When a Marketplace is not a Marketplace Afterall

I was going to title this post Marketplace 2.0 (you know like software 2.0, enterprise 2.0) but I realized I dont want to create another empty bandwagon :) Anyways, last week, oDesk raised a good chunk of cash from an investor that knows more than anyone about building marketplace businesses - Benchmark. Which reminded me of one of the most important things I learned in the 2000 B2B craze.

As much as most people think that the value created by market places are from counter party discovery (aka search), capturing that value rest solely on providing transactional settlement services.

eBay.com is the exception rather than the rule. For consumer goods, the search cost of finding a business is high and the switching cost low. Thus EVERYTIME you want to buy a laptop, you will try to find someone to give you the lowest price. Thus eBay was able to build a gigantic business focusing solely on “discovery” as its main business. However, in the long run, when Google has taken over the world’s entire need for search, I would venture to guess that in 5 years, Paypal will generate over 2x the revenue of eBay’s Marketplace business. Note that Paypal is an example of a settlement service (financial one).

During the B2B days, eBay’s success on its business model let many to believe that if one created a marketplace and help business x find business y (or person x and person y) one can charge 10% for helping to broker that transaction. Oh boy, were we (I) wrong.

For most other businesses (non-consumer goods) counter party discovery is a commodity. It is also part of the transactional value chain that is hardest to capture. In most transactions, relationships matter much more (finding a plumber, contractor, house, supplier of PCB’s, or babysitter). The switching cost to of changing vendors/customer are very high. In that environment, once the introduction is made, the relationship between buyer/seller is taken “offline” - there is no longer a need for the marketplace going forward (for the completion of the initial transaction AS WELL AS the next transaction) ... UNLESS you can add value through settlement services.

The marketplace (the discovery portion) is actually NOT the core competency of the marketplace business, it is just another way for the venture to hedge and reduce spending on Google. The Livesexchat marketplace acts as a FEEDER into the settlement services provided by the marketplace. As does Google...

Google has create the biggest “suckout” in the history of business by rendering metcalfe’s law irrelevant.

In such a world, oDesk has created the model for the next generation of online marketplace ventures. While others are still stuck in the 1.0 world competing with Google on search/discovery, oDesk has instead focused on how to lower friction and increase trust for the ENTIRE value chain. It has created a platform for relationship management that does not in anyway pigeon hole the value of the marketplace to fulfilling the initial need for finding a counter party. It has inserted itself between the buyer and seller permenantly. And that, is the brilliance of oDesk.

It chops, it dices, it minces, it grates ... its a Yahoo LBO!

Red Herring seems to always go out on a limb on its articles. (I guess if only a few hundred people read it, its not so bad if you look foolish) This time, its talking about some Manhattan based PE shops partnering up with either Silver Lake /Francisco/TPG to take on the some mega tech companies ...

Especially given the “Peanut Butter Manifesto“, this idea is actually not so remote. First of all, I think the probability of this happening is less than 5%. But its interesting exercise none the less to think about how to get this done. Putting on my banker/buy out hat on for a sec. I would not even try to “restructure” Yahoo in the operational sense ... re-orgs that focuses on people creates too much uncertainty and financial types don’t really have the appetite for that kind of risks. Instead bankers like to fall back to sum of parts type of analysis ... that’s right ... break up the peanut butter empire into yummy little pieces. Yahoo is nothing but a badly managed conglomerate (think Tyco) this is what I would do (given 10 sec to think about this and not a lot of insight on financial performance or operational issues of each Live sex division)

1. Split the company into 4 broad groups - portal, media, applications, and search/advertising

2. “Yahoo the portal” should go back to its roots as an aggregator of best of breed applications, news, and information ... it should act as an attention aggregator (like Google) but instead of search, focus on its ability to editorialize and filter out crap. As the grand daddy traffic switch on the internet it can extract placement fees (not dis-similar to adwords) to be listed or integrated. At the current incarnation, Yahoo has just way too much conflict of interest between its homepage group and its vertical groups - all fighting for a piece of traffic that Yahoo.com gets (why do you think Brad is such a central figure at yahoo? he owns the homepage). MyYahoo is an already successful implementation of this.

3. The media group should focus on content rather than distribution. . learn from lonelygirl15, G4 media, and focus on creating this generation of independent films -> half interactive TV, half character focused vignette, half commercial, half SNL, and half ... porn :)

4. Search is the seed that supports an ad network with quality traffic and thus attracts advertisers (adsense + adword). Thus I would not separate the search and the advertising business (as Yahoo does today). By leaving the mother ship, the search team will be given free reign to expand on its syndication strategy even more so.

5. The application group will probably need to be split up more, but that’s a divestiture issue for these shops to juice immediate ROI (plus making Yahoo pay it “management fees”) ... this group includes marketplaces (yahoo shopping), fantasy sports, IM , and all that good stuff that Brad considered “spread too thing” ... these wonderful apps deserves to have more resources - people/money - to compete with singularly focused startup competitors. Even more important, they need to be freed from the handcuff that keeps them from going bare knuckle with sister properties - nothing like selective self-restraint to induce general paralysis.

6. Lastly, to keep the transition into independent groups from destroying short-term value. I would strike medium term non-exclusive deals (3 - 5 year) for traffic, advertising, and cross property integrations between all three groups so that survival is not an issue. Given the rise of web API’s - integration (which used to be a major value of having everyone under one roof) is no longer a hurdle that requires extensive technical coordination and platform synergies of being the same company.

