Some industries tend to have winner-take-all dynamics more than others. These dynamics share the characteristics of “defensibility”. When a product is properly defensible, only a herculean effort or an enormous sum of money can shake it from its position of dominance, protecting it from start-ups and big companies alike. But not all defensible products have monopolistic tendencies, which is the “winner-take-all” dynamic I hope to explore a bit here. Let’s look at internet companies, in particular.
Content businesses are the furthest from winner-take-all. For a content business to succeed, it must produce unique, compelling content consistently, because page views are like snowflakes in the fall: they melt as soon as they land. The fastest growing content businesses, and the most successful, are content farms, often deploying thousands of free or unpaid writers to produce on their behalf. It doesn’t scale well.
Products are better, in this regard, because a well-designed product that captures magic in a user experience can lock a user into habitual behavior, and at scale that starts to look monopolistic, sure. But products are easily copied, and even if you have a strong brand, like Kleenex or Q-tip, you aren’t protected against competition. Technical innovation is a good to stay ahead of the market in this category, but innovation is fairly evenly distributed, and not zero sum. Better marketing is a great way to distinguish yourself, but its mad expensive, and an art not a science.
Social products, or networks, are even better! Here, the experience is not only in the product itself, but the fact that you are using this product with others. In these cases, your experience is not only tied to the design of the product, but also to the community that has gathered around the product. As networks become more dense, they become more interesting, and “network effects” describe the process whereby they become increasingly difficult to unseat. But Dunbar’s number is a real phenomenon, and some networks break at scale, thereby making them the best thus far, but still not the most defensible to the point of being monopolistic.
Enter Marketplaces. A marketplace is a network where you are transacting! On a marketplace, it is not only the value of the other people using it that adds to the experience, but the fact that the people may have things you need. Marketplaces start to look like winner-take-all when they reach liquidity. Reaching liquidity in a marketplace means reaching the point where an average customer finds what they want in the marketplace most of the time, *but not all of the time*, and yet still comes back. If they still come back, you’ve locked them in profoundly. It’s extremely hard to change their behavior once you’ve done that. I still shop a bit for on-demand ride-sharing, but it looks like 9 rides Lyft, 1 ride anything else. I still shop when looking for a car on carsharing platforms, but I’m doing so less as the industry is consolidating. AirBnb seems to be there. I don’t even go to hotels anymore, once I’ve decided I want to use AirBnb for travael. Thanks to experts like Simon Rothman of Greylock and Jeff Jordan of Andreessen Horowitz, every marketplace founder today understands that if they reach liquidity they win, but until they do, they lose.
The debate seems to be settled that vertical marketplaces tend to work better than horizontal marketplaces, because they allow the platforms to focus on user experiences that are optimized for the specific type of product transacting, allow infrastructure to reduce the friction (in insurance, trust and safety, and payments), and because they focus customer demand, which is helpful for acquisition. But eBay is horizontal. Craigslist is horizontal. They are the most important marketplaces in the history of the web, with no signs of slowing. While it may be easier to get to liquidity as a marketplace by staying vertical, perhaps once you reach liquidity, you can be horizontal? Does that mean AirBnB becomes Air? Food for thought.