September 20, 2016

Matchmakers
The New Economics of Multisided Platforms
David S. Evans and Richard Schmalensee
2016 by David S. Evans and Richard Schmalensee
Adapted by permission of Harvard Business School Publishing Corporation
ISBN: 978-1-63369-172-8

Key Concepts
Although businesses that act as matchmakers have existed for centuries, todays matchmakers are leveraging
technology to turbocharge their operations and create multisided platforms. The economics associated with
these ventures is unlike that of traditional companies, and entrepreneurs and business leaders must understand
how.

Multisided platforms must attract two or more types of customers by enabling them to interact on favorable
terms. They may be physical or virtual in nature.
With multisided platform businesses, there must be a sufficient number of participants on both sides that
would benefit from getting together. To secure critical mass, companies may use a zigzag strategy, a two-
step strategy, a commitment strategy, or a combination of these.
Six technologies have helped drive innovation at matchmaking companies: more powerful chips, the In-
ternet, the World Wide Web, broadband communications, programming languages and operating systems,
and the Cloud.
Business opportunities typically arise for multisided platforms when various types of friction or transaction
cost prevent market participants from interacting easily and directly.
The right pricing structure is critical for launching a multisided platform and ensuring it is profitable.
Multisided platforms typically operate in ecosystems that include people, businesses, institutions, and
more. It may be necessary to develop incentives for one or more of these groups to encourage its support.
The new economics of multisided platforms demonstrates that certain guidelines almost always apply, such
as making markets thick, remembering that small can be beautiful, facilitating searching and matching, and
balancing externalities.
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Matchmakers David S. Evans and Richard Schmalensee

While turbocharged matchmakers will transform industries, the transformation will happen slowly over the
course of many years, with some bursts of rapid change along the way.

Summary
Introduction
Many companies that are household names, such as Uber, Visa, Airbnb, Vogue magazine, and OpenTable, are
matchmakers that offer platforms that make it easy for members of different groups to interact. This business
model has become attractive for many entrepreneurs and established companies that are seeking new oppor-
tunities. However, it is important to recognize that these multisided platforms operate based on a different set
of economic rules than traditional businesses. In Matchmakers from Harvard Business Review Press, David S.
Evans and Richard Schmalensee illustrate the new economics of multisided platforms through case studies and
frameworks.
Matchmakers are
Part I: Economics and Technologies called multisided
A Table for Four at Eight platforms because
In 1998, people booked restaurant reservations primarily via the telephone.
they usually operate
Chuck Templeton, however, thought there must be a better way via tech- a physical or virtual
nology. He founded OpenTable, a web-based system to link diners and place that helps dif-
restaurants. The company first built a table management system, but when ferent types of cus-
Templeton discovered that restaurants did not want to purchase that type of tomers get together.
system, he moved to a monthly rental model. The consumer website, where
people could make reservations for free and restaurants paid $1 for every person who sat at a table reserved
through OpenTable, launched in March 1999. Getting both restaurants and diners to participate was slow and
difficult. OpenTable eventually realized the importance of having a critical mass of restaurants in a given city, so
the company initially focused on recruiting restaurants in San Francisco and Chicago. This was the key to attract-
ing diners. Today, 16 million people use OpenTables website to make reservations every month.

In 2000, academics identified multisided platform businesses like OpenTable as a unique type of organization.
Multisided platforms must attract two or more types of customers by enabling them to interact on favorable
terms; in other words, they are a type of matchmaker. The platforms can be virtual or physical in naturefor
example, a shopping mall is a multisided platform that connects shoppers and retailers. Although multisided
platforms have been around for millennia, the Internet has turbocharged what they can accomplish.

The Grab All the Eyeballs Fallacy

One of the precursors to academic work on multisided platforms was research done by economists on network
effects. This work identified the phenomenon of the direct network effect. An example of the direct network effect
is the telephonethe system is more valuable when more people are connected to it. In the 1980s, researchers
turned their attention to the high-tech sector and the adoption of technology standards. They concluded that
the first mover advantage is important in industries with network effects: network effects mean that bigger is
better so that one firm or standard will control the market; and to be the winner who takes all, businesses need
to start first and keep their lead.

