Stanford University



Online MarketplacesMS&E 238 final paperAndrew Adams and Lance MartinStructure of marketplaces - The natural place to begin a discussion of marketplaces is with defining what we mean when we use the term; as well, it is important to disambiguate what we don’t mean when we use the term. When we refer to marketplaces, we mean entities that facilitate transactions between buyers and sellers; importantly, they act as a third party to the principal transaction at hand. The marketplace is thus not the seller (nor a buyer), and as such it does not own the inventory or services transacted on the platform. If they did, the entities wouldn’t be marketplaces, but rather traditional retailers. Accordingly, it would be incorrect to state that recognized digital marketplaces like Uber, Etsy, and AirBnb sell transportation, handcrafted goods, or lodging [1]. Rather, they facilitate transactions between drivers and riders; artisans and buyers; and hosts and lodgers. So how do marketplaces facilitate such transactions; what do they actually sell? Marketplaces sell a reduction in transaction costs. As Stanford professor and marketplace expert Ramesh Johari defines, these transaction costs can come in the following types:Search and Information Costs:Search captures the cost of prospective buyers and sellers finding each other and information captures the cost of surfacing information relevant to either party making an informed decision as to whether they should execute the transaction.Bargaining and Negotiation CostsBargaining and Negotiation costs are the cost of determining what is being sold and for how much.Policing and Enforcement Costs [2]Policing and Enforcement Costs are the costs of ensuring transactions are prosecuted fairly and favorably for both parties.A marketplace need not mitigate costs from all three dimensions, but we cannot imagine a marketplace that does not mitigate costs along at least one. For example, Craigslist (the web’s original marketplace) mitigates Search and Information Costs by serving as a central repository for buyers and sellers to connect. (In this Search and Information Costs dimension, they provide rather limited infrastructure, as Craigslist does not provide any information beyond unverified information posted by owners). Craigslist does not mitigate costs along the other two dimensions, as they provide no infrastructure to minimize bargaining and negotiation costs or policing and enforcement costs. Compare that with Uber, a mobile transportation marketplace that provides a reduction in search and information costs (as Uber automatically makes matches between riders on the demand side and drivers on the supply side), automatically set fares (bringing bargaining and negotiation costs to zero), and provides significant liability insurance to drivers as well as reimbursements to riders if drivers take inefficient routes (both of these measures being ones minimizing policing and enforcement costs). History of online marketplaces - In ancient Greece, the agora marketplace was the center of athletic, artistic, spiritual and political life, and this spatial and cultural centrality enabled this marketplace to reduce transaction costs. New forms of media have enabled virtual marketplaces, which connected buyers and sellers?independent of physical location. Newspaper classified ads were one of the first of such virtual marketplaces and accounted for?sizable fraction (~40% in 2000) of newspaper ad industry revenue [3]. Rapid internet growth in the mid-1990s (2,300 annual growth rate in 1994 [107045243139274]) established, for the first time, a global network of producers and consumers that could, in principle, be connected by new marketplaces.Figure 1: Rapid growth in the size of the internet creates a new virtual marketplace.E-commerce first emerged in response to the demand aggregation afforded by internet connectivity. In 1994,?Americans bought $19 billion worth of books, Barnes & Noble and the Borders Group had by then captured a quarter of the market, and profit margins were notoriously thin [8]. Yet, Jeff Bezos recognized that?there are more items in the book category than there are items in any other, resulting in a?“long tail” of SKUs that are necessarily left out of the ~130,000 titles carried within the?average Barnes & Noble. The rise of Amazon has shown that that the?long tail can be profitable: a?quarter of Amazon?s book sales come from outside its top 130,000 titles [9]. This suggested that online marketplaces overcome the tyranny of physical space, enabling aggregation of demand across dispersed audiences and a centralized supply chain for fulfillment.Around the same time as Amazon was started, online peer-to-peer marketplaces emerged. After his wife wanted a way to trade Pez dispensers, Pierre Omidyar recognized that the internet could break down and remove the physical limitations of traditional auctions such as geography, presence, time, space, and a small target audience. Based upon this potential to reduce transaction costs, eBay was born and grew at a staggering rate, from?