How Revolut is using network effects to reach profitability

8

October

2021

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The rapid rise of UK-based fintech Revolut is well-documented. Founded in 2015, the company already has over 15 million users, with its services available in all EEA countries, Australia, Japan, Singapore, Switzerland and the United States (Revolut, 2021a). Revolut’s initial value proposition was centered around two key pillars: its fully digital and lightning-quick onboarding and services, enabled by the customer-friendly mobile application, and the ability to instantly exchange currencies at very advantageous rates using the application’s ‘multi-currency wallet’ (Crow and Megaw, 2020).

However, since the company’s launch, its ability to reach profitability has been considered questionable (Detrixhe, 2019). This was given by the intensity of the competition, coming from similar players (e.g., Monzo, Monese) and from incumbent banks accelerating their processes of digital transformation, and by the low-margins sources of revenue characterizing the initial iterations of Revolut’s product. While registering strong user base and revenue growth, Revolut’s losses continued to mount:

Sources: Curry, D. (2021), Revolut, Business Insider

Over the past 12 months, though, the fintech’s ‘weapon’ for becoming profitable and winning in the market became apparent: network effects. Network effects, or externalities, can be defined as the change occurring in the value of a product or service due to the increase in the number of consumers using it in a shared way (Eisenmann, Parker and Van Alstyne, 2006). They can be either positive (i.e., the value of the product/ service increasing with the number of users) or negative and their influence can be felt on the ‘same-side’ (i.e., the value of the product/ service changes for one group of users when the number of users within that group is changing) or ‘cross-side’ (i.e., the value of the product/ service changes for one group of users when the number of users of a parallel group employing the product/ service is changing).

In Revolut’s case, positive same-side network effects were at the core of their spectacular user base growth. More specifically, as the number of users rose, the value of Revolut’s offering increased for all customers due to the ability to conduct instant, fee-less transactions with more and more people, using a growing number of currencies. This was further enhanced by the implementation of attractive referral schemes, with €5-10 rewards available for existing customers for each new user brought to the platform (Revolut, 2021b). As the user base gained critical mass, the company was able to start segmenting their customers and implement versioning, offering different packages of extra services (e.g., metal physical cards, access to airport lounges throughout the world, etc.) on top of their free offerings for various monthly subscription fees.

While the subscription plans quickly became a key revenue source, accounting for ~30% of Revolut’s income in 2020 (Woodford, 2021), it seems that leveraging same-side network effects was just the first step in the company’s path to profitability. In July 2021, Revolut announced the rollout of the ‘Revolut Stays’ service for its UK users, effectively entering the online travel market (Blew, 2021). Revolut customers can now book holidays all over the world at accommodation providers integrated in the application, even receiving 10% cashback on their booking costs if they are subscribed to one of the more expensive paid plans. The implications of this move are significant, as it signals the company’s likely strategy going forward: creating positive cross-side network effects to generate new and more profitable revenue sources, on the path to potentially becoming a ‘super-app’ such as WeChat in the Chinese market.

In this specific case, Revolut comes with a highly attractive value proposition for accommodation providers, namely a customer base already larger than 15 million. To put it into context, Expedia, the 2nd largest player in Europe has ~20 million customers, with a market share of 13% (Statista, 2021). As the number of users will grow further, more and more accommodation providers will want to be part of Revolut Stays, in order to get access to them. And as the offering on Revolut Stays becomes more diversified, the number of Revolut users itself will be further boosted by travelers looking for the best options available. This ‘virtuous circle’ is replicable with other segments of the travel industry, such as flights booking, car renting and insurance, with Revolut indeed announcing it plans to start offering these services as well in the near future (Browne, 2021).

From hereon, the opportunities become endless: if one can conduct all banking operations and fulfil their leisure travel needs from one application, at the highest possible convenience, why not also order a ride from it while on holiday? Or find a restaurant, book a place in advance and confirm it with a down payment? Or even use it to chat with the new friends made during the holiday? As WeChat’s model has proven in China, the significant impact of the network effects and the convenience factor can make it possible for just one application to go to the status of ‘super-app’, allowing users to conduct most of their day-to-day activities within no more than 5 screens, while reaching record levels of profitability (BBC, 2018).

Whether replicating a similarly far-reaching model is possible in markets such as Europe or the US, where competition in all segments is much stiffer, remains doubtful. However, Revolut’s continually growing user base will certainly represent a more and more attractive proposition for players across multiple industries, allowing it to unlock new sources of positive cross-side network effects. Over time, these are likely to turn Revolut into a profitable business and make it one of the major players in today’s growing platform economy.

