How Mobile Alters Traditional Network Effects In Marketplaces

Editor’s Note: Semil Shah works on product for Swell, is a TechCrunch columnist, and an investor. He blogs at Haywire, and you can follow him on Twitter at @semil. (A special thanks to Simon Rothman, a partner at Greylock and a noted expert in marketplaces, for his help in framing this post.)

On the web, marketplaces are the stuff of legend. With properties like eBay and Amazon, among many other, an online marketplace harnesses the openness of the web, more efficiently matches supply with demand without too many intermediaries, and leverages network effects to capture economic value during each transaction. A key component for a marketplace to work, however, is liquidity – the comfort in knowing that for each item or request posted, there is a willing buyer at a certain price. Liquidity is what drives the engine of a marketplace, what keeps sellers coming back to list items and what keeps buyers coming back to fulfill their needs, and in order to have it, it requires scale – that lots of people be able to access the marketplace.

Investors love marketplaces for obvious reasons: the power and elegance of network effects. I’ve personally had the opportunity to invest in three so far, and am hoping for more. Yet, even though I’m focused on mobile for work, mobile presents would-be marketplace startups with some thorny issues out of the gate, largely because of fragmentation of users across two dominant mobile platforms (iOS and Android). Early-stage startups often do not have the luxury of time or money to build across mobile platforms at the outset, so any mobile marketplace offering would theoretically be reducing its overall size by about 50%, and this affects liquidity of the marketplace. (There are some startups, such as Threadflip and Tophatter, as examples, which began their marketplaces on the web with an eye to convert to mobile. This can be a controversial approach – using the web to hack mobile distribution – though some, like Rothman, suggest it’s a sound path in order to get mobile marketplaces going given general app store distribution woes and the liquidity issue facing mobile marketplaces.)

Of course, a few mobile-first startups have cleared the liquidity hurdle presented by the fragmentation of users across iOS and Android. For example, companies like Poshmark, which helps people buy and sell clothes directly from users, companies like Uber and Lyft, which use mobile to aggregate demand and efficiently yet indirectly route that demand to providers who can fulfill the requests. Here, we begin to see a pattern and delineation. One, very few companies are both purely mobile and a marketplace where buyers and sellers are directly interacting with each other prior to a transaction. Two, as a result, newer mobile marketplaces have followed the path carved out by Uber, which collects demand via mobile and then routes those requests to a fleet of willing drivers who are free to take or reject rides. Here, Uber gets around the market liquidity issue presented by mobile by doing the hard work of organizing assets and labor offline and then connecting them to a central hub of demand.

This is the new type of marketplace-driven network effect specific to mobile, where demand is generated online (through mobile) and fulfilled offline (driven by services).

Therefore, there’s good reason why we all hear so many “Uber for X” analogies. Startups like GAIN Fitness, HotelTonight, and many others generally take this approach, putting mobile apps in consumers’ hands and offering a promise – tap this button, and with some magic, on the other end someone will present an offer to satisfy your demand. For startups, today’s reality raises specific tactical concerns. Assuming the startup will land on iOS first, the company either needs enough capital or revenue to be able to get to some equilibrium in the marketplace’s first incarnation so that the product can be improved to a point where an Android team can build for that platform. Second, direct marketplaces present sellers with friction points around packaging and shipping or service delivery, while indirect marketplaces, which usually offer some form of an offline service, require liquidity within a location-specific density to work. It only makes sense to make Lyft available to me as a consumer if I live in an area where Lyft operates.

Moving forward, we are already seeing whole new categories of businesses on the “Uber for X” path, and I don’t see that trend stopping any time soon. But, what about pure mobile marketplaces directly connecting buyers and sellers, on a more peer-to-peer level? Sure, offerings like Airbnb and others which began on the web have built a large enough brand to play on mobile, but what about companies like Yardseller, which tried to get into the local listings game through apps, or newer apps like Bondsy, and many others I’m sure are out there – and I’d love to hear about them, so please get in touch.

In economies which are all undergoing big structural changes and facing many uncertainties, the elegance, efficiency, and dispassion of a marketplaces presents systems which can be incredibly resistant to external stresses. Mobile fragmentation presents a thorny challenge to startups, and some have responded by overcoming the liquidity hurdle or by creating a new business model to subvert the problem. All of this matters as mobile phones continue to proliferate, as economics remain under duress, as many people look for new sources of income, and as phones present a new way to segment consumers by willingness to pay and location. It’s unclear if a startup can create a mobile application that puts buyers directly in contact with sellers at true scale, and while some do exist, my belief is for the next few years most of them in the marketplace category will indirectly match consumers with providers, and that’s just fine. It’s more efficient this way, for now. And, hey, I could be wrong. Maybe there’s a new startup launching today with a direct marketplace vision…and I can’t wait to see it in the wild.

Photo Credit: Paul Sableman / Creative Commons Flickr