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Structuring your business as a marketplacemay seem attractive, but it's often a recipe for failure.by Andrei Hagiu and Julian Wright

MOST COMPANIES THAT serve as intermediaries betweenbuyers and sellers face a fundamental strategy decision:Should they be resellers (like supermarkets), acquiringand then reselling products or services? Should they op-

erate as multisided platforms (like eBay), cormecting buyers and sell-ers without controlling or owning the offerings being sold? Or shouldthey blend the two models?

The past decade has seen a multisided-platform (MSP) bubble.One reason, undoubtedly, is the success of eBay—and of Rakutenand Taobao, eBay's counterparts in Japan and China, respectively.Another is that multisided platforms look financially more alluringthan resellers. These marketplaces usually take a cut from each trans-action, which goes almost straight to the bottom line. As a result, theiroperating costs are low and their percentage margins are high. Be-cause resellers must buy and then sell their offerings, they typicallyhave higher revenues but also higher capital and operating costs andlower percentage margins.

The attractions of multisided platforms have enticed many com-panies, large and small, to try to apply the model in cases where thereseller model would have had a better chance of succeeding. For in-stance, all attempts since the early 2000s to create an eBay-style mar-ketplace for patents have been shut down, redirected, or scaled back

March 2013 Harvard Business Review 103

DO YOU REALLY WANT TO BE AN EBAY?

and limited to brokerage and technology-consultingservices. Zappos, the online shoe retailer, started offin 1999 as a marketplace but by the mid-2000s hadturned itself into a pure reseller, stocking inventoryand taking full control of transactions with end users.

Whether you're the founder of a start-up, a man-ager in an established business, or an investor, thisarticle can help you evaluate which model—or mixof models—wül work best.

A firm's position along the continuum betweenpure reseller and pure multisided platform is deter-mined by how much control the company takes overtransactions (see the sidebar "How Companies UseDifferent Sales Models"). To what extent does theintermediary control pricing, product presentation,and the other factors that influence buyers' purchas-ing decisions? To what extent does it take responsi-bility for fulfilling orders and delivering products?

Choosing the Right ModelDetermining whether more or less control overbuyer-seller transactions will allow your firm to cre-ate or extract significantly more value involves theconsideration of four factors.

Scale effects. High-demand products are soldmore efficiently by one large reseller than by manysmall sellers. The reseller can capitalize on econo-mies of scale in purchasing, infrastructure invest-ments (in warehouses and distribution centers, forexample), delivery, customer support, and so on.These advantages, however, don't apply to low-demand—or "long-tail"—products. That is whyAmazon acts as a reseller for high-demeind productsbut as a multisided platform for long-tail products,which are available on the site from independentsellers.

Aggregation effects. Some products andservices have much higher value to buyers whenbought together than when purchased separatelyfrom independent sellers. In those cases, resellersgenerally do better than multisided platforms—thelatter may not even be viable.

For instance, most patents on technology prod-ucts such as smartphones have little, if any, value ontheir own for potential buyers or licensees, becauseindividual patents can be invented around, coun-tered with related patents, or invalidated in court.This is one of the main reasons that multisided-platform business models for patent intermediation(Ocean Tomo's uve auctions, for example, and onlinemarketplaces such as yet2 and Tynax) have failed to

High-demandproducts are

sold moreefñciently by

one lai^e resellerthan by manysmall sellers.

gain much traction, while Intellectual Ventures andother patent aggregators—which buy patents, bun-dle them, and then sell or license the bundles—havethrived.

Resellers are also in a much better position toexploit complementary relationships betweenproducts. Having iTunes function mostly as a re-seller has allowed Apple to employ a "give away theblades to sell the razor" pricing strategy with theiTunes-iPod combination. The company set verylow, uniform prices for music (99 cents or $1.29 persong) and realized huge margins on the sale of iPods.That strategy would not have worked if iTunes hadbeen closer to the multisided-platform end of thecontinuum, giving record labels control over musicsales and pricing.

