The 21st century financial market is in many ways similar
to the medieval European markets of the past. It is a place
where buyers and sellers come together to trade goods, information
and, of course – to get deals. Today, like in the past,
most markets are still in nature very much one-sided. You
want shoes; you go to a shoe store. Flowers; you typically
go to a florist. You buy your car at your local dealership.
It’s a clear exchange. Yet what happens when there
are more players in the market, and each has their own interests
to be served?
Multi-sided markets are certainly not a new phenomenon.
Yet it has only been within the last few years that economists
have begun to view these markets as entities within their
own right, unique in the way they unite two or more markets
that seemingly have nothing to do with each other into one
platform.
What separates a multi-sided market from its traditional
counterpart is that it serves two or more distinct customer
groups. The service benefits each group by connecting them
to each other, and economic value is created out of the
exchange.
“The idea is to always enlarge the platform ecosystem
by adding new sides that might be valuable to the existing
sides and therefore create positive synergies,” Andrei
Hagiu told HBS Working Knowledge in a recent interview. Haigu
is a Principal at management consultant firm Market Platform
Dynamics and Assistant Professor at Harvard Business School.
Dating services are an often-cited example of a multi-sided
market, as are financial exchanges, real estate listings,
staffing agencies, computer operating systems (application
developers and users), videogame consoles (game developers
and players), shopping malls (retailers and consumers), digital
media platforms (content providers and users), and many others.
Certain categories of multi-sided markets are becoming more
numerous because of technological evolution. The Internet,
which has created many multi-sided platforms (like EBay)
is an illustration of this, as are the burgeoning number
of software platforms that run our computers, PDA’s
and mobile phones.
Out of these range of services, three types of multi-sided
markets tend to exist:
1) “Matchmakers,” such
as stock exchanges, real estate agents or staffing agencies,
who bring buyers and
sellers together on a single platform;
2) Advertising services such as newspapers or yellow pages,
which create markets and become intermediaries between readers
and advertisers;
3) And “Demand-coordinators” like
computer operating systems and credit cards, which serve
the interests of two
or more customer groups.
It’s a given that multiple sides to a market introduce
complexities. Yet what is particularly unique within multi-sided
markets is how the value the service has to one customer
is different to the value it has to another. Take a traditional
multi-side market: Tthe dating service. An Osaka-based “love
club” in Japan charges men about $100 to join. But
the value of the club to men depends on whether or not it
has an abundant number of potential partners to date, so
women are
charged
nothing at all to participate.
This is often a common solution applied to the inherent
pricing dilemma of any multi-sided market. One side is subsidized
for the other so that all sides “get on board.” It
is why dating clubs usually only charge men and why credit
card companies make their revenues mainly from merchants
rather than from consumers. A similar exchange occurs in
the media industry, where readers of newspapers and magazines
are charged a minimum to access content, and advertisers
subsidize the costs.
“Coordinating the activities of these distinct customer
groups is complicated, to say the least. If the role of the
platform is to get and keep everyone on board, the more traditional
rules of pricing, the choice of business partners and even
the business model used to guide the business itself becomes
obsolete.” writes Michael J. Reuschel, President of
Unisys Global Communications.
In terms of regulating, it’s hard for regulators to
evaluate behavior when firms in multi-sided markets have
different business models. Newspaper A, for example, may
charge for newsstand sales, while newspaper B may be distributed
for free, earning all of its revenues from advertising.
“When all is said and done, however,” says Reuschel, “Pricing
is what determines success with multi-sided markets.”
To achieve successful pricing strategies, it becomes necessary
to understand the dynamics of the “multi-sides.” By
their very nature, multi-sided markets exist because many
groups of customers use the product or service at the same
time, meaning that each side creates benefits as well as
costs.
To do this, one needs to analyze the interdependence between
all sides – customers, producers and vendors - as well
as the willingness of each side to pay and join the platform.
In North America, Wal-Mart is plying the multi-sided market
by renting shelf space in its stores to suppliers like Coke
and Sony. These supplies are responsible for supplying, displaying,
pricing and advertising their merchandise within their shelf
space at Wal-Mart – and they receive the revenue from
sales to consumers. In this case, Wal-Mart is acting as a
two-sided platform for interaction between producers and
consumers.
Likewise, Apple operates iTunes as a merchant that buys
music rights from publishers and then sells it back to users.
This functions within the traditional one-side market domain,
yet it is easily conceivable how one day, Apple may want
to transform iTunes into a two-sided platform through which
music publishers can sell directly to users at prices they
choose individually.
These are examples of how companies can – and do – follow
the line of creating multi-sided markets. So what are the
business benefits of getting into such a market?
1) It reduces search costs (connecting men and women in
dating services, buyers to sellers etc.);
2) Connects services to larger audiences (this is essentially
the function of advertising platforms);
3) And provides an opportunity for service-providers to
save on shared costs.
All multi-sided markets perform at least one of these three
functions – and many perform more than one. “Indeed,
many multi-sided platforms are “imperialistic” in
nature, in that they have a strong tendency to expand horizontally
(ie. Entering into parallel markets), says Hagiu.
Within the Communications Industry, companies like Unisys
and IBM are looking to integrate content, customers and channels,
doing so on the strong lead of NTT DoCoMo, Japan’s
famous mobile phone operator. DoCoMO ‘s business platform
has exploded from its beginnings as a communications and
mobile internet content provider. By making smart business
choices, DoCoMo now includes mobile payment systems and mobile
television in its services, and is looked to as an example
of how a successful multi-sided market can function.
As Reuschel, President of Unisys Global Communications,
suggests, “Along with what is surely greater challenges,
also go greater rewards.”
It also requires a series of careful steps when planning
to implement a multi-sided framework into an existing business,
and Reuschel offers the following guidelines to consider:
1) Identify the “Platform Communities” – this
means understanding all parties involved in the transaction,
including their incentives and related dependencies.
2) Establishing Pricing Structures
3) Create a profitability roadmap
4) Implement an incentive structure, developing market positioning
and value propositions for each group of customers
5) Experiment and Evolve
Source: ConnectWorld
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