References

BBC, 2018. WeChat’s owner Tencent sees profits soar by more than 60%. BBC News. Available at: https://www.bbc.com/news/business-44149371 (Accessed: October 8, 2021)

Blew, G. (2021). There’s a new way to book your perfect stay. Revolut Blog. Available at: https://blog.revolut.com/say-hello-to-stays/ (Accessed: October 8, 2021)

Browne, R. (2021). Revolut, Europe’s $33 billion fintech giant, launches a travel booking feature. CNBC. Available at: https://www.cnbc.com/2021/07/20/revolut-launches-travel-booking-feature-stays.html (Accessed: October 8, 2021)

Crow, D. and Megaw, N. (2020). Revolut is the most hyped fintech in Europe. Can it grow up? FT Magazine. Available at: https://www.ft.com/content/7fa2a8ea-8e66-11ea-a8ec-961a33ba80aa (Accessed: October 8, 2021)

Curry, D. (2021). Revolut Revenue and Usage Statistics. Business of Apps. Available at: https://www.businessofapps.com/data/revolut-statistics/ (Accessed: October 8, 2021)

Detrixhe, J. (2019). Digital banks are racking up users, but will they ever make money? Quartz. Available at: https://qz.com/1679197/when-will-digital-banks-like-n26-and-revolut-start-making-money/ (Accessed: October 8, 2021)

Eisenmann, T., Parker, G. and Van Alstyne, M. (2006). “Strategies for Two-Sided Markets”. Harvard Business Review, 84(10). Available at: https://hbr.org/2006/10/strategies-for-two-sided-markets (Accessed: October 8, 2021)

Revolut, 2021a. What countries are supported. Revolut. Available at: https://www.revolut.com/en-BE/help/profile-plan/verifying-identity/what-countries-are-supported (Accessed: October 8, 2021)

Revolut, 2021b. Referral campaigns. Revolut. Available at: https://www.revolut.com/en-NL/help/more/2021-referrals-campaign (Accessed: October 8, 2021)

Statista, 2021. Number of users in the Online Travel Booking market in Europe* from 2017 to 2023. Statista. Available at: https://www.statista.com/forecasts/891338/number-of-users-in-the-online-travel-booking-market-in-europe (Accessed: October 8, 2021)

Woodford, I. (2021). Losses at Revolut double to £207m as revenue growth slows. Sifted. Available at: https://sifted.eu/articles/revolut-losses-results-2020/ (Accessed: October 8, 2021)

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Platform Competition: When Winner-Take-All turns into Winner-Take-Some

6

October

2020

No ratings yet. When organizations enter in a platform competition, the most dominant strategy to use is the “Get-Big-Fast” (GBF-) strategy (Oliva et al., 2003). If the strategy succeeds in its effect to take on the competition, platforms often end up having to defend their market share from envelopment attacks. The goal is to reach such a market dominance that a winner-take-all result will be obtained. However, GBF-strategies are very costly and because technological developments enter the markets more and more rapidly, there is little time for management to consider alternative effective strategies themselves. But when the platforms grow and platform competition evolves through envelopments would it not be strange to expect that platform competition will always end in a winner-take-all result?  

 

“The more people searched, the more data they gave Google to make its index better, smarter, faster, and, eventually, more personal. In short: as Google got bigger, it got better, which made it bigger still. Google is a winner that has taken it all.” – Om Malik, founder of GigaOm

 

Driver of winner-take-all outcomes

We speak of a winner-take-all outcome when a market demonstrates positive network effects (van Alstyne et al., 2016), a technology or firm (or platform for that matter) that somehow gets ahead, increases its market share and corners the market, thereby driving out the firms or technology that lag behind who lose their market share. 

In particular, are the indirect network effects considered to be the most important driver. These indirect network effects can also be considered as having a ‘focality advantage’ where a low-quality platform with strong indirect network effects or ‘local bias’ are still able to win the market or let the market tip when the consumer believes the network size or -intensity is more important. Therefore, consumer beliefs could shape the platform competition outcome in winner-take-all. 

“In some industries, digitalization and globalization have created a winner-take-all game in which the company that wins the game accrues almost all the pay-off. How? By attaining either a scale or a network advantage.”– Dan Neiweem, co-founder and principal at Avionos

 

Winner-take-some outcome

However, there is a considerate amount of literature that challenge the general winner-take-all outcome in platform competition. There are four ways in which a winner-take-all outcome is not obtained in platform competition: 

First, winner-take-all results are not obtained when multihoming is available on both sides. This happens mostly through a combination of indirect network effects and the development of low-cost conversion technologies that enable more multihoming (Iansiti and Lakhani, 2018).

Second, when platform business model complexity is low, then a winner-take-all result will not be obtained because the openness of its architecture is easily adapted and perfected by competitors (Zhao et al., 2019).

Third, it could also happen that  multiple platforms enter the platform competition early in a platform life-cycle. In that case there is a higher chance that they will coexist considered they have the same network and business opportunities. Thus a winner-take-all result not to be obtained.

Finally, platform path dependency can determine whether or not a winner-take-all result can be obtained. This means that if a platform has a successful history in the market, it is more likely that a winner-take-all result will be obtained, and if less successful, this likelihood is reduced. Therefore when the platform has some downfalls in it’s market-performance, it could indicate negative spiral downwards (Schilling, 2002).

