Remember the first battle between the net marketplaces and industry consortia?
First came the net marketplaces such as Ventro, Chemdex, eSteel, Instill, PlasticsNet, and many others. Dreams of disruption and bubble-era riches danced in their heads. Most net marketplaces failed spectacularly, though a few succeeded modestly.
In response to these “interlopers”, industry consortia formed. The giants of industry would not allow venture-backed start-ups to insert themselves between them and their customers (or suppliers). Consortia included ForestExpress, Worldwide Retail Exchange, Transora, Covisint, and many others. Again, most of these efforts failed (relative to the hype or capital invested) or stalled out. Though many survive in some form or another.
The instincts of the industry consortia to respond to the threat were not crazy. (The consortia simply overestimated the capabilities of most of the net marketplaces.) Since then, in many, mainly B2C industries, very powerful platforms have formed and developed substantial market power.
- In real estate, brokers fear the power of a proposed Zillow/Trulia combination. In the UK, the same is true of Zoopla combining with Rightmove.
- Uber is putting a scare in the taxicab industry and many municipalities.
- Amazon’s skirmishes with the publishing industry are well-publicized (sorry).
In many industries, the value of platforms and network effects are leading to powerful monopolists or oligopolists. Just a few examples:
- 4 major payment networks (and some nice interchange fees)
- Limited cable and high-speed internet competition (try canceling Comcast)
- 4 major cell phone networks (almost 3)
- A few major stock trading exchanges
- 2-3 search engines
When platforms become powerful a few, predictable things happen:
- Prices often go up and service goes down. After all, the ability to raise prices without consequence is the best measure of market power!
- Powerful companies hire former government officials to lobby the regulators.
- VCs fund new entrants to take on the existing giants with new technology, or in niches (e.g., cross-border payments, block chain-based payments, etc.)
- If the industry is concentrated enough, a new consortium may form and try to “cut out” the platform. Revenge of the consortia.
In the UK, a new consortium of real estate brokers is forming to try to beat back the Zoopla/Rightmove combination. Taxi companies and municipalities may support applications to fend off Uber. But nowhere is the battle between private platforms and consortia more intense, and ongoing, than in the financial services industry.
- Consumer payment networks were originally consortia of banks themselves. They eventually went public and now are being “challenged” by a consortium of retailers (MCX). MCX is trying to build its own payment network, Current-C.
- The NASDAQ and NYSE became powerful through growth and acquisition. Broker-dealers then formed BATS and CHI-X to fight back. Ultimately, their business model was challenged on behalf of the buyside by Michael Lewis and the Flash Boys (IEX)!
- When Fair Isaac’s credit score, FICO, developed a monopolistic position in consumer credit scoring, the three large national credit reporting companies joined forces to create VantageScore as an alternative. (Monopolist versus oligopolists–watch out!)
- Early Warning and Clarient Global are examples of banking consortia (data-sharing initiatives) that seek to reduce fraud and compliance costs without third-party platforms.
Unfortunately, consortia are a limited way to maintain competition with successful platforms because they are notoriously difficult to manage and grow:
- Consortia have to be highly regulated to avoid anti-trust concerns
- Consortia often have boards of 3-5 (or more) competitors, presenting sticky governance challenges
- Consortia often require their owners to diversify into a new business. For instance, can retailers build a great payment network? Can municipalities build and maintain great ride-sharing apps?
- The benefits of consortia are widespread, yet the costs to achieve the benefits may be shared unequally (the “public goods problem”). As a result, consortia tend to form only in highly concentrated industries (e.g., banking). (Owners of extra rooms to rent out are unlikely to rise up against Airbnb if Airbnb starts to take too much margin.)
- If you work for a consortium are you likely to get paid and rewarded like you would for a venture-backed platform play? (Not likely.)
- What are the exit options for a consortium play?
The bottom line is that consortia are hard to staff, govern, grow, and maintain. As platforms and networks start to dominate businesses, we are likely to find more success in countering their market power with entirely new technologies and business models, than with hoping for the resurrection of consortia.