Why didn't Apple employ the reseller strategywith its App Store? Whereas there are only a hand-ful of powerful record labels, there are thousands ofapp developers. Consequently, Apple would haveincurred exorbitant costs trying to deal with all ofthem and gained little by taking control of app sales:Fierce competition among developers keeps pricesextremely low (28% of iPhone apps are free; the av-erage price of the rest is $4), increasing the value ofthe iPhone to users and allowing Apple to extractbig margins from its sale. As a result, serving as amultisided platform makes a lot more sense for theApp Store.

Even when complementarities are limited, areseller that aggregates products may be able toextract more value from buyers through strategiessuch as bundling and loss-leader pricing, which in-dependent suppliers cannot achieve. For instance,ESPN might not be an obvious complement to theDiscovery Channel, but by selling those channelstogether as part of the cable bundle, Comcast canobtain much higher revenues from subscribers andadvertisers than if it sold them separately. Costco,Target, Walmart, and other retailers lure custom-ers into their stores with prices at or below cost oncertain goods (for example, gas at Costco and high-definition TVs at Walmart), which they more thanmake up for with higher meirgins on other products.Again, controlling products—especially their presen-tation and pricing—is necessary to achieve this.

The buyer and seller experiences. Multisidedplatforms generally create value by matching buyerswith the right sellers and vice versa, and then en-abling them to transact. In some contexts, however,one side might not want to deal with multiple agents

104 Harvard Business Review March 2013

HBR.ORG

ideajMultisided platforms-marketplaces thatallow buyers and sell-ers to transact directlywith each other—haveemerged as a powerfulbusiness model.

But the breathtaking rise of

marketplaces like eBay has

lured managers into copy-

ing them in cases where they

should have operated more

like traditional resellers, which

buy and then resell products

or services. The result has

been a wave of failures and

restructurings.

The lesson: Managers and

investors should consider

where on the continuum

between pure reseller and pure

multisided platform a company

belongs and understand that

it may take one or more moves

to get there. This involves as-

sessing which model will best

allow the business to exploit

scale and aggregation effects,

offer a better buyer or seller

experience, and resolve market

failures such as uncertainty

about product quality or the

reliability of sellers or suppliers.

After establishing the busi-

ness, managers must remem-

ber to reevaluate its position

as the competitive landscape

changes. Otherwise, the busi-

ness could be disrupted.

on the other side, which makes the reseller modelpreferable.

Zappos's shift from multisided platform to re-seller was driven by that realization. At the begin-ning, Zappos relied entirely on partnerships withshoe manufacturers that held inventory and fiilfiDedcustomer orders directly. But the company soon dis-covered that buyers were more likely to completetransactions and come back for more if they wereoffered a great retail experience: guaranteed fast de-livery, an extremely favorable and universal returnpolicy, reliable and standardized information aboutproduct characteristics and availability, and so on.The realization that it could not provide this expe-rience if it continued to operate as a marketplaceled Zappos to build its own warehouses and takecomplete control over interactions with end users.Its successful strategy made it an attractive acquisi-tion target: In 2009 Amazon bought the company fornearly $1 billion.

Sometimes the need to provide a good sellerexperience calls for the reseller model. ConsiderGazelle, a leading online reseller of used electron-ics products. Gazelle buys items from individualsthrough its website and resells them through vari-ous channels, including export wholesalers and eBay,where Gazelle has earned the prestigious Power-Seller designation. It may seem ironic that the com-pany makes a profit buying from users and resellingon eBay. But Gazelle's key insight was that individual,one-off sellers are at a tremendous disadvantage onmultisided platforms: They lack the expertise, cred-ibility, and time to compete with the professionalsellers in these marketplaces. In this context, thevalue proposition of resellers like Gazelle is transac-tion convenience and speed in excheinge for a lowerprice than sellers might have obtained through aneBay auction.

That said, some multisided platforms manage toachieve the holy grail of providing great experiences

for both buyers and sellers. For example, oDesk hascreated a leading online marketplace for virtual workthat allows employers to find, hire, monitor, and payindividual workers. In stark contrast to traditionalstaffing agencies, oDesk is able to satisfy the needsof both sides without taking direct responsibility foreither party or for their agreements.

