakers need to monitor and police the interaction of participants with each other.
6. Technologies that have turbo-charged platform economy -
   1. Powerful chips - allowed mass computation toreach every home and now ever hand.
   2. Internet - allowed machines to communicate without being connected to wires
   3. World Wide Web - enabled people to put information on a centrally accessible location
   4. Broadband communication - improved the experience and speed of tranferring information to and fro
   5. Programing languages and Operating system - made technology user friendly and enabled developers to express more with less effort
   6. The cloud - allowed businesses to start operation without investing upfront in setting up IT infrastructure.

7. A matchmaker creates value for all the participantscand derive its revenue from it. But for everyone to keep participating the value pie must be large enough so that participants have an incentive to come to the platform and the platform can continue to derive value out of felicitating the exchange. If the value pie is not large enough to accomodate all the participants as well as the platform, the model will fizzle out.

8. Multi sided platforms face a coordination problemvbecause their product offering is to provide one set of customers with another. If any one group does not show up then there is no value for the other group. Therefore the platform needs to reach a critical mass of users to get the engine running. You know you have achieved it when your DAU starts to pick from the zero axis and the angle is getting steep fast.

9. A checklist to gague companies that are planning to build a platform -
   1. What is the friction, how big is it and who benefits from solving it?
   2. Does the platform design reduce this friction, balances the interest of participants on all sides and does it better than other entrants?
   3. How hard is the ignition problem, and does the business have a solid plan for achieveing critical mass?
   4. Do the prices necessary for ignition and growth enable startup to make money?
   5. How is the matchmaker going to work with others in the broader ecosystem, does it face related risks, and has they been dealt with?
   6. Is the business ready to modify the design and ignition strategy quickly in response to market reactions?