 

References: 

– van Alstyne, M. W., Parker, G. G., & Choudary, S. P. (2016). Pipelines, Platforms, and the New Rules of Strategy. Harvard Business Review. https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy

– Iansiti, M., & Lakhani, K. R. (2018). Managing Our Hub Economy. Harvard Business Review. https://hbr.org/2017/09/managing-our-hub-economy

– Malik, O. (2017, June 19). In Silicon Valley Now, It’s Almost Always Winner Takes All. The New Yorker. https://www.newyorker.com/tech/annals-of-technology/in-silicon-valley-now-its-almost-always-winner-takes-all

– Mourdoukoutas, P. (2019, February 16). How To Compete In A Winner-Takes-All Digital Global Economy. Forbes. https://www.forbes.com/sites/panosmourdoukoutas/2019/02/16/how-to-compete-in-a-winner-takes-all-digital-global-economy/#25420386c22d

– Oliva, R., Sterman, J. D., & Giese, M. (2003). Limits to growth in the new economy: exploring the ‘get big fast’ strategy in e-commerce. System Dynamics Review, 19(2), 83–117. https://doi.org/10.1002/sdr.271

– Schilling, M. A. (2002). Technology Success and Failure in Winner-Take-All Markets: The Impact of Learning Orientation, Timing, and Network Externalities. Academy of Management Journal, 45(2), 387–398. https://doi.org/10.5465/3069353

– Zhao, Y., von Delft, S., Morgan-Thomas, A., & Buck, T. (2019). The evolution of platform business models: Exploring competitive battles in the world of platforms. Long Range Planning, 101892. https://doi.org/10.1016/j.lrp.2019.101892

 

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Happy birthday, Instagram!

6

October

2018

No ratings yet. Happy birthday, Instagram! Today, it is Instagram’s eighth birthday. In the past eight years, many has changed about the app. It has transformed itself to become one of the biggest, most popular social media platforms in the world. What has made the app so significantly big?

On the 6thof October 2010, Instagram was launched, solely being available in the App Store yet. One and a half year later, it became available for Android as well. Its initial purpose was allowing users to share pictures with family and friends, and its competitive edge was the ability to professionally adjust photos by giving filters and frames. (Otto, 2018)

Ever since, Instagram has grown significantly, due to its network effects. Being a platform, Instagram gained great value by its community, i.e. the users of the app. The positive same-sided network effects came at play when an increased number of users attracted an ever-growing number of users. When one did not have Instagram yet, he or she would become very curious what kind of pictures, and later on also videos, users of Instagram shared. Soon, they would start using the app as well.

Currently, Instagram has become a platform where ‘normal’ people can become famous and a role model for many; they become so-called ‘influencers’ and have numerous followers. However, this had led to much critique as well: the lives of influencers seem ever-perfect. They seem to travel nonstop, are always very good-looking, are extremely fashionable, and experience many cool events. One may wonder how ‘true’ this depiction of reality is. Despite their many followers, many users of Instagram may also become annoyed because of the ‘overload’ of Instagram influencers. This, in turn, may lead to negative same-sided network effects: users may stop using the app, because they feel annoyed by those influencers.

What do you think? May the overload of Instagram influencers lead to negative same-sided network effects? Or do you believe the option to ‘unfollow’ those influencers will diminish the negative same-sided network effects sufficiently?

References:

Otto, R., 2018. Acht jaar Instagram: ‘Normale mensen kunnen rolmodellen worden. Nu.nl. Retrieved from: https://www.nu.nl/apps/5498408/acht-jaar-instagram-normale-mensen-kunnen-rolmodellen-worden.html

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From unicorns to…?

7

October

2017

5/5 (4) Unfortunately, this blog post is not about those cute, legendary creatures called unicorns. Instead, I refer to start-up companies, those valued at over 1$ billion. As this article was not part of the required readings of session four, I will summarize it before criticizing.

The term ‘unicorn’ is a little bit outdated, as Aileen Lee came up with it in 2013. As only 39 start-ups (valued at over 1 billion dollar) existed back then, it was a perfect fitting term. In 2015, already 80 of these firms existed, for example snapchat, which had a $19 billion valuation. Reasons for this growth goes from big corporate buys to technological advances to the growing costs and bother of going public (Howe, 2015). Will Gen-X business leaders (1965-1984) be able to avoid the pitfalls that the Boomers (20 years before Gen-X) had faced, leading to the dot-com crash?

Unicorns have become normal, and a new measure of exclusivity is the “decacorn”, which is a start-up worth at over $10 billion. In 2015, already eight of them existed, such as Uber and Airbnb. On the supply end, massive investor spending has led to this growth, such as Venture Capitalists (VCs) and investment firms. Their main reason is the larger return, as the start-ups are riskier. On the other end, big tech moneys simply have more money than in the past, which they hope to spend on big buyouts of start-ups. These cash reserves are thanked to slow-growth, low-interest rate environments, together with small enthusiasm (by Facebook and Apple for example) for capex investing.