~ 0.25M users in 1997 to?~ 10M users and?$2.8 billion annual revenue in 1999 [5]. In an iconic venture deal, Benchmark Capital invested?$6.7M in?1997?(22% ownership), a stak17286983115106e worth $5 billion by April 1999 [6]. Network effects allowed eBay to get stronger as?it got bigger, a unique feature of internet technology marketplace businesses vis-a-vis old economy business [7].??Figure 2: Network effects allows eBay to get strong as it got bigger.Over the past two decades since the inception of eBay, growth in internet connectivity and online marketplaces have dramatically affected revenuers captured by newspapers. By 2000, newspaper?classified advertising was $4.6 billion, dropping ~77% in a decade [3] and demonstrating the speed with which marketplaces can evolve.Technology driving new marketplaces - As mentioned, by altering transaction costs, IT has opened up the feasibility of new marketplace models. But how, exactly? As Venture Capitalist Fred Wilson explains, historically organizations—whether they be corporations, militaries, or governments—have been organized as top-down bureaucracies. This has been the case because of the prohibitive magnitude of communication and transactional costs. Though slow-moving, big bureaucracies can aggregate transactions and communications such that these per-transaction and per-communication costs are minimized. The web, however, has drastically reduced such transaction costs, and thus these sorts of top-down bureaucracies are being replaced by distributed networks. Wilson provides as an example Twitter, which as a distributed network of content producers is replacing the newspaper newsroom, which has typically been organized in a slow-moving hierarchical structure (writers/reporters reporting to editors, editor reporting to editor in chief, and editor in chief reporting to publisher, etc). In commerce generally, one can apply Wilson’s framework to the concept of the traditional retailer, which serves as an intermediary between consumers and suppliers. Rather than individual agents from the supply side and demand side connecting on an individual transaction basis, to minimize the transactional costs, retailers purchase in limited ordering cycles; retailers place orders to suppliers on behalf of the consumer on a quarterly or yearly basis, rather than every time an individual consumers seeks out an individual supplier. Marketplaces, which facilitate such unitary transactions between single supplier and single buyer, become feasible when these costs are sufficiently low. Indeed, the internet, which at its core is fundamentally a communication medium, has greatly diminished these transaction costs. Mobile extends the scope of the internet, allowing people to be constantly online, and further diminishing these costs. There are around 1.6B PCs in use today and an equal number of smart phones. Over the next few years, the majority of the mobile base will convert to smart phones, resulting in as many as ~8B by 2020 [12]. In parallel, the internet of things may grow to ~ 26B devices by 2020, collectively meaning that the scope of the internet - both the number of people and devices connected - will grow by an order of magnitude in the coming years. When everyone and everything is digitally connected, the communication costs required to prosecute a prospective transaction between multiple parties is greatly reduced. This has opened the opportunity for new marketplace businesses. In parallel with the emergent marketplace opportunity, the cost to build a tech business more generally has fallen, partially through the considerable investment made by Web 1.0 firms. Amazon now offers primitive infrastructure building blocks as services, freeing developers from buying and maintaining costly infrastructure. The Amazon open APIs / IaaS drive more network traffic than its websites [10] and serve as foundational technology for the next generation of internet businesses. Companies can now be far smaller, leading to flatter organizations. As a testament to this trend, WhatsApp managed a messaging system as large as global SMS with only 32 engineers [11]. Types of new online marketplace -In addition to the framework of transaction costs provided by Johari, we find it useful to further establish our marketplace taxonomy. Consider the following taxonomic distinctions:Horizontal vs VerticalHorizontal vs Vertical is perhaps the most intuitive characterization of emerging marketplaces: a Horizontal marketplace serves multiple industries, whereas a vertical marketplace serves only a particular industry. For instance, eBay and Craigslist are the prototypical horizontal marketplaces of the internet. As a horizontal marketplace for goods, eBay facilitates transactions for automotive, fashion, electronics, and collectible goods; Caigslist is even “more horizontal”, because it facilitates transactions for both goods