Matchmakers Create A Whole New Way Of Doing Business
The rapid rise of such businesses as Airbnb, Uber and other stars of the “sharing economy” has been a key feature of this technology-driven era. So much so that a lot of would-be entrepreneurs put a great deal of effort (and even attract a fair amount of investors’ money) into coming up with “the Uber of this sector” or “the Airbnb of that.” However, many have discovered that being part of a sector seen as in vogue is in itself no guarantee of success. These businesses – often called platforms or multisided markets — can fail for just the same sort of reasons as any other startup.
And, as economists David Evans and Richard Schmalensee point out in their new book, Matchmakers: The New Economics of Multisided Platforms, they can also take a lot longer than anticipated to find their place in the wider economy. As Evans said in a recent interview, “There are so many of these startups because a lot of people do think it’s all like WhatsApp [the messaging service that went from a standing start in 2010 to being bought by Facebook for more than $19 million four years later].” In fact, it can take several years before a platform business even becomes really noticed.
Trainline, a rail ticket booking service based in the U.K., has been in existence for 17 years but has only recently become more than a secret for web-savvy users. Alidad Moghaddam, European managing director for Trainline for Business, who recently featured in a public discussion in London with Evans, explained that this was a result of the company adopting “the narrow and deep” strategy of many successful platform businesses rather than taking a “broad and shallow” approach. It is now expanding into mainland Europe, but the company started by offering a simple way of giving travellers access to tickets across a highly fragmented rail network. Unlike many platform businesses, which drive down prices through the transparency provided by their listings, Trainline is more concerned with helping travellers find the best way of using the railway, although it is generally cheaper to buy tickets through it than to do so at the station. As it has developed, it has gradually added features in keeping with its mission to take the friction out of the customer experience. So users of the mobile app can now find out whether a train they are seeking to catch is running late or is cancelled, for instance.
This gradual development is in contrast to another platform business now familiar on both sides of the Atlantic – the OpenTable restaurant bookings service. In its early days the company struggled for a number of reasons. First, when it began in the late 1990s, most restaurants were not using technology in the ways they are today. They generally did not have internet connectivity at the host station, where reservations were taken. As a result, it was not much use joining a web-based service. Then the company, which had been heavily funded, went for market share – signing up restaurants wherever they could find them. Although the service attracted some restaurants in many cities, it did not have a lot in any. This might work for other businesses, but as Evans and Schmalensee point out in the book, “If you want to go out for dinner on Saturday night in San Francisco, a table for four in Seattle doesn’t do you much good.” Noting that diners wanted options, the company changed tack and focused on signing up the key restaurants in a handful of U.S. cities. This worked to the extent that by 2004 it was growing rapidly in the initial four target cities of San Francisco, Chicago, New York and Washington DC, and was able to start expanding the number of cities. OpenTable became a listed company in 2009 with an initial market capitalization of $626 million and five years later was sold to Priceline for $2.6 billion. As of last year, the business had attracted 32,000 restaurants, mainly fine-dining establishments, to use its table-management software and had 16 million people using its website to make reservations every month.
The business model is the same as in the initial proposal – let people book for free, even with a little reward for doing so regularly, charge restaurants a small fee for every set filled by the website and a monthly fee for the software. Secure a critical mass of restaurants and diners in each city and then watch growth increase rapidly by attracting still more on both sides of the platform. The point is that this is a profoundly different approach from that of the traditional business, which typically produces a good or service and charges for it on the basis of the cost of producing it with a margin for profit. And while the concept has been around for as long as there have been exchanges and markets – anything that brings buyers and sellers together (even shopping malls) – what is powering it today is technology. This both enables rapid connection between the individual users on all sides of the market and aids expansion and so enables the rise of giant enterprises. If technology could not transcend borders, Uber or Airbnb, for instance, would probably be confined to North America – and they would most likely have equivalents or imitators in the U.K. or in continental Europe. Now, Uber and Airbnb can simply grow by word of mouth.