Another advantage for the tech start-ups nowadays is the ability to use the massive economies of scale of social media to reach millions, while only paying a handful of salaries and avoiding costly overhead. Moreover, plenty of unicorns choose to stay private, because of though regulations for newly-public companies. Recent development has also made it simpler and more cost-effective to stay private.

The term unicorn better describes the current macroeconomic landscape, where there is a zero-interest rate without the threat of recession. Some argue that those start-ups may boom in value, but entrepreneurship in the rest of the economy is declining, together with not virtually adding anything to the workforce. As many start-ups are burning through their cash, a threat arises when the market cools, and only the most efficient, agile and revolutionary companies will be able to survive. This will be a repetition of the dot-com crash.

I assume that I belong to the optimists for this scenario, as the network effects build by those ‘unicorns’, or even ‘decacorns’, have such an advantage compared to those companies during the dot-com bubble. However, the companies need to understand the challenges they are facing, such as pricing, winner-take-all and envelopment (Eisenmann et al., 2006).

Sources:

Eisenmann, T., Parker, G., and Van Alstyne, M.W. (2006). Strategies for Two-Sided Markets. Harvard Business Review 84(10) 92-101.

Howe, N. (2015). What’s Feeding The Growth Of The Billion-Dollar ‘Unicorn’ Startups? March 18, 2015. Forbes.com. Available at: http://www.forbes.com/sites/neilhowe/2015/03/18/whats-feeding- the-growth-of-the-billion-dollar-unicorn-startups/#3c6a108b6c96.

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The Difficulties of Dominating the Dark Net Black Markets

3

October

2017

5/5 (2) “Not since the days of the now legendary Silk Road has a single site dominated the dark web’s black market as completely, and for as long as the online bazaar Alphabay. With the news that the site has been torn down by a law enforcement raid —and one of its leaders found dead in a Thai prison— the dark web drug trade has fallen into a temporary state of chaos.” (Wired, 14th July 2017)

In July 2017 the US and Dutch authorities shut down the two major illegal marketplaces Alphabay and Hansa with the aim to crack down the sales of drugs, weapons and malware. However, the shutdown was accompanied by increased traffic at other black markets (BBC, 2017).

This blog looks at the platform properties of a black market on the dark net and asks the question whether another black market can dominate and attain a winner takes all scenario? In this blog the term black market is used to refer to the markets which mainly trade in illegal products and are hosted on the dark net.

Platform location and product nature

Alphabay and eBay both provide a platform which connects buyers and sellers. The main difference is that one sells illegal products and the other does not. For that reason eBay can have its platform on the searchable web, the Surface Web, while Alphabay operates from the dark net. The dark net (also called dark web) which is intentionally hidden and inaccessible through standard web browsers (Sing, 2014).
The majority (70%) of illegal products sold are cannabis-, ecstasy- and cocaine-related products. There are black markets which are specialised in a certain product, and markets which offer a wide variety of products. Specialisation can for example occur with respect to drugs, weapons or counterfeits (Soska & Christin, 2015). This indicates that niche specialisation seems possible and worthwhile, which decreases the odds for a winner takes all game.

Risk mitigation function

The black market does not sell any products itself, but has as main function to manage risks for its users while they participate in transactions (Soska & Christin, 2015). Risk is mitigated in four ways:

  1. Abolishing physical interactions to eliminate physical violence during transactions
  2. Providing superior anonymity guarantees compared to other modes of transactions
  3. Holding payments (often in bitcoins) in an account until for example the receiving party confirms that his order has arrived. This idea is referred to as escrow and some black markets work with a more advanced multi signature escrow. Financial risks are also mitigated by allowing its user to hedge against bitcoin value fluctuations.
  4. Requiring feedback for the quality of goods received

Power of a feedback system

The fourth method, a feedback system, ensures that buyers and sellers behave in an honest way. In case of a scam on the black market there is no where to turn to. There are no contracts, no physical interactions, and no government who will help you. Hardy & Norgaard (2016) write that reputation based on a feedback system is a strong self-enforcing mechanism to sustain transactions on black markets. Furthermore, the existence of feedback systems make it possible for researchers to investigate the size of sales on black markets.

Positive network effects

In order to thrive as black market you want to increase the number of buyers an sellers to achieve a higher number of transactions and a better match between buyer and seller. Strong positive network effects are found in a multiyear study on black market transactions. Either marketplaces manage to get initial traction and then rapidly flourish, or they never manage to take off (Soska & Chrstin, 2015). The increase user base enhances the value of the platform for users which stimulates a further increase in users. This effect contributes to a winner takes it all scenario.