Market failures. Left to their own devices,marketplaces sometimes collapse. The most obvi-ous cause of a market failure is uncertainty aboutproduct quality or about the reliability of sellers orsuppliers.

Many multisided platforms have solved thisproblem without moving to a reseller model. Ebay,for example, instituted a feedback system for buyersand sellers. Airbnb, which allows house and apart-ment owners to rent rooms to complete strangers,provides not only a reputation mechanism similar toeBay's but also several other features that keep bothsides honest. For instance, it releases the renter'spayment to the owner 24 hours after the renter haschecked in and confirmed that the location is as de-scribed. And it returns the renter's deposit after theowner has retaken possession and confirmed that noserious damage occurred.

It would be a mistake, however, to conclude thatsuch market-based mechanisms are always suf-ficient to ensure quality and reliability. Sometimesit is necessary to move closer to a reseller model byexerting more control over transactions. This wasthe painful lesson learned by SellaBand, Bandstocks,and Slicethepie, which all hoped to disrupt recordlabels by creating platforms where fans would beable to interact with and fund their favorite bands.Too many poor-quality bands led investors to loseinterest, however, and all three companies failed (al-though SellaBand was resuscitated by a group of out-side investors with a model closer to that of the tradi-tional record labels). As SellaBand's former CFO toldus, "If you want to be successful in this field [music


DO YOU REALLY WANT TO BE AN EBAY?

How Companies Use Different Sales Models

Companies can take variouspositions on the continuumbetween a pure resellermodel (buying and thenreselling products) and apure multisided-platform(MSP) model (providing amarketplace in which buyersand sellers transact directlywith each other). Here areexamples of how companiesin three industries have donethat. In some cases, they havechanged their positions overtime.

Online marketplaces such as eBay and Taobao have always beenpure multisided platforms: They have never exerted much controlover buyer-seller interactions or owned the goods sold throughtheir sites. In contrast, supermarkets, Walmart, 7-Eieven, and otherretailers (online and offline) have largely been pure resellers. Animportant exception is when a retailer sells shelf space to a marqueesupplier such as Coca-Cola and gives it control over pricing and thelayout and stocking ofthe shelf.

Amazon started off as a pure reseller: From its founding in 1994 un-ti l the early 2000s, it bought and resold products in its own name. The company thenstarted moving toward the MSP end ofthe continuum, allowing third-party merchantsto sell products directly to Amazon users, in 2011 those sellers accounted for 30% ofunit sales on Amazon. Within a given product category, Amazon may operate as a purereseller, a pure multisided platform, or something in between—for instance, fulfillingorders but letting merchants control prices and the relationship with buyers.

RETAIL ANDE-COMMERCE

CostcoWalmartZappos

Amazon Ral<uteneBay

Taobao

Pure Reseller Pure Multisided Platform

Cable and satellite services (such as Comcast and Dish Network),iTunes, and Netflix are resellers: Users' contractual relationshipsare with those services, not with the content providers, and thecompanies control pricing and delivery to users. Apple's App Storeand Google Play, a marketplace for Android apps, are near the otherend ofthe spectrum. In those marketplaces, users buy apps fromthird-party developers, not from Apple or Google. They are not puremultisided platforms, however, because Apple and Google exert

some control over the quality and distribution ofthe apps—more than eBay does overthe offerings in its online marketplace, for example. Other digital content services liesomewhere in between: When users buy movies and games on Xbox Live Marketplaceand Sony's PlayStation Store, their purchase contracts are with Microsoft and Sony, yetgame publishers and movie studios maintain control over pricing.

DIGITALCONTENT

ComcastDirecTViTunesNetflix

PlayStation StoreXbox Live

Marketplace

App StoreGoogle Play


Traditional car-rental companies (such as Avis and Budget) andZipcar are pure resellers: They own fleets of cars, which they rentout to consumers. In contrast, newer services such as Getaround,Lyft, RelayRides, and Über simply facilitate transactions betweencar owners and car users. None of these services owns a fleet, andthe car owners set their own rates except in the case of Über, whichimposes some standard rates. With Über and Lyft, users can get aride from professional drivers (über) or private individuals (Lyft).