This model is not always valid with multisided platform businesses, however. Multisided platforms harness indi-
rect network effects, which arise when the value of a matchmaker to one group of customers depends on how
many members of a different group participate. With multisided platform businesses, the first mover advantage
and winner take all theories do not apply. Instead, there must be enough participants on both sides to benefit
from getting together.
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Matchmakers David S. Evans and Richard Schmalensee

In conventional businesses, it rarely makes sense to set prices at or below the cost of creating an additional
unit of output. This rule does not apply, however, to multisided platforms. Matchmakers must choose a price
structure to balance the interests of all participants to keep them on board and interacting with one another. In
many cases, multisided platform companies charge one set of participants either a low price or nothing at all.
This is the subsidy side of the platform. The companies make up subsidy-side losses by charging participants on
the money side of the platform.

Multisided platforms must consider six important issues:

1. Business opportunities typically arise when various types of friction prevent market participants from inter-
acting easily and directly.
2. Before multisided platforms can succeed, they must secure a critical mass of participants on all sides.
3. The right pricing structure is critical for launching a multisided platform and ensuring that it is profitable.
4. Multisided platforms typically exist within a broader ecosystem that requires attention.
5. Multisided platforms must design either physical or virtual places where participants can interact.
6. Matchmakers need to pay attention to how participants interact.

Matchmakers face Turbocharging

much more com- Although multisided platforms have existed for millennia, they have become
plex pricing prob- more powerful because information and communication technologies have
lems than traditional lowered the cost of connecting and increased the reach of platforms. Six
technologies in particular have helped drive innovation at matchmaking com-
businesses because
panies: more powerful chips, the Internet, the World Wide Web, broadband
they must balance communications, programming languages and operating systems, and the
the interests of all Cloud. They have, in effect, turbocharged multisided platforms.
sides in order to get
In the early 1990s, people began to distinguish between the online and offline
all sides on board the worlds. Today, these two worlds are converging. The result is a single world
platform . . . where a physical space may have many connections to the Cloud.

Part II: Building, Igniting, and Operating Matchmakers

Friction Fighters

Multisided platform businesses cannot succeed if they do not reduce a significant amount of friction in the
market. Alibaba.com is an example of a company that has thrived through reducing friction. The company was
founded in 1999 in China, when numerous frictions made it difficult to do business between global buyers
and Chinese sellers. Initially, Alibaba charged no fees to any participants. Its goal was to build a critical mass of
buyers and sellers. In 2001, the company launched International TrustPass to provide authentication and docu-
mentation services for Chinese businesses. In subsequent years, the company built more features into its B2B
sites to serve buyers and sellers. Eventually, Alibaba moved into systems that facilitate retail transactions.

Alibaba succeeded in the B2B exchange space by creating thick markets for narrow product categories. This con-
trasts starkly with the American B2B exchanges that proliferated in the early 2000s. These multisided platforms
had thin markets with few buyers and sellers, and, because transportation, financial, communications, and legal
systems were well-developed in the U.S., they simply did not reduce enough friction to create much value.

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Matchmakers David S. Evans and Richard Schmalensee

Ignite or Fizzle

In 2005, Chad Hurley, Steven Chen, and Jawed Karim created a video-sharing website. Over the course of a year,
the trio determined how to secure a critical mass of individuals to upload and watch videos, so that uploaders
attracted more viewers, viewers attracted more uploaders, and explosive growth was ignited. The result was
YouTube. Solving the chicken and egg problem associated with assembling critical mass it is one of the most
challenging hurdles for multisided platform companies.

Companies can use three main strategies to secure critical mass: . . . [N]ew turbo-
charged matchmak-
1. The zigzag strategy: YouTube used this approach, pushing participation by
ers have already
both sides simultaneously.
roiled existing indus-
2. The two-step strategy: Some organizations convince one group to join the
platform. Once critical mass is reached in that population, they convince
tries. In some cases,
the other group to join. they have created
3. The commitment strategy: This approach is useful for platforms where one
value by reducing fric-
group must make an investment in order to participate in the platform. tions without threat-
In some cases, organizations use a combination of these strategies. The best ening existing firms.
approach depends on the companys business and unique circumstances.