Access and long-tail 

Complete open access to the platform comes however with the risk of a drop in quality goods offered and more user misbehaviour (Alstyne et al., 2016). Silk Road allowed its buyers, the subsidised party, to create free accounts. Sellers needed to either bid for an account or pay a fixed fee (Dread Pirate Roberts, 2011). In this way low-quality sellers would be deterred from the platform and it would be costly for sellers to keep recreating accounts after they received negative feedback. At the same time the fee for sellers provided income for the owners of the platform. In addition, the owners profit from a commission on sales.
Although a few big sellers are very successful with respect to sales, the majority of sellers earns little revenue. Soska & Christin (2015) state that the long-tail phenomenon can found in in the seller population.

The end of a black market

Since the rise and fall of Silk Road, multiple black markets came to existence and vanished. There are three main ways, one forced by government and two voluntarily chosen by the administrators, in which these black markets closed:

  1. Take-down: The black market was shut down by government and the bitcoins are confiscated.
  2. Exit-scam: The black market owners ran away with the bitcoins of its users. Sometimes the owners try to blame technological failures for the disappearance of the black market and its bitcoins.
  3. Exit-in-Fear: Some black markets close down and give back bitcoins or freeze when the owners suspect that the governments are close to a take-down.

Network effects and take-down

In 2011, the existence of Silk Road, the most popular black market at that time, became more known on the Surface Web when an article was published on Gawker, a US Blog. Silk Road started to be a topic of discussion. At this time a US Senator requested the FBI to shut down Silk Road. The existence of online market, where thousands of drugs transaction took place per day, was a slap in the face for law enforcement.  The extra attention for Silk Road boosted its traffic even more. (Wired, 2015).
Silk Road was eventually taken down in 2013. Temporarily negative network effects were witnessed for other black markets, when the technology of their sites could not cope well with an overflow of new users which moved away from Silk Road. Since the fall of Silk Road only Alphabay was able to dominate the market for as long as Silk Road did. (Wired, 2017) However, in the summer of 2017, also this black market has been shut down by the government. The probability of getting on the radar for law enforcement increases with the popularity of the market. In addition, the priority for the law enforcement to take you down increases also with the popularity of the market. In this way the upside from network effects come suddenly to an halt when the FBI knocks on your door.

The growth of the black markets ecosystem

Although some black markets have closed down voluntarily or through external force in the past years, the total sales of all the black markets still in existence keeps on growing  (Saska & Christin, 2015). Buyers and sellers quickly move to another existing market or start a new one. Saska & Chrstin (2015) argue therefore that new crackdowns of marketplaces might not help in an effort to reduce online drug trade.
Sellers are often active on multiple black markets, a case of multihoming, in the anticipation that one of them will eventually end. This means that the threat of a close down stimulates multihoming and undermines the ability of a winner take it all scenario in the black markets ecosystem.

How to escape the government?

Before a take-down happens, a game of hide and seek is played between the government and the administrators of the black market. The ability of the administrators to hide themselves, and their access to the marketplace, depends on the technological sophistication of their marketplace and the  human behaviour of the administrators. In theory it could be possible to have superior technology and perfect human behaviour which would allow the administrators and their marketplace to hide forever. This is however a difficult bet since you only know when your security is flawed when someone breaches it.
Another scenario which would improve the sustainability of black markets is when the government accepts the existence of black markets and shifts its resources away from take-down operations. As Saska & Christin (2015) suggest, it might be more worthwhile for the the government to reduce the demand for drugs or focus on the sellers of drugs rather than trying to fight the marketplaces itself. However, so far there are no indications that that the government will take this position.

Conclusion: can a winner takes all scenario materialise?

Positive network effects contribute to the rise of black markets as major players while other black markets remain small. However, buyers have a wide variety of demand for illegal products allowing niche markets to remain. In addition, sellers are present on multiple markets indicating that multihoming is not too costly and hence enforces the existence of multiple black markets. The multihoming behaviour is incentivised by the threat of black market closure. Popularity of a black market, due to network effects, make a black market more likely for government take-down. So far the two most dominant black markets Silk Road and Alphabay have both ended in this way. There are many threats preventing a winner take all scenario and even sustaining a position as major black market seems to be difficult. A potential for more sustainable black markets might arise with new technological developments or a change government strategies.

 

References:

BBC (1 August 2017) “Dark web markets boom after AlphaBay and Hansa busts” http://www.bbc.com/news/technology-40788266

Dread Pirate Roberts (26 June 2011). “New seller accounts”. Silk Road forums., Source copied from references at https://en.wikipedia.org/wiki/Silk_Road_(marketplace)#cite_note-10

Hardy, R. A., & Norgaard, J. R. (2016). Reputation in the Internet black market: an empirical and theoretical analysis of the Deep Web. Journal of Institutional Economics, 12(3), 515-539

Sing (27 March 2014). “Clearing Up Confusion – Deep Web vs. Dark Web” https://brightplanet.com/2014/03/clearing-confusion-deep-web-vs-dark-web/

Soska, K. & Christin, N. (2015). Measuring the Longitudinal Evolution of the Online Anonymous Marketplace Ecosystem. 24th SENIX Security Symposium

Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. (2016). Pipelines, platforms, and the new rules of strategy. Harvard Business Review, 94(4), 54-62

Wired (April 2015) “The Untold Story of Silk Road, Part 1” https://www.wired.com/2015/04/silk-road-1/

Wired (14 July 2017). “The Biggest Dark Web Takedown Yet Sends Black Markets Reeling” https://www.wired.com/story/alphabay-takedown-dark-web-chaos/

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BookStash.nl: Experiences From Platform Design

27

September

2016

5/5 (1) Fitting to this week’s subject of platform mediated networks, I’d like to share some experiences I’ve made building my own platform together with a friend back in Maastricht.
 
