Two-sided Marketplaces

Consumer online services are driven by commerce, i.e. they are intermediaries that bring buyers and sellers together.

Portals (Yahoo, AOL, MSN), Search (Google, Bing), Social (Facebook, Twitter, Pintrest), Local (Yelp, Google, Bing) and Commerce (Amazon, eBay) are all platforms that create value by enabling buyers and sellers (advertisers) to interact.

Two-sided marketplaces are fascinating because of their network effects either inside each participating group or across groups.

They are the reason that the freemium model exists. Marketplaces allow subsidizing one side – typically the buyers – by charging the other side  – the sellers or advertisers. Network effects also create a winner-takes-all effect that allows one platform to dominate.

Google with its auction-driven advertising platform and its Internet properties has become the largest consumer marketplace. However not all is well in the world of searches with “purchase intent” and Google’s monetization of the last click.

When I was running MSN Marketplaces and Bing Shopping consumers would use comparison search engines to look for products and compare prices. If Amazon was close enough with its price they would head over to Amazon and buy it there – a simple matter of trust and convenience associated with the brand.

Price are much more transparent in todays online market and competition has forced retailers to price match in near real-time. Today customers might as well go directly to Amazon’s site and search and purchase the product there – bypassing Google as intermediary.

The net effect of this is that more buyers are heading directly to Amazon today. This brings positive network effects into play that pull more advertisers into Amazon’s marketplace and ad exchange, which in turn attracts more buyers and so on.

Amazon “database of individual purchase history” beats Google’s “database of search purchase intent” hands-down in its targeting capabilities and therefore attractiveness to advertisers.

Amazon however is not the only one eying Google’s market position.  Facebook’s has created successful advertiser marketplace driven by its massive “database of connections” with its rich profile and interest data. Facebook’s understanding of users and their activities eclipse Google’s knowledge derived form anonymous searchers and their click.

Two-sided marketplaces can create phenomenal growth if their network-effects are positive. The flip side is that negative network-effects are equal strong causing buyers or advertisers to withdraw stripping always Google’s economy of scale and pricing power.

This competition will be interesting to watch and study.