How Spotify, Amazon, and Zappos built successful digital marketplaces
by Patrick McCarthy, SVP, marketplace partnerships, AppNexus
Global marketplaces are hardly a new phenomenon. By circumventing the Silk Road, the long overland trade road that once connected China to the West, European seafarers like Bartolomeu Dias and Vasco da Gama paved a more direct trade route to Asia and its goods. By connecting European buyers with Asian sellers more directly, these voyagers – in effect – were laying ground for a more sustainable marketplace, where supply-chain friction and overland pace of delivery were not obstacles.
As with yesterday’s explorers, so with today’s internet pioneers. By creating digital marketplaces where buyers and sellers can transact with each other directly, without middlemen or lengthy delivery time, we see history repeating itself in a remarkable way.
In many ways, the success of digital marketplaces like Spotify, Amazon and Zappos comes down to three governing principles. Successful marketplaces:
• Offer lower margins than competing platforms.
• Feature greater degrees of transparency – and thereby establish greater levels of consumer trust – than other would-be rivals.
• Minimize the supply-chain friction that connects buyers and sellers.
If marketplaces can manage all these– and offer customers quality inventory from a net effect of vendors that are actually worth buying from – then the sky’s the limit in terms of revenue and growth.
1.) Lower margins: Spotify
Take a music-streaming company like Spotify and stack it up against Apple. When Apple rolled out its Apple Music paid-subscription music-streaming service in June of 2015, many in the industry saw the move as a slow deathblow to its Swedish competitor. This prediction seemed justified, especially when Apple Music announced that it had acquired over 15 million new members over the year post-launch.
What advantage did Spotify have over Apple Music that allowed it to remain a powerful, even dominant, force in the game, continuing to match and even outpace Apple Music’s subscribership? While Apple offers more songs than Spotify, Spotify has a distinct and strategic advantage over Apple Music: Unlike Apple Music, Spotify allows its listeners the choice to stream free, on-demand songs.
Spotify is able to provide its consumers with such a low take-rate by using streamed, sponsored audio advertising. While Apple has exclusive rights to The Beatles catalogue and Taylor Swift, but Spotify’s got over 100 million users, all of whom listen to sponsored ads.
2.) Greater transparency: Zappos
Few online marketplace companies in the world take greater pride in demonstrating transparency to their customers than Zappos, the online shoe retailer (and now a division of Amazon). Zappos’ CEO, Tony Hsieh, has a lot to say about the virtues of corporate transparency. He makes the case that when digital marketplaces wall away their secrets – leaving their vendors and business partners in the dark as to how they operate – they create unnecessary levels of …read more