and services (agnostic of industry). Vertical marketplaces [14] focus on a specific industry, such as Uber with transportation or Airbnb for short-term travel lodging.Supply-Side-Driven vs Demand-Side-DrivenThe distinction between a supply-side-driven vs demand-side-driven marketplace can be subtle; in fact, the terminology may seem somewhat counterintuitive as marketplaces by definition are two-sided. Some marketplaces nonetheless cater to minimizing costs of one side of the marketplace more than another. As such, some can be said to be supply-side-driven whereas other could be said to be demand-side-driven. Consider the following two pairs of marketplaces: ‘oDesk’ and ‘fiver’ versus ‘Hatch.co’ and ‘Custommade’. These pairs are horizontal marketplaces in the professional services outsourcing space and the custom goods space, respectively. However, each pair contains one marketplace that is supply-side-driven and one that is demand-side-driven.Odesk and Fiverr are marketplaces for outsourcing professional services on a contract basis. Odesk is a demand-side-driven marketplace whereas Fiverr is supply-side-driven. On Fiverr, professionals post the services they are capable of performing and the prices they are willing to perform them for, and those on the demand side sort through offerings for what they want and send in offers. On Odesk, those on the demand side seeking contractual labor post the tasks they want performed, and those on the supply side sort through postings and send in offers. Fiverr, thus, is supply-side-driven, as search and information costs are being mitigated for the supply side more than the demand side. The inverse is true for Odesk, where those on the supply side must spend time and effort to find job requests they could perform. A similar dynamic is evident in the comparison between Hatch relative to Custommade, marketplaces for custom goods. On hatch.co, users can search through goods that supply-side craftsmen are offering to customize for individuals; on Custommade, the demand side dictates the jobs, as craftsmen search through jobs they would like to perform and go through the effort of submitting a proposal to the demand-side agent. Again, the search and information costs are being disproportionately mitigated for different parties for these two different models.11303001613535Figure 3: Supply-side driven (fiverr, on left) versus demand-side driven (oDesk, on right).Full-Stack vs Thin-SliceFull-stack online marketplaces have historically built supply chain infrastructure to achieve economies of scale. Comparing Webvan to Instacart, a recent marketplace for local grocery store delivery, highlights the distinction. Instacart leverages a “virtual supply chain,” viewing local grocery stores as distributed inventory and building a “thin” software and logistics layer on top of this to enable fulfillment. This was far harder to do before the advent of smart phone, as Instacart must manage a distributed local workforce of drivers and shoppers. This model may have benefits relative to the centralized full-stack marketplace (e.g., lower cost to scale and giving consumers local brands) [15].Features of successful online marketplace -Successful online marketplaces reduce at least one of the following costs.Search and Information Costs (“meeting”)Definition: Search cost is the cost of prospective buyers and sellers finding each other. Information cost is the cost of surfacing information relevant to either party making an informed decision as to whether they should execute the transaction. Challenges: Cold-start, liquidity. Solution: Marketplaces with network effects more quickly overcome these.Simply stated, network effects are present when the value delivered to users scales with the network size. OpenTable, a restaurant-booking marketplace, illustrates this dynamic. Started in 1998, OpenTable now processes ~99% of all online reservations in North America [16]?OpenTable is aggregating the world's restaurant goers and cataloguing their tastes.?This aggregation of foodies attracts more restaurants, which in turn attracts more consumers. More consumers means that OpenTable has more data, making it more valuable both to consumers (recommendations) and restaurants. This “flywheel” drives favorable economics, as fixed costs can be shared over a larger and larger customer base (their margins went from 37% to 47% between 2010 and 2013) [17].Bargaining and Negotiation Costs (“transacting”)Definition: Bargaining and Negotiation costs are the cost of determining out what is being sold and for how much. Challenge: For goods or services with poly-defined value, it is difficult as a marketplace to reduce negotiation costs. Solution: One way to address this is to target higher fungibility goods or services that more easily admit to pricing automation. Fungibility is the degree to which a good or service is interchangeable with another such good or service. An example of a highly fungible good would be a piece of mass-produced