Background story
 
During our Bachelor time in Maastricht, a good friend of mine, Oskar, and I early realised that both of us were fascinated by the idea of starting our own project. So we spent some time brainstorming and went on the hunt to spot some good opportunities. It didn’t take us long until we found a problem that was not only bothering us two, but also many of our other friends:
 
Since almost every course at university requires you to buy a book and new books are super expensive, the second-hand book market is booming (I guess that’s the case in almost every student city). Almost all of the second-hand books are sold on Facebook, where buyers and sellers connect and communicate via dedicated Facebook groups (e.g. “Second-hand Book Market Maastricht”). The biggest problem with these groups is, however, that the posts appear chronologically, similar to how your personal timeline works. This means that with an increasing amount of listings being created, things quickly become quite messy. Without a search function, you find yourself scrolling through endless posts until you finally find the book you were looking for. And from a seller perspective, you need to ensure that your post stays on top of the list to be found by other students. At this point it was clear to us that we wanted to change something about this annoying and inefficient part of buying used books via Facebook. Determined to make a change, we soon had to make the frustrating realisation that without any programming knowledge whatsoever, it is hard to impossible to build something on your own.
 
It would take almost until the end of our studies that this situation changed. Coming back from our exchange semesters abroad, we both figured out that there was more than one month left until university would start again. So we decided to move back to Maastricht earlier and learn some programming. After 3 weeks of intense online courses we felt that we were finally able to build the application we envisioned almost 2 years earlier – BookStash was born.
 
Why am I telling you this story and how does it relate to our course content you might ask? According to Eisenmann, Parker & van Alstyne (2006) “[p]roducts and services that bring together groups of users in two-sided networks are [referred to as] platforms”. The web application we’ve built, BookStash, is a good example of such a platform. On the one side there are the sellers of used books and on the other side students who are looking to buy used books. BookStash serves as the intermediary platform that facilitates the transactions of both sides of the equation. Fitting to this week’s subject of platform mediated networks, I’d like to share some thoughts on this topic and discuss two key points taken from the literature.

 

1. Pricing the platform
 
Two-sided networks typically have a “money” and a “subsidy” group of users (Eisenmann, Parker & van Alstyne, 2006) – remember the bar example from the lecture. Ideally, you as the platform provider know which side of your network belongs to which group. Attracting many users on the subsidy side will bring more money-side users to the platform. An increased presence of money-side users, in turn, will drive more subsidy-side users to the platform. Especially for platforms that just launched, this “penguin” problem is particularly challenging though. Why should subsidy-side users sign up when there are few to none money-side users? And why would money-side users pay money when there are almost no customers for them?
 
Let’s have a look at BookStash. Both sides, sellers and buyers, are students, so their willingness to pay for a service is low anyways (i.e. they are both highly price sensitive). Besides the fact that we built BookStash more as a “fun-but-relevant” learning project and not to make money, it was clear that our main goal in the beginning should be to drive users on both sides to the platform. We decided that this is only possible if the service is free for everyone. Maybe when a critical mass of users is reached, we might think about charging a small fee for the sellers of books (the rationale here is that sellers would potentially just sit on their books if they cannot sell them so they are happy to make any money instead of none).
 
Taking BookStash as an example, it might make sense for new platforms to delay monetisation on either side until a certain user base is reached. Only then providers can start thinking about the “money” vs. “subsidy” pricing decisions.
 

Directory of books on sale
Directory of books on sale

 

2. Website registration: Value vs. Privacy
 
Most of today’s websites require users to register to access the key functionalities or content on their site (and so does BookStash). Providing personal information such as an email or home address is a very common part of the sign-up process. Disclosing such information is likely to cause some privacy concerns on the user’s side and might even scare people away from registering at all. This is why we don’t ask users to link their Facebook profile in the registration process but leave is as an optional point in your personal settings once registered. In contrast to the privacy concerns, people also know that without registering, they will not be able to take full advantage of the privileges and benefits of the website in question. Thus, there is a personal conflict between privacy concerns and access to value (Li and Pavlou, 2016).
 
