One of the oldest business models in the world is using new technology to trample traditional businesses, drive innovation, and create new and immense sources of value. Matchmakers, the subject of our new book, make it easy for two or more groups of customers, like drivers and riders in the case of Uber, to get together and do business. They operate platforms that make it easy and efficient for participants to connect and exchange value.
Unlike traditional businesses, they don’t buy inputs, make stuff, and sell it. Instead, they recruit participants, and then sell each group of participants access to the other group of participants. The “participants” are the “inputs” that they use to produce the intermediation service they provide.
Today, we’re living in the matchmaker economy. It is a bigger and more pervasive part of our lives than many imagine.
Three of the five most highly valued companies in the world — Apple, Google, and Microsoft — make much of their profits from connecting different groups, like developers and users in the case of Apple. So do seven of the most valuable unicorns — startups worth more than $1 billion in their latest funding round — such as Uber, Airbnb, and Flipkart. And then many other companies that have IPO’d in the last decade, like Visa, which connects cardholders and merchants, and Facebook, which connects friends, advertisers, and developers.
And it’s not just these humongous companies. Westfield Malls operates shopping malls that help retailers and shoppers to get together. Then there are all the ad-supported media that troll for eyeballs so they can sell them to marketers.
In fact, if you think about, as a consumer and a worker, you probably use multiple matchmakers throughout your day, from the operating system on your phone, to an exchange for trading stock, to a dating app for finding a mate.
The firms that make up the gig economy and the sharing economy — the new darlings — are matchmakers too. Gig economy companies connect workers with consumers who need them, such as home care workers with families that need help, while sharing economy ones match up unused capacity, like automobiles, with people who want to rent them.
All matchmakers play by similar rules. But the rules are different than those for traditional firms.
Matchmakers have to solve the hardest problem in business — a critical mass of two or more groups of participants who value the service will sign on only if they can get access to the other groups of participants.
When OpenTable started it had trouble getting restaurants because it had few prospective diners, and had trouble getting prospective diners because it had few restaurants. It took OpenTable almost six years, and tens of millions of dollars of investment, to get enough restaurants and diners in just two cities — San Francisco and Chicago. Most platforms don’t have such patient investors and simply implode during their failed attempts to reach critical mass, like the hundreds of B2B exchanges that died in the early 2000s.
Many successful matchmakers violate the rules of pricing that every beginning econ student learns. They sell their services to one group for less than cost, maybe even giving it away for free, or perhaps providing rewards. Google’s indexing is invaluable to websites but the search giant doesn’t charge any of them for the service. But even physical platforms often do this: Shopping malls don’t charge shoppers, for instance, and sometimes provide free entertainment.
Most significant matchmakers have something that no traditional business has — an elaborate governance system of laws, enforcement, and penalties to keep their participants in line. In 2009 a fifth of Facebook’s employees were “policemen” patrolling the site for naughty stuff (we suspect the proportion is much lower today and the problem much greater). And there’s a Google Jail, at least that’s what its prisoners call it, where websites that game the search algorithm are sent to do time. And Apple hands down death sentences to apps that violate its rules or that it just doesn’t like very much.
These matchmaker businesses are extending their tentacles all through the economy. Platforms are being erected on top of platforms that are being erected on top of platforms. Android, for example, is a platform for users, developers, and handset makers. Uber’s platform for connecting drivers and passengers is built on top of Android (as well as the iPhone). And now Uber is building a platform on top of Uber that connects drivers, restaurants, and people who want a take-out meal.
The matchmaker business model is hardly new. Visa will turn 50 this year, the London Stock Exchange is more than 200 years old, and the Grand Bazaar in Istanbul more than 500. Today, though, matchmakers are turbocharged — powered by the cloud, broadband, microprocessors, software, and other modern technologies. Companies like Uber wouldn’t exist, for example, without the development of mobile broadband, mobile software platforms, and the internet.
These turbocharged platforms, boosted by other turbocharged platforms, are marching around the globe, trampling both traditional businesses and older platforms. No business is safe in the path of this most recent gale of creative destruction.
In Kenya, the M-PESA mobile money platform is leapfrogging traditional banking and payment cards. Around 90% of adults use it to transfer money, and many use it for savings, borrowing, and other services.
Airbnb, which seems to have come out of nowhere, is challenging the global hotel industry. It has 1.5 million rooms, making it larger than Marriott.
Once impregnable platforms, like Microsoft Windows, are in decline. PC sales declined by 10% last year, reflecting the rapid move to mobile app platforms like Apple’s iOS and Google’s Android mobile operating systems and app stores.
Whether you are an investor, an entrepreneur, a worker at a traditional firm, or an established platform, you will need to learn what the oldest business model, newly turbocharged, means for you.
We bring to bear great optimism that the turbocharged matchmakers will power a gale of creative destruction that will sweep across the economy and produce great social value. But our views are tempered with realism that most who try this business model will fail miserably, after burning through mountains of cash. Some of the copycat “Uber for Something” companies will revolutionize industries, but most, like Shuddle, the ride-sharing service for kids, will close down, and become the “Uber for Nothing.”
This digital article is adapted from Matchmakers:
David S. Evans is an economist, business adviser, and entrepreneur. He has done pioneering research into the new economics of multisided platforms. He is the co-author of Matchmakers: The New Economics of Multisided Platforms.
Richard Schmalensee is the Howard W. Johnson Professor of Management and Economics, Emeritus, at the Massachusetts Institute of Technology. He served as the dean of the MIT Sloan School of Management for nine years and as a Member of the President’s Council of Economic Advisers. He is the co-author of Matchmakers: The New Economics of Multisided Platforms.