electronics, such as an xbox 360 video game console. There are 78 million such consoles worldwide, and purchasing one of these consoles new is as good as purchasing another. A highly fungible service would be something like retained automobile transportation—as long as a rider is delivered from point A to point B, one ride from a driver is as good as another.Higher fungibility means that more suppliers are capable of performing a given service (e.g., drivers on Lyft), relative to cases in which each individual supplier is unique and more difficult to evaluate (e.g., designers on oDesk). If goods or services are not fungible, it is more difficult to automate transaction infrastructure (reduce bargaining and negotiation costs) because by definition comparables do not exist. When a fundamentally unique item or service must be priced for the first time, negotiation and bargaining costs are inevitable. Contrarily, when comparables do exist, goods and services can be priced according to precedent according to a limited set of known variables. In the case of electronic goods, these variables may be make, year, condition; in the case of a Lyft ride, these variables could be time of day, length of trip, location.Policing and Enforcement Costs (“fulfilling”)Policing and Enforcement Costs are the costs of ensuring transactions are prosecuted fairly and favorably for both parties. Challenges that this category often address is dis-intermediation.Solution: Low likelihood of recurrent transaction between same supply side and demand side agent.When you enter an Uber or meet your AirBnB host, what keeps users from turning off the meter or transacting offline? Typically this is because the interaction is high frequency with low likelihood of recurrence of the same service provider. Bill Gurley explains this best: “failed marketplaces attack purchasing cycles that are simply way too infrequent, which makes it much more difficult to build brand awareness and word-of-mouth customer growth. Another repeated mistake is attacking verticals where a satisfactory supplier “match” end’s the customer’s need to re-enter the market in search of an alternative” [51]. Unpacking this further, if trust is easy to build offline (e.g., through a repeat interaction) then the marketplace is more easily dis-intermediated by offline transactions once trust is established. In contrast, the value of marketplace-enabled security is higher if the user must engage frequently with unique service providers (e.g., ride-sharing). Business features of successful online marketplace -Clearly, functional online marketplaces must address at least one of the above-mentioned costs. Yet, that does not make it a successful business! Other considerations are relevant when evaluating the potential of a marketplace business. Transaction volume and defensibilityUber’s transaction volume is high in at least two important ways: ride sharing is a repeat-use service with high-ticket sales. Lower repeat-use services (e.g., real-time car washing, which was tried by a now defunct company called Cherry) suffer from the fact that consumers rarely require the service that the marketplace offers. Other failed marketplaces, such as Kozmo, suffered from (among other things) transaction of low-value items. A similarly interesting case study in this issue is education marketplaces, such as Teachers Pay Teachers (TPT). TPT currently has ~ 10% of US teachers and had total transactions ~$50M per year (in 2013) with revenue then a fraction of this. Yet, the sale item (lesson plans) may not be a repeat-use item, which would mean that recurring sales at the 2013 level are harder to obtain without expanding the size of the customer base.Defensibility, an important concern for marketplaces, is related to transaction volume of the service. Generally, marketplaces with a challenging cold-start problem exhibit higher defensibility. Higher transaction volume can drive this. For example, ride-sharing or real-time logistics are frequently used services. To have acceptable liquidity, marketplaces then require large network of drivers or couriers. Marketplaces for services with longer payment cycles or infrequent utilization may be less defensible, because the barrier to achieving liquidity is lower and new marketplaces can more easily be started.Understanding the market participantseBay’s bid for the Chinese market in the mid-2000s is an iconic failure in consumer tailoring. At the time, Alibaba was a small Chinese company that launched a competing consumer-to-consumer (C2C) auction site called Taobao (means “digging for treasure”) to compete against eBay’s incursion. Taobao was free for individuals buying and selling virtually any consumer good, relative to eBay’s rake of ~10% for users of the platform (which dubbed Jack Ma, the CEO of Alibaba, “Crazy Ma”). Whereas eBay focused on internet ads, Taobao bet that television was a better medium for reaching consumers. Similarly, they focused on IM and voice mail services