With Getaround and RelayRides, users can rent cars from private individuals.

CARSHARING

AvisBudgetZipcar

ÜberGetaround

LyftRelayRides



HBR.ORG

crowdfunding], you need to take some kind of con-trol over what happens on your site because of thepotential friction in goals and expectation betweenthe two different parties."

Another potential market failure that multisidedplatforms cannot address is when one side has aninformation or bargaining advantage over the other.Fearful of being exploited, the weaker party is un-likely to participate. The reseller model can helpsolve this. Intellectual Ventures (IV), the worid's larg-est patent aggregator, has raised more than $5 billionand spent in excess of $2 billion acquiring more than30,000 patents. IV typically acquires patents fromuniversities, small companies, and individual inven-tors and then resells or licenses them, mostly to largeoperating companies.

In addition to the benefits of aggregation men-tioned above, IV creates value by correcting (to anextent) the huge power imbalance between smallpatent owners and large operating companies.Lacking the expertise and resources to bargainsuccessfully or engage in litigation, small patentowners have traditionally been able to obtain onlymeager, if any, payment from large operating com-panies. The central pillar of IV's strategy is success-fully negotiating with companies on behalf of themany small patent owners that are its suppliers—and in the process making a sizable profit. Again, amultisided platform could not achieve this, whichis why virtually all attempts to create patent mar-ketplaces have failed. IV has already become themost influential patent intermediary in the tech-nology sector.

Start-Up and GrowthThe considerations above are sufficient for mostcompanies to decide where to position themselveson the reseller-MSP continuum. But a company can'talways get there immediately. Sometimes compa-nies that should ultimately be multisided platformsneed to start out as resellers and vice versa.

The catch-22 problem. Suppose you are astart-up or a large company entering a new industryand have determined that the multisided-platformmodel is best for you. The problem is that buyerswill not join your platform if you don't have enoughsellers; neither will sellers if you don't have enoughbuyers. Sometimes you can solve this by focusing ona small niche and growing from there, as eBay didwith collectors of PEZ Candy dispensers. If you areunable to find such a niche, resorting to the reseller

Buyers will notjoin your

maricetplace ifyou don*t haveenough sellers;

neither will sellersifyoudon*thaveenough buyers.

model for an interim period might be a wise move.Amazon adopted exactly this strategy: It bought andresold books and other products and established asubstantial base of buyers before it tried to attractindependent sellers.

Karma—a start-up that launched a mobile appli-cation in early 2012 that allows users to select, buy,and send presents from a variety of sources—is tak-ing a similar approach. The core of its value proposi-tion is the ability to provide gift recommendationsbased on data gleaned from users' social networks.Currently, Karma buys items from manufacturersand retailers and resells them for a small profit. Butthe pure reseller model is probably not optimal inthe long run: For most gift categories, the large re-tailers and manufacturers that supply the items toKarma have superior scale; Karma doesn't have totake possession of the items to create a great experi-ence for buyers; and because the gifts are typicallywell-known items from branded producers, con-sumers aren't going to be concerned about quality orreliability. Nevertheless, the company may have hadno choice but to act as a reseller at the outset in orderto prove the value of its concept to manufacturersand retailers. In addition, the control offered by thereseller model gives Karma more leeway in experi-menting with ways to serve buyers. Once it figuresout the best way to do that, it can start shifting to-ward a multisided-platform model.

Limited capital. If your business should ul-timately be a reseller but needs to grow fast in theshort run and lacks the resources to do so, operat-ing as a multisided platform, which enjoys lowercapital and operating costs, might be a good interimsolution.