While I certainly agree with everything that is stated in the literature, I’d like to bring up another point regarding the registration discussion. In my opinion you can argue for cases where a mandatory registration on a website actually increases trust and is a sign of quality. Since people have to go through the registration procedure and are willing to provide personal information, they show commitment and an honest intent towards the network they would like to enter. Sure, this argument is somehow weakened by the possibility of creating fake profiles, but I still would prefer to engage with somebody on a marketplace where users have to register with personal information instead of one without this requirement. This is also why sellers of books have to register on the BookStash platform. Interesting side note: Even though you could register on BookStash only indicating your first name, most people use their full name.
 

BookStash User Registration
BookStash User Registration

 
It would be great to hear your thoughts on some of the things I discussed in my post! Also if you have any question about the programming or web app project in general, just shoot me a message or leave a comment. Oh, and don’t forget to check out BookStash 😉

 

PS: The website wasn’t used for quite a while, so don’t be surprised.

 

References

Eisenmann, T., Parker, G., and Van Alstyne, M.W. 2006. Strategies for Two-Sided Markets. Harvard Business Review 84(10) 92-101.

Li, T., and Pavlou, P. 2016. What Drives Users’ Website Registration? The Network Externalities versus Information Privacy Dilemma. (Working Paper).

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Microsoft will pay you to use its new W10 Edge browser

27

September

2016

5/5 (8) It is common knowledge that the competition to win over the market of Internet browser has been fierce in the past, and Google Chrome has conquered the biggest share of the pie starting from June 2012. Several newcomers have unsuccessfully tried to enter this market, which then appeared to be at a stable and mature stage.

Browser mkt share_Aug16

…Are browser wars really over?

 

Microsoft would certainly not agree. With the launch of its new Windows 10 Operating System in July 2015, the tech giant has released the first version of Microsoft Edge: This is a desktop browser which is promoted as faster, more battery-efficient, safer and all-round better than competitors. A distinctive feature of it is the ability to quickly scribble and annotate on webpages and the possibility to enhance searches with the voice assistance Cortana. However, Edge still has a long way to go before conquering the market also because it is currently available only for computers running Windows 10 (differently from competitors who run on multiple editions of rival OSs): its overall market share is 5% (vs 52% of Chrome’s market share), but only 25% of W10 computers are currently using Edge as browser despite it being the initial default option.

 

The stickiness of the browser market is linked to the concept of Network Effects: the bigger is the users’ base, the more will be the developers (providers of content running on or adjusted for a determined browser, or companies willing to spend money to advertise their products on a determined browser), the higher will be the value of the platform. This is a feedback loop that increases the switching costs of the parties, and makes it harder to change the status quo. And this is why Chrome market share has kept on growing.

 

In order to attack this issue, Microsoft has launched a program that allows users to gain financial benefits from using Edge: The purpose is to bring on-board enough users so as to trigger a new feedback loop on its newly-launched browser. This program is called Microsoft Rewards (formerly Bing Rewards) and is currently only available in the USA: People using Microsoft Edge as browser, Bing as default search engine and Windows Store for the apps, will be able to accumulate points. These points will then be traded in for credits or vouchers to vendors such as Amazon, Skype, Starbucks, Xbox, and the advertisement-free version of Outlook.com.

 

Users will be monitored by Microsoft in order to ensure that they are using the Edge browser for as many as 30 hours per month by tracking signs such as mouse movements to make sure that they are not cheating. However, no precise conversion system of points per hour of usage has yet been specified, apart from the statement that every 1$ spent in the Microsoft/Windows Store corresponds to “at least 1 point”.

 

At this point we should question ourselves: seeing as Edge is a technically good product, will the tactic of paying users be able to break the ‘great wall of Chrome’ and gradually increase Microsoft Edge’s users base and market  share in the browser industry?

 

 

REFERENCES:

  1. Microsoft Edge: https://www.microsoft.com/en-us/windows/microsoft-edge#JW7akzYofWQ3oeyE.97. Last visited on 26/9/2016.
  2. Microsoft Rewards: https://www.microsoftstore.com/store/msusa/html/pbPage.Rewards. Last visited on 26/9/2016.
  3. Computer world: Edge’s weak adoption contributes to Microsoft’s declining browser share:  http://www.computerworld.com/article/3029631/web-browsers/edges-weak-adoption-contributes-to-microsofts-declining-browser-share.html . Last visited on 26/9/2016.
  4. Express: Microsoft will now PAY YOU to use its unpopular Windows 10 web browser: http://www.express.co.uk/life-style/science-technology/702570/Windows-10-Microsoft-Edge-Failure-Pay-Rewards. Last visited on 26/9/2016.
  5. NetMarketShare: Market share of desktop browser: http://marketshare.hitslink.com/browser-market-share.aspx?qprid=0&qpcustomd=0&qptimeframe=Q. Last visited on 26/9/2016.
  6. SitePoint: Browser wars trends September 2016: https://www.sitepoint.com/browser-trends-september-2016-browser-wars/. Last visited on 26/9/2016.
  7. Tech Times: Microsoft Will Pay You To Use The Windows 10 Edge Browser: Here Are The Details: http://www.techtimes.com/articles/174361/20160820/microsoft-will-pay-you-to-use-the-windows-10-edge-browser-here-are-the-details.htm. Last visited on 26/9/2016.
  8. The guardian: Microsoft paying to use Edge: https://www.theguardian.com/technology/2016/aug/19/microsoft-windows-10-browser-edge-pay-users-bing. Last visited on 26/9/2016.