for mobile phones, knowing that buyers and sellers were more cell-phone savvy (300M users) than computer savvy (90M users, at that time) [46]. In 2006, eBay shut down its China site.The rakeA sustainable platform or marketplace is one where the value of being in the network outshines the transactional costs charged for being in network. An important parameter in this dynamic is the fraction of gross merchandise sales taken as revenue by the platform, which is known as “the rake” or “the vig.” Interestingly, a bigger rake is not always better. Jeff Bezos has famously said “your margin is my opportunity,” which speaks to the fact that greedy marketplaces with high rakes are targets. In the early stages of building a marketplace, a low rake is a good way to acquire users. Around the time that oDesk was building an “ebay for work,” several services (e.g., Freelancer and Rent-a-coder) were charging commissions ~30% whereas oDesk opted for 10%. By 2009, oDesk had far surpassed the nearest competitor. Another interesting case study is the rise of , the leader in online travel in Europe and substantial portion of Priceline Group’s $35B market capitalization. While travel companies were bundling “package” vacation offerings and charging a high rake (>30%), Booking started a 10% “agency model” that consequently acquired nearly every small hotel in Europe [47]. Then they instituted a market-driven pricing dynamic that allows those suppliers who want more volume or exposure to pay more on an opt-in basis. The competitive dynamic leads to a higher average rake over time and, if prices go up due to bidding, the suppliers blame competition (e.g., the Google AdWords business model).Grow the marketHistorically, predictions related to the growth of technology-enabled markets have been spectacularly wrong. In 1980, AT&T commissioned McKinsey & Company to forecast cell phone penetration in the U.S. by 2000. The prediction (900,000) was wrong by two orders of magnitude (less than 1% of the actual figure, 109 Million) [21]. Moreover, it is challenging to predict the market growth if a fundamentally new marketplace is established, particularly if market forces have been long stifled or manipulated.In general, we can consider growth of either supply or demand. Growing supply can be achieved through at least two levers. (1) Capturing remnant time or capacity available for service providers or (2) capturing currently un-used supply. A critical driver for (1) is the reduction of marketplace truncation costs; to capture small chances of excess capacity, service providers require tools for rapid identification of demand. Mobile technology has driven this and we see examples in diverse services such as rapid health consultations (e.g., HealthTap), finding doctors (e.g., ZocDoc’s real time features), or hairdresser appointments (e.g., Styleseat). Several of the most famous marketplaces have addressed driver (2), which is importantly aided by a reduction in policing and enforcement costs. This has been largely helped by the migration of trust online and now marketplaces such as AirBnb, Getable, and SnapGoods allow suppliers to share underutilized housing stock, large-scale construction equipment, and power tools.Collectively, this leads to new economic opportunity, as people find ways monetize things they otherwise could not (e.g., time or possessions). eBay has long supported hundreds of thousands of Americans with primary or secondary income [18]. AirBnB is a recent phenomena that addresses the mis-match between housing stock and consumer demand, providing a way for homeowners to monetize space. Like eBay, it empowers people to be micro-entrepreneurs and helps over half of its users pay for their home [20].Marketplaces can also grow demand for a service by offering far better experience than was previously possible. The taxi and black car transportation market is a fascinating case study in this light. In New York City, the number of taxi?medallions?has not increased over the past century: the number was 21,000 in 1931 and now is?13,437 [22].?The city keeps the number of medallions low in order to ensure that there’s more demand for rides than there are cabs, though this has also led to an absurd appreciation in Medallion values, growing more than Gold or the housing index [23] and now costing ~ $1M. By creating an orthogonal market (de-coupled from Medallions) priced internally with unprecedented convenience, Uber is threatening Taxi monopolies worldwide. It’s interesting to recognize that Uber’s service grew demand for Black Cars in San Francisco by 100% in two years: in 2010, there were about 600 total black cars in San Francisco. In 2012, more than 600 black cars were active on Uber and the company was still growing at 20% month over month. Moreover, in 20 months Uber was already at 100% of the historic market and growth was still tilting up and to the right [24].Uber’s recent valuation of $17B may be justified by the ~$1.1 billion of gross receipts (the fares paid by customers for rides) in?2013, which translates into revenues of ~$220 million (~20% of gross?receipts) and projected revenue growth (doubling every six months, at times) [24]. But the deeper question is the narrative surrounding market expansion: pessimistic cases assume that Uber captures a fraction of the global taxi and car-service market (with total revenues ~ $100B with ~ 6% growth) [25]. An alternative narrative is that Uber’s user-experience expands the market for contract car services, potentially cutting into the rental car market ($27B) or new car dealership sales ($730B). Stated simply, the experience enabled by new online marketplaces may grow demand for the service in unexpected or surprising ways (e.g., Uber’s mesh grid enabling logistics) because the experience injects unprecedented trust and convenience into car services. Trends - Collectively, the iconic online marketplace businesses typically target?information rich and capital light industries (e.g., retail) rather than capital intensive (e.g., energy) ones, target fragmented or distorted supply chains (e.g., taxi services), are structured with mechanics that can initiate flywheel can start (e.g., OpenTable), target fungible?services (e.g., rides) with a rapid payment cycle, and build empowered consumer communities.Verticalization vs. Horizontal aggregationAs marketplaces have become more?horizontal, opportunities to dis-intermediate them through?verticalization have emerged. After Craigslist took billions in advertising revenue from newspapers, mobile-enabled and vertical marketplaces are taking slices away from Craigslist [27]. This un-bundling typically targets experiences that are broken within existing horizontal marketplaces. For example, Poshmark addresses the fact that selling secondary goods on?eBay or Craigslist is challenging. In turn, it has built an experience that uses social integration to drive community optimized for mobile with design targeted to end-user demographics [28]. Yet, it’s worth noting an interesting counter-trend towards marketplace aggregation on mobile. This is driven by the fact that apps continue to grow in number, but our ability to discover them through existing means does not scale. In China, WeChat and Baidu Maps have addressed this by moving the service aggregation layer up the stack from the home screen, bundling it within their single -meta app [29]. They then contract with third-party apps for fulfillment of services. Back to brick-and-mortarHistorically, mail-order companies like Sears built the first national retail corporations, though they were largely replaced by brick-and-mortar during American consumerization. Ecommerce changed this and is now a throwback to turn-of-the century Sears, with centralized supply chains and mobile serving as the new catalog [30]. Times are bad for retail: the Census Bureau reports that four specialty retail categories representing total sales of just over $600 billion grew by only $5 billion between 2007 and 2011. Ecommerce players increased their cumulative sales in these categories by $35 billion over the time period. Furthermore, roughly 1,000 large malls in the U.S. will fail within the next 10 years and be converted into something with far less retail [31].Yet, brick-and-mortar retail is a large distributed inventory that could, in principle, be coupled with consumers via new distribution models. Specific segments of retail that have failed [32] in e-commerce (e.g., grocery) are now trying new models in contrast to prior efforts (e.g., Webvan raised $1.2 billion largely for cap ex in their unsuccessful bit to re-invent grocery shopping). For example, Instacart is overlaying a logistics platform on brick-and-mortar retail, which may fend off competition from e-commerce (good for retailers) as well as giving consumers fast delivery and access to local grocery brands of choice. Companies like Uber, Addy, and Postmates are positioned to serve as a digital mesh grid that connects users with a distributed cache of brick-and-mortar goods [34]. Interestingly, while marketplaces have long been seen as a rivalrous challenge to brick and mortar retail, the future may have them working in cooperation. It’s further worth noting that local caches may be aggregated by new supply chains. An interesting grocery example is GoodEggs, which aims to aggregate offerings from local farmers or artesian food makers. This is in response to rapid?growth in community-supported agriculture (CSA) programs since 1984; there have been a doubling of farmers markets in the past 10 years [35]. GoodEggs has built out their own software-driven distribution infrastructure for delivery, though we may expect to see services like Uber sit on top of new aggregation systems (like GoodEggs) in the future.Emergence of people marketplacesHistorically, marketplaces for professional services were restricted to remote knowledge work. oDesk has been a leading marketplace in this space, providing a platform