Gome, China's largest electronics retailer, em-ployed that strategy. Since its founding, in the early2000s, Gome has sold or rented space in its storesto suppliers, which operate as de facto independentconcessions. This means that products in Gomestores are organized by brand, not by category, and80% of the salespeople are employed by the manu-facturers. Given that this model doesn't provide agreat customer experience, it's hard to imagine thatit can succeed in the long term. But the companylacked the resources to achieve its goal—to be thefirst to open electronics stores in all major Chinesecities—if it operated as a traditional retailer. Indeed,Gome has expanded at a much faster rate than itscompetitors. Although it has been struggling finan-cially and has recently dosed some underperforming


DO YOU REALLY WANT TO BE AN EBAY? HBR.ORG

Creating a Marketplace Is Harder Than It LooksConnecting buyers and sellers without ever owning the product is a seductive business model: Capitaland operating costs are low, and margins are high. However, being a reseller often proves to be a betterchoice. If you answer yes to any ofthe questions below, then reselling (or a hybrid approach) is probablya better bet for your company.

1 2 3 4 5 6Are there significant Can your company Do buyers derive Is your company

economies of scale

to be exploited?

create and extract

much more value

by bundling or by

selling complemen-

tary products?

significant benefits

from aggregation?

able to create a

better buyer or

seller experience

by taking control

of transactions?

Do buyers need

to be protected

from sellers or

vice versa?

Does one side have

a disproportionate

information or bar-

gaining advantage?

stores, the issue seems to be a lack of capable seniormanagers, not the company's business model. In fact.Gome's closest competitor in China, Suning, uses thesame model and is thriving.

Disruption and DisintermediationThe framework we've offered above is also useful foridentifying disruption opportunities or, if you're anexisting intermediary, threats.

In the typical disruption scenario, emerging mar-ketplaces displace incumbent resellers. Indeed, themultisided-platform model has become particularlypowerful and widespread with the rise ofthe inter-net and mobile-communication technologies. Newmarketplaces are created every day, which makesit easier for buyers and sellers to interact directly,bypassing traditional middlemen. EBay renderedcollectibles stores obsolete. ODesk and similar sitesare displacing staffing agencies. Amazon's Kindleand other online self-publishing and distributionplatforms are challenging book publishers. Peer-to-peer car-sharing services such as RelayRides andGetaround are challenging established car-rentalcompanies as well as Zipcar (all of which function asresellers, buying their own cars and renting them tousers).

It would be a mistake, however, to assume thatall resellers are subject to disruption by online ormobile-based multisided platforms. Li & Fung, tbeworld's leading middleman for apparel fabric, hasfunctioned as a reseller since its founding, in 1906.Although a well-designed online platform could pro-vide a convenient one-stop shop, it would lack theadvantage that Li & Fung achieves by aggregating de-mand from many clients: the power to obtain lowerprices from suppliers, make faster deliveries, andhelp suppliers better utilize their capacity.


In the typicaldisruptionscenario,emerging

multisidedplatformsdisplace

incumbentresellers.

Similarly, the proliferation of internet-basedvideo marketplaces such as Hulu, YouTube, andXbox Live Marketplace, through which users buycontent directly from providers, has not renderedcable and satellite aggregators obsolete. Aggregatorsuse bundling to extract much higher revenues fromviewers and advertisers than content providers canby selling their products independently through on-line marketplaces; the aggregators then share thosehigher revenues with content providers.

We are beginning to see a reverse disruptionscenario, in which upstart resellers are challengingestablished multisided platforms. Gazelle is an ex-ample. This suggests that successful multisided plat-forms inevitably create opportunities for resellers toaggregate demand or supply in specific markets orto offer a better experience for a segment on eitherside ofthe market.

MULTISIDED PLATFORMS have emerged over the pastdecade as some ofthe most powerful and valuablebusiness models around. It is important, however,not to overestimate their attractiveness relative tothe more traditional reseller model. Before jumpingon the multisided-platform bandwagon, managersand investors should carefully consider where onthe reseller-MSP continuum an intermediary be-longs and understand that it may take one or moremoves to get there. They must then be diligent aboutreevaluating that positioning as the competitivelandscape changes. Otherwise, they may wake upto discover that their seemingly secure business hasbeen upended by a disrupter from either end. ü

HBR Reprint R13O3J

• B l Andrei Hagiu is an associate professor in the strategyWaA unit at Harvard Business School. Julian Wright isa professor of economics at National University of Singapore.

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