 

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The rise of the Platform Economy

27

September

2016

5/5 (1) Technological enterprises and companies that started in the digital age, such as Google, Alibaba, and Amazon have understood the power of digital technologies. However, most of these companies’ disruptive innovations are not services or products, they are in fact the platforms that form the foundation for these products and service. This is called a platform-based business model and it changes the way how companies can do business. It results in a system that does much of the work to grow the company (quickly) by itself.

The three main reasons for the success of these platform-based business models are:

  1. Network effects: This exists when two user groups (in most cases, consumer, and producer) generate network value for each other, resulting in joint benefits that increase demand-side economies of scale. The network effects of these platforms, with increasing connected transactions and users, push value creation.
  2. Distribution power law: Platform business models enable a much larger scale. This is done by allowing third parties to sell products in the long tail, avoiding diminishing returns usually associated with these products. E.g. Amazon is able to offer books very specifically tailored for a niche market that would never be sold in regular book shops.
  3. Asymmetric growth: This is the principle of driving demand for their core market through complementary markets, by subsidizing these, or even offering them for free, to users. An example of this is Adobe offering their PDF readers for free to its users. Because of the resulting increased use of Adobe’s pdf reader, producers are willing to pay more to be able to distribute PDF files.

Accenture’s Technology Vision 2016 names platform economy as one of the key trends to watch. It mentions that every company will, eventually, need a platform strategy. They will need such a strategy not only for the growth of their business, but also to be able to fight off the platform-based competition.

 

Sources:

Technology Trends 2016 – Accenture Technology Vision. Retrieved September 26, 2016, from https://www.accenture.com/us-en/insight-technology-trends-2016

 

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The new way to book live music!

26

September

2016

No ratings yet. Imagine, you are looking for an artist to perform, at your wedding, your office party, to spice up your huis-warming, for in your café or restaurant or for your best friends birthday. Where do you go? We used to have to google artists, call around, use the phone book or use a third party booking agents.. which always charge way to much. And this all is just way too complicated.

Why not make it easier?

Plugify has disrupted the music booking industry in the Netherlands. Plugify was set up to make the search for artists a lot easier. The success of Plugify is already evident, in just one day it reached €200.000 through Crowdfunding and in five weeks it reached it’s goal of € 745.690!

How does it work?

Think of Airbnb and Booking.com, how simple it is to book an apartment or hotel? Plugify is the Airbnb for booking artists! Within 4 simple steps you can book the artists of your dream on the Plugify Platform.  The first step is to find the artists and get a taste of their style. On Plugify there are already more than 380 artists, from DJ’s to pianists to coverbands to quarttets. Moreover, in every price range you can find unique talents. There are multiple filters such as price, length of performance, repertoire and mood and within seconds you can find the artists to your preference! Every artist has to post a video and picture of what there set looks like so the customer can get a taste of what the artist is about. Step 2, Check availability. Within three days the artist will reply and let you know whether they are available. Step 3. Accept the artists offer. The Plugify artists also allows direct and secured payment. The price of the a performance is immediately transparent. So no more envelopes of cash on the evening itself or invoices afterwards. Moreover, once you paid it’s a done deal, so no more costs after the performance such as parking costs or transfer costs. The motto of Plugify is what you see is what you get!

Step 4: Enjoy the music and rate the artists. Once the artists has performed the booker gets a request to review the artist. This only takes 2 to 5 minutes and not only does the artist benefit from this but the Plugify Community as well. Why? Because the better the reviews, the higher the artists are in the ranking. This also serves as an incentive for artists to book through Plugify as the more they play, the more reviews, the higher they get in the rankings and the more they get booked. It’s a vicious cycle and creates high switching costs for artists.

What’s in it for Plugify? Plugify earns 12 % commission from the booking. However, as a further incentive for its artists the commission decreases to solely 8% the more the artists get booked! This way, Plugify promotes the artist to get booked through Plugify and discourages the artist to “go around” Plugify.

But what if the artist needs technique and apparatus and this is not available at the wished location? Plugify has thought of that as well. You can rent the right and appropriate technique on Plugify without a third person and the technique rental company has direct contact with the artist so no more hassle for the customer!

The Plugify platform is a community for both artists and bookers and is a win-win situation. The more artists join the platform, the more bookers will come to the platform and the more artists will be booked.  The value of Plugify is in it’s users. Plugify enjoys scale as it’s competitors aren’t as far along and hesitant in reacting. This increases the bargaining power for Plugify and widens their competitive moat.

Plugify still has a long road ahead of them but they are on the right track. Let the music flow!

 

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