for virtual contractors to manage work diary, payment details, and messages with other remote team-members. From oDesk, numerous other freelancer marketplaces (e.g., Rev) have emerged for remote tasks (e.g., language transcriptions and translations).Recently, local service marketplaces have emerged. Some have focused on horizontal supply-side driven services (TaskRabbit, Zaarly) whereas Thumbtack (which recently received $30M in series C funding) is demand-side driven, allowing user to specify what they are looking for and allowing suppliers to bid. Extending this further, at least two trends have created marketplace opportunities around real-time and on-demand professional services. Mobile makes it easier to manage a distributed workforce and trust has shifted online. By cutting out the middle-man in many cases, these marketplacescan be both convenient and offer better economics. For example, service departments are car dealerships are the only segment that earns strong returns and, in turn, costs are bloated to cover other segments. In turn, garages pay mechanics a small share of what they charge consumers. Moreover, marketplaces (e.g., YourMechanic) comes the consumer’s vehicle and perform a wide variety of services while paying mechanics far more than garages for the service and charging the consumer less [36]. Another interesting case-study along these lines is Homejoy, which changes $20 per hour for cleaning leverages mobile to target the 400 billion global home cleaning opportunity, which may expand into other home-focused services (e.g., plumbing). Whereas many marketplace services are rapidly getting commoditized in a “race to the bottom” (e.g., the emergent price war between Uber and Lyft), there is a parallel trends towards of “higher-value” service marketplaces. In part, this represents an un-bundling of commodity services from verticals that have historically been monolithic and subject to bulk branding. For example, DoctorOnDemand is a marketplace targeting primary care, HourlyNerd is a marketplace for MBAs, skill bridge is a marketplace for consulting, and RocketLawyer is a marketplace for legal work. These higher stack services have typically been resistant to marketplace dynamics, as high-skilled lawyers, doctors, and consultants are thought to be highly unfungible. Yet these aforementioned marketplaces have found fungible components within these larger bundled services to break away. While surgery or criminal trial law are unfungible, assessing a common cold or a boiler plate legal document is rather fungible. These are the sort of services that new service marketplaces like DoctorOnDemand and RocketLawyer are unbundling.Emergence of consumer focused healthcare marketplacesHealthcare presents a particularly interesting opportunity because it is often painful (e.g., offering a poor consumer experience), characterized by considerable waste, and will soon be suffering from a strong doctor shortage that may increase waiting times despite the high frequency of last-minute cancelled appointments and ER visits [37]. ZocDoc is probably the leading healthcare marketplace, offering a tool for finding doctors in real-time (to address the no-show problem) that 5 million people now use to get appointments more quickly and easily than before. Employers are facing escalating costs in parallel with pressure to offer high quality plans, leading to the emergence of the $600B employer benefits market [38]. Employees are now trying to encourage better health decisions (e.g., staying in network and focus wellness) and ZocDoc plans to offer an enterprise tool for this. Castlight Health (another marketplace) has already been successful in this space due to a tailwind of interest in higher deductible insurance plans. In short, better tools that help consumer source and book doctors - analogous to the ability to book a reservation at a restaurant - is a marketplace for fast growth. Emergence of crowd-funding and financial services marketplaces An interesting theme to highlight in financial services is the democratization of lending. Recovery from the financial crisis has been slow: mortgages are hard to obtain, small business credit is tight, and loans to small businesses fell 20 percent from from 2008 to 2011 [39]. Crowd-funding platforms have emerged, and 3 million people have pledged more than $400 million to 35,000 different successful projects on Kickstarter [39]. Hardware projects have particularly benefitted from crowd-funding: hardware projects that have raised at least $100,000 through Kickstarter or Indiegogo have gone on to raise $321 million from venture capitalists [40] with notable examples such as Occulus or Pebble. The glut of angle money deployed to early stage businesses has lead to new marketplaces that help companies find acquisitions, such as Exitround. Marketplaces such as Crowdtilt are democratizing crowd-funding, focusing on informal projects (e.g., events) that appeal to a larger audiences. In contrast, marketplaces