MIT's IDE: "The VC View of the Platform Market"

Following up on "You Understand Why Mr. Son and SoftBank Are Circling Uber, Right?" wherein Reuters Breakingviews makes the point that SoftBank could, as a less desirable outcome than scooping up the AI treasure trove, view an Uber acquisition as a platform for other pedestrian (so to speak) ventures.

From the MIT Initiative on the Digital Economy:

Greylock VC Partner, Simon Rothman, explains why platforms are the “best business models ever.”

At the recent 2017 MIT Platform Strategy Summit, co-chair, Peter Evans, Principal at KPMG, noted that the top 50 platform companies now have a market capitalization of nearly $5 trillion. And the shift has been swift. As recently as 2011, the top publicly traded companies by market capitalization were in finance, energy, and industrials. In 2016, however, these traditional industries were displaced by much faster-growing companies that manage digital platforms — such as Apple, Google, Microsoft, and Facebook.

To discuss these fast-moving trends, the Summit hosted a conversation between Andrei Hagiu, Visiting Associate Professor, MIT, (pictured, at right), and Simon Rothman, Partner, Greylock VC.

Simon Rothman: Marketplaces, networks, or more broadly two-sided platforms — where you don’t own the assets or the people — are probably the best business models ever created.

I’m very biased, but I can support my reasons with several examples: One is platforms are very, very durable. Typically, as businesses get bigger, they tend to get weak, as illustrated by the lack of original S&P 500 companies that are still on the list — the only one left may be GE. In contrast, network businesses get stronger over time.

Secondly, they tend to be very high growth; when they work, they compound. If you look at Facebook, Airbnb, or Uber, as they work faster, they actually have exponential growth until they plateau. Craigslist today is so anachronistic; it looks as if it were built 20 years ago — which it was — and it hasn’t evolved. At the same time, Craigslist is a testament to the durability of marketplaces and platforms.

Lastly, platforms tend to have really high margins because they don’t own the people or assets. Airbnb doesn’t own the hotel or the rooms. Uber doesn’t own the vehicle; eBay didn’t own the products on its site. Traditional economic dynamics are inverted. There is high, compounding, exponential growth and high margins, because there is no ownership. And that defies normal business gravity.

The biggest downside to these marketplaces is the fact that they’re almost impossible to build, but that also means they’re equally hard to kill.

Andrei Hagiu: The early generation of marketplaces, eBay and Craigslist, were very open platforms and laissez-faire, where people did the listing. The platform created the metadata, the images, the writing, and the sales. They created the terms, the pricing; everything.

That model worked well when the Internet was young, consumers were new, and it was acceptable to have broad selection. If you wanted collectibles, going where there were a million of them was a lot better than trying to go to a million swap meets. The platform was “good enough.” Today, marketplaces tend to be intermediated, and platform companies are in a middle zone. They’re no longer completely hands-off, nor do they own everything.

Uber tries to looks as if it controls customer service, but it doesn’t. The vehicles aren’t theirs, the drivers aren’t theirs, but they do a lot of matching. Airbnb is in the middle, as well, but is slightly closer to eBay’s model.

The challenge is this: if you’re a customer at an Airbnb and you have a bad experience, whose fault is it? For most legal purposes, it’s not Airbnb’s fault. However, when something happens, Airbnb gets blamed.

While it seems like Airbnb actually brokers boarding rooms, Uber brokers rides, and eBay brokers used goods, each really brokers trust. Their currency is not cash or products, it’s trust. When the market violates that, it bears the weight of that consequence regardless of the legal issues. That’s the challenge: Customers expect control and platforms live in the tension between having control and not having it.

Andrei Hagiu: These two points are worth emphasizing: One reason we like marketplaces is that they are very low touch. If they work, they work beautifully in the sense that the platform is orchestrating buyers and sellers to come together without actually having to do much, except governance. In practice, it’s not that simple. In a lot of cases, the users, or the buyers and sellers, or other constituents, may actually hold you responsible for much more than you control.

Simon Rothman: Once you breach the trust, the marketplace unwinds. This is especially difficult to understand for companies that are not born as marketplaces or platforms, but are trying to transform their business into a platform. If you start as a pure marketplace, you’re aware of these issues, at least, and you set the rules and educate users from the get-go....MORE

Which brings us back around to Uber. As the company's new CEO,  Dara Khosrowshahi, said in his comments onTransport for London declining to renew the Ube's Private Hire Operators License:

“So it’s worth examining how we got here. The truth is that there is a high cost to a bad reputation.” 

I can't believe it was three years ago we posted "Here's the Real Problem With Uber: You Can't Trust Them".
It's difficult to understand what took so long for the message to get out.

Related, earlier today: "Platform Economics in the Consumer Car Space"