Why Everyone From Facebook to Google Wants to Be a Marketplace

There is trend in e-commerce towards marketplaces. This trend makes sense: large online retailers like Amazon and Zalando can leverage their relationship with end consumers to open up and widen their businesses by turning on marketplaces on top. In every large e-commerce market a marketplace dominates: USA: Amazon Marketplace, China: Alibaba, Japan: Rakuten.

The enticement of marketplaces is huge: All the benefits of e-commerce (revenue streams!) without the downsides. (inventory, logistics, all those expensive shenanigans)

But marketplaces, like all two-sided markets, need to get the ball rolling somewhere. And this is the hardest part: Starting up a marketplace.

That is why big online retailers can more easily establish marketplaces. They already have one side locked in. (And they already have good working relationships with some on the other side.)

But someone else has access to that side -the end consumers- as well. Social Networks like Facebook, Instagram, Pinterest to a lesser extent, can, in theory, leverage that side as well to build a marketplace.

Right now, ads are the predominant business model for those networks. There are a few problems with this. For one, the ad market is a zero-sum game.

Here is an interesting data point form Bloomberg:

Looking at data since the 1920s, the U.S. advertising industry has always been about 1 percent of U.S. GDP. It’s surprisingly consistent, mostly tracking between 1 percent and 1.4 percent—and averaging 1.29 percent.

Given the valuation and ambitions of companies like Facebook or Google this seems like not that much. Where will be the growth potential for those giants?

Albert Wenger, a partner at VC firm Union Square Ventures (investor in, among other things, Etsy, Twitter, etc.):

In 2011 I gave a talk at conference that The Media Kitchen had organized about the impact of mobile on marketing. While everyone else presenting was talking about how to make mobile ads work, I was openly critical of advertising on mobile platforms altogether arguing that ads were (a) mostly annoying given the small screen size and (b) likely to be replaced by direct commerce. […]

Tencent’s WeChat makes the bulk of its revenues from direct commerce, meaning in-app transactions. The post mentions that Facebook is pushing directly into transactions again. If Facebook pulls that off it will be a real threat to Google which does not have a successful messaging app itself.

Soeren Stamer in a guest post on Venturebeat, which Wenger referenced above, is going into more detail on why Google and Facebook (and others) will move, or at least keep trying to move, into e-commerce:

What if Google and Facebook focused on the wrong monetization strategy from a long-term perspective? What if ads are inferior to transactions? And what if we can watch our future unfolding in China today? […]

There are a growing number of signs that this might be true. One of the most revealing is the rapid evolution of China’s e-commerce market and Tencent’s rise to the top as China’s most valuable tech company.

Tencent’s success point to a business model that goes beyond ads: direct transactions. Instead of mainly selling ad impressions to advertisers while – more often than not – annoying users, Tencent decided to sell virtual goods — and now physical goods — by delivering these commercial transactions directly to consumers on any channel or device. Give people the chance to immediately buy what they want, when they want it. If you can see it, you can buy it: right here, right now on your mobile device.

​E-commerce represents growth potential for these companies that advertising increasingly does not anymore. (Since Google and Facebook take large chunks of online advertising off the table, while increasing their shares constantly, it has become rather obvious that smaller social networks like Twitter or Pinterest won’t be able to survice on ads alone. The scale effects in online ads are that massive.)

But there is more, especially for Google. Amazon is continously taking shopping searches away from Google, directly eating into the search company’s business.

Venturebeat:

Even in the U.S., Google is confronted with signs of trouble. Google is no longer the #1 search engine for product searches. That title now goes to Amazon. And Amazon is pulling further ahead. In 2016, 55 percent (up from 44 percent in 2015) of consumers use Amazon to search for products, while only 28 percent (down from 34 percent) use Google. This creates significant long-term problems for Google because these are the best searches to monetize.

They may fail (I can’t count how many times Google has failed in e-commerce) but they will keep trying.

With this context in mind, look at how Facebook Marketplace is taking over the (very prominently placed) Messenger spot in the main Facebook app.

TechCrunch from October of this year:

450 million people already visit “buy and sell” Groups on Facebook each month, and now the company is launching a whole tab in its app dedicated to peer-to-peer shopping.

Facebook Marketplace lets you browse a relevancy-sorted feed of things to buy from people who live nearby, and quickly list your own stuff for sale. Integration with Facebook Messenger lets you haggle or arrange a meet-up, and you know more about who you’re dealing with than on anonymous sites like Craigslist thanks to Facebook’s profiles.

Marketplace is launching today in the US, UK, Australia, and New Zealand on mobile, but could roll out globally and on the web if it’s popular. There’s an unfortunate lack of a two-way rating system which helps discourage scamming and bad behavior. There’s also no native checkout option for transactions beyond ad-hoc payment through Messenger, which is annoying but promotes in-person exchanges instead of fraud-laden shipping.

Facebook marketplace

Facebook is serious about this. Maybe Facebook will ‘only’ take the p2p segment away from eBay. Maybe Facebook Marketplace will be bigger. Or maybe Facebook will fail again. (If that 450 million number is correct, I doubt the last scenario.)

One thing is for sure: If it won’t work building up the e-commerce business in-house, Facebook seems determined enough to make another big acquisition to jumpstart the social network giant’s efforts in this space.

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