Two-Sided MarketsApple, Google and Microsoft are examples of two-sided markets.
- What is a two-sided market?
- How are two-sided markets created?
- How do two-sided markets collapse?
Two-sided markets typically are entities that connect actors consistently having the same roles in transactions, eg. consumers with
a network of suppliers. This marketplace leads to a virtuous cycle between increases
in overall value due to the scale, and that value attracting additional
consumers and suppliers. Examples include Internet companies providing services and products this way such as Amazon, Google, Facebook,
Microsoft and others.
The Two-Sided Market
Facebook is especially interesting since it started using the underlying network effects where a social network is more attractive as more people sign up, then evolved into a two-sided market by connecting users to suppliers in the form of advertisers and app makers.
A hallmark of the market is that consumers access it under the market's brand: its Internet domain name, its physical store, or its software or device.
Becoming a two-sided markets is attractive because the increasing
returns with scale, and the ability to facilitate that scale by
subsidizing the more price sensitive party. Consumers are typically
very price sensitive, so Google can provide them with a free utility
like the free gmail email service, and then charge advertisers to
access those consumers. As advertisers pay, Google can evolve and
expands its free services, in turn attracting more consumers. Additional consumers increases the willingness of advertisers to pay, and so on. The party
that the network decides to charge is the money side, and that side
pays for access to the network's other side.
A key aspect of the two-sided market is customer control. By
withholding the customer's identity or charging details, a supplier
in the market is less likely to be able to bypass the market entity
in a break-out attempt to compete by bypassing the market.
Another strategy for the market is to disperse parts of a solution across several suppliers, so that one single supplier is unable to sell directly to the market's consumers.
It is also in the market entity's interest to not have one single supplier becoming dominant, in order to prevent that supplier from evolving into a competing network.
Customers can also be locked in as a discouragement to leaving the
network. This could be in the form of investments made, such as
buying an iPhone discouraging a switch to Android, or relevant data
saved with the network, such as friendships or pictures stored with
Facebook, or simply efforts invested in the platform such as code
written, high scores achieved or digital purchases.
As a two-sided market grows it tends to enter adjacent businesses
where its technology built, its customer base or scale, or other
combined-value synergies allows the market to compete favorably with
incumbents. Amazon is a glowing example where a book delivery
platform first expands to anything that can be shipped in a box or
downloaded, then further to the very devices used by its consumers.
The supplier joins the network to access a larger market and revenue
than otherwise feasible or possible independently. The long-term
challenge is that the network is unlikely to allow the supplier to be
too successful: with increased success the network will attract or
encourage competing suppliers limiting that success, and the network
can punish or reward its individual suppliers at will.
The Supplier's Decision
Suppliers with a unique solution but lack of competency or ability to
reach a broad market may partner with a market for mutual benefit.
Such partnerships, however, tends to be short lived with a 2 – 3
year life, because the market entity quickly learns the technology, maintains
customer control and absorbs the value provided by its partner frequently ending in
litigation and the partner becoming irrelevant. There are numerous
examples with especially Microsoft but also Google and Amazon of this
pattern being repeated over time for different technologies adding value to the market.
Partnering with a Market
To maintain a market it needs to evolve at least every 5 years.
Microsoft is a great example that started with command-line Basic,
evolved to Windows, Office, Internet browsers and now lately tablets
in a continued effort to connect developers with paying computer
users. Had Microsoft stayed with Basic, it would have become
irrelevant today. So, one threat that could make users leave a market
over time is evolved technology along the lines of
cheaper-better-faster as perceived by the users. Users come to your
market to satisfy a need, why it is important to early-on detect
users being deflected to some upcoming competing market.
How Markets Evaporate
The value for users is illustrated by how Facebook disrupted MySpace. It became apparent that there was greater user value in communicating with other users that exposed their true identity, why Facebook became the more valuable option to users. Facebook also maintained a very high rate of innovation, where the few things that proved to work amounted to an additional value MySpace simply did not offer, one of which was evolving from a social network into a two-sided market.
There are plenty of examples how a two-sided market can kill a supplier's business overnight. The market itself, however, tends to gradually go away simply because its value consists of being accessed by many independent users, each with their own decision making. Maintaining customer control and managing your suppliers practically guarantees your further existence. Sudden disruption is only likely by government intervention or catastrophic event to facilities.