Marketplaces and Moats

I’m invested heavily in marketplaces ($AMZN, $ETSY, $FB, $SE, maaaybe $Z), which has led me to think heavily around how marketplaces work.

Marketplaces are relatively simple:

  1. Marketplaces are two sided (buyers and sellers)
  2. Marketplaces connect buyers and sellers
  3. Marketplaces facilitate the transaction
  4. Marketplaces add value for both buyers and sellers
Simple marketplaces were one of the internet’s first disruptions. The first round of marketplaces were all information and ease driven (Amazon, eBay, Expedia, etc…). All of those opportunities have dried up at this point. A new feature was needed to take advantage of new opportunities. In addition to information and ease, trust is the new characteristic in marketplaces. Uber and Airbnb are great examples of how adding trust can create new marketplaces. Airbnb, for instance, would never have worked before trust was commodified. Trusting strangers in your house would never have worked before the peer reviewing system commodified trust.
So, new marketplaces are being created… big deal? I think so… if marketplaces can prove durable. Once you have the marketplace already built and network effects in place, how durable is the marketplace? I think a great example to show this is Craigslist. Craigslist dominated as a marketplace for years, despite essentially doing minimal action. Craigslist was filled with scams, but nobody really could ever challenge them until Facebook Marketplace came along (and did a better job of building trust!) Now, I’m not saying marketplaces have moats, but I am saying that they do have a clear competitive advantage. I do think the marketplaces do need to continue innovating for both buyers and sellers to survive long term. Network effects are not a moat in and of themselves.
I think marketplaces are an amazing business style, but solely being a marketplace isn’t enough to be a great investment. Marketplaces aren’t moats and neither are network effects. That being said, both marketplaces and network effects are profit multipliers! Marketplaces can be highly profitable due to this, but a combination of huge profits plus no moat draws a lot of competition. I like my marketplaces to continue innovating and get “sticky” with customers and vendors. Fulfillment by Amazon is a great example of this. I’ll hold on to marketplaces in the medium term and I’ll hold on to marketplaces that innovate for the long term.
Below are a few extra thoughts on marketplaces:
Facebook is a threat to any and all marketplaces. They have only gone after craigslist so far, but have started to look into online dating. Facebook is the threat to all middle men.
I’d argue that Etsy is an example of trust building as well. People are ordering wedding dresses on Etsy, if that isn’t trust, I don’t know what it is.
I think Zillow is an example of a marketplace in waiting. Zillow has everything set up, but trusting selling a house online is a little far out. Buyers are all over it, they just need to figure out the sellers side.
Universities are essentially marketplaces. As trust is commodified, universities will come under increasing threat.

Author: fatbabyfunds

6 thoughts on “Marketplaces and Moats

Comments are closed.