Understanding the nuances of Digital Marketplace: Does 100% FDI in that space change anything?

When I hear about Digital Marketplace, I think of eBay, PayPal, Avvo, OpenTable, Yelp, Zillow, oDesk, GrubHub, 1stdibs, Instacart, UShip, Uber or Airbnb. Understanding the digital market place model is important, more so now that 100% FDI is allowed in this space in India. 

None of these players owned any item they helped to sell either between B2B, B2C, C2B, C2C, players or employed / owned any asset directly involved in the transaction. For a service aggregator like Avvo, the lawyers they connected to the clients were not on their payrolls, for Uber, neither the drivers were employed by Uber nor the cars were owned by Uber. Airbnb does not own a single room, while arranging for million rooms all over the world by renting out idle rooms that people own.

This takes us to the question, what value did they add, after all, if they owned nothing, not even the inventory they sold?

The business model of a digital marketplace, which is essentially a digital platform aggregating demand and supply, must be so value enhancing that it provides both sides of the transaction a unique opportunity (even after the premium each side has to pay to the platform), which is currently not available.

If this enhanced value is not fully modelled with a compelling proposition, they would have ended up as Clearing Houses, dying a natural death in no time.

Fortunately, some of these models have provided unique value enhancing opportunity that wasn’t there in the first place; no wonder PayPal market capitalization today is at $48 Billion, eBay is at $28 Billion, while Uber is valued at $60 Billion & Airbnb valued at $25 Billion are strong contenders for the next IPOs.

To understand their uniqueness, one has to understand the debilitating influence of cartelization they helped to disrupt and in the process unlock unique value proposition as is evident in the case of Uber or Airbnb or some of them provided a new business opportunity which wasn’t there in the first place like in the case of eBay.

The success of these models was based on incremental acquisition of customer as well as supplier through aggregation of demand and supply in an organic manner. They succeeded in cases where the transactions were repetitive and are therefore not ‘niche experience’ models. In some the experience is not possible without the platform, like OpenTable gives the reservation availability of restaurants in your locality. The unique opportunity against status quo is seen in the case of Airbnb where the property owner was simply sitting on an idle asset not knowing that it could be of economic value to a customer who could find value in a lower cost than a hotel room.

But one aspect stands out that this market place model works where buyers and sellers are fragmented not concentrated. For example the online sales platform for air tickets did not create any much value as the sellers were not fragmented, while it made great economic sense for on-line hotel bookings where the sellers were fragmented.

Many players initially failed to identify the total size of the market and some made mistakes to expand their markets as well. For example Uber quickly expanded their model from San Francisco to the entire California to the entire U.S. and then to the world in matter of just four years. Technology helped to do this but it needed vision. Same is the case for Airbnb.

The payment flow aspect is the icing on the cake; all these models had cash coming in to the supplier ‘net of the fee’, which is quite different from the added waiting time from invoicing to getting paid. The success of this model came from the smart phones and convergence of payment systems that virtually squeezed the time delay, adding enormous value in the process.

Finally the network effect makes the most potent case for these models. If the model is going to run better if the customer or the supplier size is 10,000 instead of 1000, then this is telling you that with growth the service is getting better and more effective. This is the network effect.

For the digital marketplace to add value through the FDI route, I see the pros and cons as follows. The positives are that at least we have a FDI policy starting with this in the e-commerce space which removes all the interpretation related problems. It will give consumers and suppliers new experiences and far better economies. It gives the Indian manufacturers the added advantage of additional sales coming from the digital platform.

However this would mean that we have the biggies given a free hand to enter the Indian market space and those start-ups vying for space in similar segments with the same models will have tough times ahead.

The fear on prices being too low or too high or competition in the retail sector squeezing out smaller players with the additional flow of organized capital in the digital platforms is still unfounded. As long as the platform brings two sides of the transaction together providing some unique value, the supplier on one side and customer on the other will have better days. It is normal that such disruptive processes will leave some participants not in a good shape and they better adapt to the changed circumstances.

The Government has taken the first step, in the digital market place, which is far less disrupting to the millions of market participants in the total B2B & B2C (& vice versa) space, by the way. It remains to be seen what happens to the rest of the space in the days to come.