Strategies for two sided markets

REVIEW OF PAPER HBR PAPER STRATEGY FOR TWO-SIDED MARKETS by EISENMANN ET. AL. ,

PRESENTED BY

Nithin Mahesh Babu Prashantkumar S S Raghavendra K Rakshmi Bhatia Vijay P Sankar

1012033 1012042 1012047 1012048 1012073

SOME KEY TERMS

    

2 Sided Markets, Platforms Subsidy Side: Set of users generally subsided by the platform Money Side: Set of users who pay more than the costs to the platform Cross Side Network Effects, Same Side Network Effects Same Side Network Effects can be negative as well (eg. Sellers may want to be exclusive)

Platforms vs Merchants

Eg. Merchants: Amazon, Walmart; Platforms: eBay Pure platforms leave complete control to sellers.

A condition, a continuum, or a landscape?

No clear division between one-sided and two-sided market models. It s tempting to say that there s a continuum between two types of business:  One-sided merchants, who acquire goods from suppliers (sellers), combine and modify them, and re-sell them to users (buyers). The sellers and buyers don t interact with one another, and the merchant takes on all the inventory risk of buying from the suppliers.
 Two-sided platforms, where the buyers and sellers interact directly, facilitated by the platform in the middle, which offers some kind of needed resource to facilitate the interaction.

Qualifiers

 Whether the parties have a single interaction vs. multiple repeated interactions with the platform and each other  Whether there is a direct sales alternative to the platform  Whether there is competition between parties on one side for the attention of the other  Whether negative pricing is possible to encourage participation (e.g. if the nightclub paid girls to come, would the boys arrive?)

Qualifiers

 Whether the parties have a single interaction vs. multiple repeated interactions with the platform and each other  Whether there is a direct sales alternative to the platform  Whether there is competition between parties on one side for the attention of the other  Whether negative pricing is possible to encourage participation (e.g. if the nightclub paid girls to come, would the boys arrive?): http://www.telco2.net/blog/2008/06/ring_ring_hot_n ews_16th_june_2.html

CHALLENGES: PRICING THE PLATFORM

 The key challenge is which side should be subsidized and by how much? Look at the following factors:      Ability to capture cross-side network effects(Netscape) User Sensitivity to Price (Adobe) User Sensitivity to Quality(Video Games. Charge suppliers) Same Side Network Effects(Negative effects - Exclusivity) User s brand value (Some players need to be specially priced. Eg EA Sports)

CHALLENGES: WINNER TAKES ALL

When is Winner-Take- All Possible?  Multi-Homing is expensive(Windows OS lots of Applications)  Network-Effects are strong and positive  No strong preference for special features (American Express for business users as compared to Visa)

CHALLENGES: WINNER TAKES ALL

What can be done to win?  Cost or differentiation  Pre-Existing Relations  Past Prowess and reputations help(Big Companies)

CHALLENGES: ENVELOPMENT
 Established platforms cannot be easily displaced because of factors like network effects, switching costs and sunk costs in R&D, marketing and infrastructure  Platform envelopment is entry by one platform provider into another s market, combining its own functionality with the target s in a multi-platform bundle that leverages common components and/or shared user relationships

CHALLENGES: ENVELOPMENT

Ex 1. Monster.com existing platform connecting jobseekers and employers. Linkedin a new player initially only a professional networking site adds job listings Ex 2. Microsoft adding save as PDF to Microsoft Word effectively displacing a 300$ application Adobe Writer

CHALLENGES: ENVELOPMENT

What can be done when enveloped?  Change business models (Real Player free to user-> Rhapsody subscription fee from user when Microsoft bundled WMP server free)  Partner with other players (Real Networks partners with mobile operators to provide streaming)  Sue

CHALLENGES: ENVELOPMENT

 There is increase in cases related to anti-trust related to two-sided markets  For eg. Visa charges interchange fee from merchants. This fee is also differential based on the size of the retailer. (Credit Card is two-sided)  There have been a number of cases across countries on this.  Rulings have varied. In some places, interchange fee was reduced.