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Business book review: Matchmakers

12 Jul 2016 by Tom Otley
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This fascinating and timely book examines companies of unrivalled power and influence – companies such as Alibaba, Facebook, AirBnB, Uber and Visa – and finds common connection between them as business types, namely platforms, or multisided markets. It sounds technical, but we all know these companies and what they achieve – acting as matchmakers connecting one group of customers with another group of customers.

As the authors David Evans and Richard Schmalensee explain,

“Economists call matchmakers multisided platforms because they provide physical or virtual platforms for multiple groups to get together. Dating sites connect people with potential matches, for example, and ride-sharing apps do the same for drivers and riders. Although matchmakers have been around for millennia, they’re becoming more and more popular–and profitable–due to dramatic advances in technology, and a lot of companies that have managed to crack the code of this business model have become today’s power brokers.”

If you are aiming to launch a business like this, then there are insights to be gained from the case studies in the book, including exposing the “Grab all the eyeballs” fallacy of growing in the wrong way.

Building on the work of Jean-Charles Rochet and Jean Tirole the authors show that when companies provide value by connecting two or more types of customers, then they are a multi-sided platform. If you are aiming to launch a business like this, then there are insights to be gained from the case studies in the book, including exposing the “Grab all the eyeballs” fallacy of growing in the wrong way. In short this is the network effect many will have learned at business school, but misunderstood, since the significance of direct network effects is over-estimated over indirect network effects. Direct is easy to understand: a telephone is useless unless someone else has got one, and the more people who have telephones, the more people there are to call and so the more useful the telephone becomes. Economists call this a direct network effect (or positive direct network externality). It might seem to follow, therefore, that first mover advantage is important with a new business, since if you get enough people signed up before the competition, it’s winner take all. Unfortunately, this then leads to the sort of misguided strategies we saw during the first dot com boom, as companies went after as many customers as possible without realising that as a multi-sided platform, it is serving two or more distinct types of customers. As Rochet and Tirole point with regards to the indirect network – “A network effect is indirect when the value of a matchmaker to one group of customers depends on how many members of a different group participate.”

"A network effect is indirect when the value of a matchmaker to one group of customers depends on how many members of a different group participate.”

This is easily demonstrated with a company such as OpenTable for restaurant bookings. If I am in London and want to book a restaurant, it’s of little interest that 1500 restaurants are on the platform worldwide, but only a dozen in London. In other words it’s not just enough to get lots of participants on both sides – those participants need to be ones with whom each side wants to interact. For a platform like OpenTable, it means to “go narrow / go deep”  – focus on just a few cities, and then add cities incrementally. Obvious with hindsight, but a mistake made by many multisided platform businesses. The same holds true for review sites (Trip Advisor) or car sharing apps (Uber).

  1. The authors are two economists who have spent the last 15 years studying and analysing multisided platforms to discover their principles and the book uses cases studies to focus on six critical issues that multi-sided platforms must address:
  2. The opportunity for a multisided platform ordinarily arises when frictions keep market participants from dealing with each other easily and directly
  3. Multisided platforms have to secure critical mass in order to ignite
  4. Getting the pricing structure right is critical for getting a matchmaker off the ground and for making it profitable in the long run
  5. Multisided platforms are usually situated within broader ecosystems of firms, governments, regulation, and other institutions
  6. Multisided platforms operate physical or virtual places where the participants get together
  7. Matchmakers have to worry about how participants interact with each other.

What’s refreshing in this book is the lack of jargon and the honesty of the authors in explaining their aims. As they say, “This isn’t a gee-wiz , use the [fill in the buzzword] strategy and you’ll make a billion…. We aren’t going to tell you that the match maker strategy… will work for you. It probably won’t”.

Instead they analyse successful businesses, explaining the obstacles they overcame (or have yet to overcome – Apple Pay, for instance – and how entrepreneurs can improve their chances for success. It provides historical context – matchmaking isn’t new – but also explains why it’s come to the forefront of business now (more powerful chips, the internet, the world wide web, broadband communications, programming languages and operating systems and the cloud).

Whether you’re an entrepreneur, an investor, a consumer, or an executive, your future will involve more and more multisided platforms, and “Matchmakers”–rich with stories from platform winners and losers–is the one book you’ll need in order to navigate this appealing but confusing world.

hbr.org

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