such as Patreon are proving ways for users to acts as patrons and support the work of artists (e.g., YouTube stars) while also enjoying perks (e.g., access) associated with patronage. Finally, some marketplaces have emerged to provide funding for stable small businesses. Funding circle is a peer-to-peer marketplace for small (non-startup) business to get loans from individuals and has been growing at 150% a year over the past four years [41]. Abstraction One interesting lesson to take from Amazon is that abstraction is a powerful driver of innovation. Amazon’s internal infrastructure stack got flatted into a set of APIs, which now serve as the IaaS layer driving many online businesses today. It follow that the marketplace businesses today will eventually be flattened into a set of APIs upon which the next generation of businesses will be built. Uber recently announced that it is releasing an API that essentially allows for the creation of new Uber “buttons” outside of its own app. For example, Uber could be hailed from other apps based upon context (e.g., an address) [48] and, more broadly, new services could be built upon the API.Bundling and Un-bundling Often, a key characteristic of large incumbents in any industry is that they have accumulated a “bundle” over time. Then something changes in technology, creating a new way to deliver services wrapped within the bundle. Brick-and-mortar retail has been disrupted by horizontal marketplaces (e.g., eBay, Amazon), which in turn have been un-bundled by verticalized marketplaces (e.g., Poshmark). A similar dynamic is playing out with professional services, as briefly mentioned. Thumbtack has emerged as a horizontal marketplace that competes with Angie’s List for local professional (e.g., home services), despite the struggle of other (e.g., TaskRabbit, Zaarly) local horizontal marketplace. Both may be un-bundled by vertical service marketplaces such as Homejoy (for cleaning). Going forward, we may expect to see the leading brands in home cleaning - such as Homejoy - bundle into other services [48], as Angie’s List features a very wide array of local services that may be suitable as a feature tuck-in to an existing app [49].The intelligent marketplaceMany of first online marketplaces moved the passive viewing experience of the Yellow pages online and overlaid social data (e.g., reviews). Yet, the passive browsing experience for consumers remained similar to that of the Yellow pages. Thumbtack, a local marketplace that competes with Angie’s List and Yelp, has a different design. It is demand-side driven (as the user specifies the need) and the app an internal algorithm (e.g., data) to make recommendations. This is similar to Homejoy’s approach to home cleaning, which claims to use intelligence to match consumers and producers. In this sense, marketplaces will shift from being passive digital “Yellow pages” into intelligent products that may push recommendations or services to the user based upon needs or context. The overlay of more contextual signals (e.g., micro-location, social mining) will likely aid this process and allow marketplace to expand their reach in the future.Conclusion - The cost framework that we defined at the stars of this review provides a framework for thinking about marketplaces: what remaining costs are the marketplace lowering? The trend towards verticalization has largely addressed fact that costs still exist within popular horizontal marketplaces. For example, selling second-hand goods is challenging on eBay. Poshmark addresses this for the female clothing vertical, reducing search and information costs by overlaying social media and creating attractive profiles that appeal to users of a specific demographic. FOBO, a marketplace targeting electronics re-sale, lowers bargaining and negotiation costs, as it guarantees sale of goods put on the platform. Going forward, we may expect to see intelligent marketplaces that predict what you want to sell and perform it for you, essentially flattening all costs to zero.A similar arc will likely play out in service marketplaces. Thumbback lowers the search and information costs for professional services, making it easier to find local services relative to passive “virtual yellow pages” reviews platform such as Yelp or Angie’s List. The proliferation of smart things (e.g., IoT) provides an opportunity to overlay intelligence on service marketplaces, essentially predicting services you need before you know and initiating sourcing of service providers (e.g., for home services, car services). This means the broad and likely intersection of data (e.g., from sensors or context) and service marketplaces: professional services could be predicted based upon social context and infrastructural services could similar be predicted via IoT.References -[1] 5[2] Johari slides 6[3]?[4]?[5]?[6]?[7]?[8]?[9]?[10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] ................
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