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Managing the Maze of Multisided Markets

Running a platform business? Take a tip from Hiromoto Fukuda’s dating club.

Illustration by Lars Leetaru
Hiromoto Fukuda started a new kind of dating club in Osaka a few years ago. At the Tu-Ba Café, men and women sit on opposite sides of a glass divide. A man who sees a woman he wishes to meet can ask a waiter to carry a “love note” to her. Mr. Fukuda knew he needed to get his pricing right to ensure there would be enough men for the women, and women for the men. So the Tu-Ba Café charges men $100 for membership plus $20 a visit — and lets women in free.

Frank McNamara started a different kind of club in 1950: He invented the credit card. A “member” of the Diners Club could charge meals at restaurants and pay the card company at the end of the month. Like Hiromoto Fukuda, Mr. McNamara recognized that it takes two to tango. Without enough cardholders, merchants wouldn’t participate, and without enough merchants on board, customers wouldn’t bother to obtain a card. Merchants were equivalent to the men in the dating club, and the cardholders were like the women, so Mr. McNamara loaded the charges on the merchants. American Express Company adopted this pricing model a few years later, and made a fortune.

New York City mayor and business information entrepreneur Michael Bloomberg didn’t call the Bloomberg Professional Service a club when it was launched in 1982, but the global data and news powerhouse that this club became rests on insights parallel to those of Hiromoto Fukuda and Frank McNamara. Like other information services, Bloomberg L.P. provides proprietary financial data via an electronic network. Unlike others, however, Bloomberg recognized early on that the system would be most valuable if it linked customers to a vast array of third parties offering services ranging from securities trading to electronic “road shows.” Users pay a monthly fee ($1,300 per terminal for multiple terminals). But to attract the ocean of content that makes the service so popular with financial-services professionals, Bloomberg often doesn’t charge independent content providers much for access to the platform.

Multisided markets (markets that link two or more distinct but interdependent groups of customers) have been around for decades, but they’re proliferating rapidly today as modern information technology creates more opportunities for organizing complex markets. (See Exhibit 1.) Although the “platforms” that businesses create to serve multisided markets differ widely in technology and organizing institutions, all share three features:

  • Each platform serves two or more distinct groups of customers. Examples: men and women, merchants and cardholders, financial-services users and financial-services sellers.
  • The value of the platform to each group of customers increases along with the number of customers in the other interdependent groups. Credit card holders want every store near them to accept their plastic; the more customers carrying the card, the more stores value it.
  • The platform must provide a superior way for the customer groups to interact. Financial-services professionals have plenty of alternatives for gathering information, but Bloomberg offers one-stop shopping for almost every conceivable source of financial data.

The fact that circumstances make it possible for a platform to exist does not mean that it will. Moreover, even if a platform is built, potential customers may find other ways to obtain the services. IBM maintained an operating system for its mainframe computers, but expended less effort to make it a ubiquitous platform than the Microsoft Corporation did with Windows. And although you can find your true love on Yahoo Personals, you still might prefer chatting up strangers on a Sunday walk in the Boston Public Garden.

The economics underlying these multisided platforms are only just now being plumbed, with a couple of French academics, Jean-Charles Rochet and Jean Tirole, in the forefront. We already know enough, however, to recognize that you’ll poke yourself in the eye if you apply the rules of thumb about traditional markets learned by every MBA candidate in the land. As the dating club example plainly shows, equating incremental costs to incremental revenues for each class of consumers doesn’t work. Nor, for that matter, will pricing low to build market share and lock in customers — a lesson learned the hard way by dozens of dot-coms operating in multisided markets.

 
 
 
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