Matchmakers: The New Economics of Multi-Sided Platforms by David Evans and Richard Schmalensee

Summary
  1. Matchmakers create and release value by connecting different groups and reducing transactional and other friction costs. Matchmakers are also known as multi-sided platforms and are becoming increasingly popular and profitable due to advances in technology
Key Takeaways
  1. Matchmakers operate under a different set of economic rules as their raw materials aren’t commodities but the different groups they bring together and the access they give to other groups
  2. OpenTable pursued a faulty strategy early on by getting a handful of restaurants in many cities. They soon shifted to a more critical mass strategy by focusing on getting as many restaurants as possible in four cities. This soon fueled the flywheel for both restaurants and customers. Charge restaurants a monthly fee, a cut of each reservation, make it free for diners and even incentivize with small rewards. This free usage for diners is strange according to traditional rules of economics but works because this solves the chicken and the egg problem – restaurants will be compelled to join if there are enough diners on the platform. The new business model takes into account that demand from producers and consumers are interdependent.
  3. The economic key lies in attracting at least two or more different types of customers and facilitating valuable interactions. This business model has existed for centuries but was only recently noticed – night clubs facilitate interactions between men and women via a physical space, music and lighting; shopping malls connect shoppers and retailers. A tell tale sign is if something seems too good to be true for one side of the market is when a great service is free – the business is monetizing your attention, data or something else so you can access their content or other customers/producers
  4. The great network effects mistake was that it assumed multi sided platforms followed the same rules as one sided network effect companies where there was only one type of customer when in fact there are many. Multi sided platforms have indirect network effects where an additional diner benefits restaurants rather than other diners. Build share first and fast doesn’t apply as much to multi sided platforms and in fact most of the times the first movers die
  5. The same person can play different roles at different times like when someone uploads a video to YouTube and then watches videos
  6. Important to recognize that indirect network effects also work negatively and therefore dominance can dissolve relatively quickly. Important to not only have a lot of customers on both sides but also the right customers whom the other side wants to interact with (a lot of restaurants and also the right restaurants)
  7. Multi sided platforms also can charge below cost where traditional businesses can’t because must balance interests of all sides and demand for each group depends on the demand from the other side. It may or not make sense to subsidize one side like OpenTable does with diners. It often does if the platform removes so much friction that one side is willing to pay more to get the other side on board
  8. Matchmakers have taken off recently because the cost of connecting customers has decreased significantly and the reach is larger than ever. This trend will only continue meaning matchmakers will likely play an increasingly important role
  9. YouTube gained critical mass by encouraging uploads which encouraged views which encouraged further uploads. It took them only a little over a year to have more than 100m videos and people spent more time on their site than any other. They made it free for both publishers and viewers with the hope that if they did reach critical mass, they could begin charging advertisers
  10. Platforms have to take into account the relative pricing on all sides of the platform, how much to charge and how much to earn on each side relative to the other side. One side tends to be subsidized and figuring out the price structure is crucial. They can often make more overall profit by actually losing money on one side. Price sensitivity, whether to charge access or usage fees or both are important to consider. Charge those who are least price sensitive
  11. Key questions
    1. What’s the friction, how big is it and who benefits from solving it?
    2. Does the platform reduce this friction, balance the interests of all sides and do it better than other entrants?
    3. How hard is the admission problem and does the entrepreneur have a good plan for achieving critical mass?
    4. Are the prices for admission and growth high enough for the platform to make money?
    5. How is the matchmaker going to work with others in the broader ecosystem, does it face related risks and has it dealt with it?
    6. Is the entrepreneur ready to shift the design and admission quickly to respond to market reactions?
    7. Who’s participating in the platform and how does the platform create value for the users
    8. How is the platform designed to promote interactions among participants?
    9. How does the platform use prices to encourage participation? Does it have rules and standards? Is anyone subsidized? How do these affect the ability of the platform to create value?
    10. How did or will it solve the chicken and egg problem?
  12. New, turbo charged matchmakers
    1. Matchmakers have been around for hundreds if not thousands of years
    2. A lot of what the new market darlings do is old but use technology to improve in things matchmakers have done in prior years
    3. What is pioneering is that modern technologies have turbocharged the multi sided platform model
    4. History of matchmakers suggests that today’s sharing economy matchmakers will get disrupted at some point
    5. Turbocharged matchmakers will transform industries. Will change it over decades but in dense, clustered periods of time
What I got out of it
  1. The rationale behind who to subsidize and who to charge and how that can help unlock and create even more supply and demand. Turning linear pipelines into platforms means that people who used to be only consumers can now be consumers and producers (people can stay in an Airbnb and also rent out their own apartment – consumer and producer)