-Amit Nath
It is almost impossible to imagine life without the internet. It has permeated every aspect of our personal, professional and our new post-pandemic lives. It is certainly fascinating that one of the most significant human catastrophes of all time, strengthened the role of the internet in our lives and accelerated many internet-based businesses by several years. Most “covid beneficiaries” existed prior to the pandemic but they share several characteristics that have helped create some of the most powerful and dominant business models humanity has ever seen.
An online marketplace is a good example of a great internet enabled business model, however not all marketplaces are created equal. The most durable, self-sustaining and valuable marketplaces obviously connect consumers and suppliers, but the most effective examples, aggregate both supply and demand. Furthermore, they often organically realign themselves as the clearinghouse in a transaction that reduces friction and increases scale for both sides (e.g. eBay). Some key characteristics we look for in a successful marketplace model include:
Network Effects: While somewhat difficult to describe, an activate network effect can be observed on both consumer and supplier sides of the marketplace. From the consumer’s perspective the experience should improve as more suppliers are added to the marketplace, and from the suppliers perspective the same should happen with more consumers. Effectively the experience for consumer / supplier “N + 1000” should be better than the experience for consumer / supplier “N” as a direct result of adding 1000 more participants to the market (the “flywheel”). If this is true, the marketplace will get stronger over time (e.g. Facebook).
Disruptive Economics: Some of the best marketplaces shift the field of battle entirely, releasing untapped latent supply and connecting it to consumer demand usually a lower price point with more convenience than what had existed previously. While it is not easy to shift the economics of an industry, such tectonic plates exist beneath many antiquated businesses. Uber and AirBNB are both good examples of this type of marketplace. For the supplier (property or car owner), the income generated from being a participant in the marketplace represents “buried treasure” and income that was not accessible prior to the marketplace. Additionally, the consumer receives a better, more convenient service, usually at a lower price than alternatives are available at (hotel or taxi / car service).
Fragmentation: Perhaps paradoxically, fragmentation is the friend of a thriving online marketplace. It might be easier to invert the claim and assess a highly concentrated supplier base. In such an industry, suppliers will be reluctant to allow a new intermediary into their market as it will likely lower their share of profits (all things equal) while disruptive economic marketplaces (discussed earlier), seek these industries out. An example of a marketplace that benefits from high fragmentation on both supplier and consumer sides is Amazon. While an example of a concentrated supplier base is U.S. healthcare, where an oligopoly of large players control an enormous proportion of the market and reluctant to support alternatives. A recent example was Haven, the powerful joint-venture formed between Amazon, Berkshire Hathaway, JPMorgan Chase and tasked with lowering the cost of healthcare for the companies was disbanded in early 2021, failing less than three years after its launch.
At Montaka Global, we focus our expert deep sector and market knowledge on selecting excellent businesses that are long-term winners, maintain robust valuation discipline, leverage our specialist short-selling expertise and deploy capital protection enhancements in order for our portfolios to successfully navigate all market environments.
Amit Nath is a Senior Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.