Freed from the matrixed to the tilt structure of an overly managed organization, I think Yahoo as the magic bullet will have a chance to thrive once again.

Remember the lessens that Adam Smith tried to impart ... let the invisible hand of market economics drive the ebbs and flows of interactions between companies and Live jasmin people. As complexities rise in any organization (or country) a centrally managed economy (isn’t that Yahoo with all its value transfer between groups?) is destined to fail.

MVNO Flu Spreads to Europe

The majority of mobile subscribers in Europe has a prepaid mobile account - as opposed to mostly underbanked customers having prepaid accounts here in the U.S. As much as it is a coincidence or prescient segmentation, the majority of first general MVNO (or just sub-brands like Boost) here in the US are prepaid focused giving the MVNO market an apparent high growth trajectory where it was really “prepaid” that was driving growth in the US. (confounding variable)

As a result, most of the second generation MVNO did not fare too well given that the prepaid market is beginning to saturate like the post paid (Disney, ESPN, AMP’d, Helio and a dozen more). Some are still hanging on through technical innovation and blanket mass marketing (AMP’d + Helio) ... but steadfastly refusing to release sub #’s.

Well ... long story short... easyMobile, the MVNO of the Richard Bronson wanna be, Stelio (first name only, like Madonna), is about to fold after only acquiring 80K customers (another rule of thumb for me, you gotta have user # higher than the total people in any given superbowl to be considered “impressive” growth).

This is scary given the amount of runway left for mobile innovation is unlimited, but MVNO’s who can potentially push incumbents forward are fading like flies. As a result, the “walled garden” of the mobile platforms might persist much longer than the IBM monopoly on the PC BIOS (the last time the PC platform was “closed”).

It used to be that economies of scale in the mobile business comes in the capex (network buildout, spectrum acquisition); right now it looks like economies of scale in distribution & marketing is equally big too ...

Only companies that has already achieved economies of scale in marketing and distribution can really leverage the MVNO model to some degrees of success ... (read Apple)... lets hope

RIP Milton Friedman

When I was an undergrad at Stanford, Milton Friedman came to speak on campus. Of all my 4 years there only Jesse Jackson (at the peak of his popularity) out drew Milton. At an ultra liberal (which college is not?) campus like Stanford, this is a feat in of itself.

To me, he is the progenitor of “market-based socialism” (I’ll get hanged by Friedman scholars for this) ... and direct influencer of the current community driven web 2.0 vision. Essentially, he argued that personal choice (include greed) will drive toward a better society. That there is nothing in conflict between capitalism, self preservation and public good... (how 2.0!) Far from a Reagan apologist, he argued for those on the wrong end of the bell curve as much as he did for the middle class. He is the greatest economist of our times; if not, the most influential to the cause ...

Business is Personal in China

Today’s eBay China and Baidu deal isnt so surprising ... In the U.S. competition is very passive aggressive (example, eBay + Yahoo + Google advertising partnershipswebs). In China, the battle lines are drawn pretty clearly ... competition is open hatred, in fact, its very very personal. EachNet and Alibaba are well known rivals Yahoo China is now run by Alibaba Baidu hates the 3721 (Yahoo subsidiary) “spyware” toolbar so much that it sued yahoo Alibaba believe search is its next big opportunity Zhou Hongyi (founder of 3721) left in bad terms with Yahoo (even before Alibaba buying Yahoo China) Jack Ma and Zhou Hongyi are engaged in an epic battle that now includes a lawsuit(imagine if Jack Welsh and Steve Job hates each other to the bones). Alibaba is also suing Zhou’s new startup, Qihoo. (ironically for unstalling 3721’s toolbar) So what’s EachNet to do? My enemy’s enemy must be my best friend ... so it conveniently partners with the industry leader (baidu.com) ... ofcourse if EachNet is smart, they would have already lobbed in a call to Zhou about Qihoo to figure a way to partner with it (like juggling Google & Yahoo here in the U.S.)

Right to Change One’s Mind

A few months ago, Dare Obasanjo ripped me a new one for praising Meebo in Meebo and the Coming Battle For the Software Long Tail. Apparently Dare has changed his mind. Not trying to pick fight :) (ok, maybe to gloat a little bit?) I’m a loyal reader, in fact, I find his blog insightful and thought provoking. And in this case, I can see why he didnt really change his mind. It is MeeboMe that he found “fucking cool” not Meebo itself. Meebo in its first incarnation is not that innovative of an idea ... that I have to agree with. However, it is offering a sizable value proposition as proven by its near instaneous scale. As a result, Meebo was able to leverage that traction into new products such as MeeboMe that IS INNOVATIVE and ground breaking...AND popularly recieved. As an optimist, I was focused on Meebo’s potentials (read multistep strategies) and opportunities while Dare focuse on its current product & execution. Nothing wrong with either approach really. And ofcourse, in the end, bloggers always reserve the right to change our mind ... we write posts in matter of minutes; more often than not, a stream of conciousness post rather than a cogent essay ... this is the beauty of the blogosphere, its a conversation rather than a publication ... Next time, when I change my mind (almost every week) I hope someone goes easy on me.