Several tactics that can be used to implement these strategies, such as winning marquee customers, shaping
expectations, and leveraging the entrepreneurs business reputation. To obtain enough participants on both
sides, it is often necessary to narrowly focus efforts.

Long Haul

The majority of long-haul truck drivers use a fleet card to pay for fuel at truck stops, and fleets can easily track
fuel expenses. Fleet card companies must offer the right prices to both sides of the multisided platform (i.e.,
truck stops and fleets) to get both on board. For example, charging a higher price to truck stops results in a less
attractive fueling network for fleets, while charging a higher price for fleets results in fewer fleet customers and a
less attractive value proposition for truck stops. In setting prices, fleet card companies need to address the price
sensitivity and demand of both parties, and changes in market conditions can make changes in price structure
optimal.

Pricing decisions add complexity to developing a multisided platform. It is important for companies to consider:

How sensitive is each group to price?

Who needs whom, why, and how much?
Does one group control whether a transaction takes place?
The answers to these questions can help establish access and usage fees. In established industries, the situation
may be simpler than for pioneering platformsmatchmakers can follow everyone else. However, circumstances
may change over time, which can affect pricing.

Beyond the Castle Walls

The ecosystem in which a multisided platform operates typically includes people, businesses, and institutions.
Understanding the ecosystem is important because it may be necessary to develop incentives to encourage
necessary support. It is also important for companies to decide how many sides their platforms will have. Adding
sides can increase indirect network effects, but it also complicates the business model.

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Matchmakers David S. Evans and Richard Schmalensee

Apple and Google illustrate two different approaches to building mobile platforms and the associated ecosys-
tems. With the iPhone, Apple initially maintained total control over its handsets and the iOS mobile operating
system. Third-party apps were not allowed. Eventually, Apple did decide to allow them. The company released
a software development kit in March 2008 and the app store in July 2008. The iPhone became a two-sided plat-
form, connecting users and app developers.

Google promoted an open-source mobile operating system called Android. Android is a framework for orga-
nizing the ecosystem for Android smartphones. Google has organized a coalition of handset makers, mobile
carriers, software developers, and others. They all agree to maintain a standard version of Android, and Google
has developed a certification system to ensure compliance.

Interior Design

Every matchmaker must determine how to design a platform that increases the chance that participants will be
able to find one another and interact. The new economics associated with multisided platforms demonstrate
that the following design guidelines almost always apply:

Make markets thick. This occurs when a platform gets large numbers of
Any new platform has participants on all sides that want to interact with one another.
to develop a thick mar- Remember that small can be beautiful. In some instances, platforms add
ket in which there are value by limiting their size and focusing on recruiting certain types of par-
enough participants ticipants to make it more likely that they will want to interact. This may be
on each side that accomplished through a platform screening device.
want to interact with Facilitate searching and matching. The design of the platform must help
enough participants promote interactions between the participants. This may be done by us-
on the other side. That ing a standard, such as software development kits, or guidelines, like Twit-
ters 140-character limit.
often requires focus-
Balance externalities. Some multisided platforms match participants who
ing efforts narrowly.
ordinarily would not want to get together, such as media businesses that
offer content as compensation for also receiving advertising messages.
Fakesters and Fraudsters

With multisided platforms, externalities can be generated as a result of participant behavior. Since community
members can impose behavioral externalities on other community members, some platforms impose laws and
regulations. The goal is to discourage participants from behaving badly. The ultimate punishment for platform
members who behave badly is often to be banned from the community.

Fizzle or Sizzle

Before embarking on the development of a new multisided platform, entrepreneurs should consider six key
questions:

1. What is the friction, how big is it, and who benefits from solving it? When important frictions exist, platforms
have the potential to provide greater value. In the absence of significant friction, there is no reason to invest
in a multisided platform.
2. Does the design of the platform reduce friction, balance participants interests on all sides, and do so more ef-
fectively than other market entrants? The answer to this question, unfortunately, is usually no. Analyzing how
the platform is designed to reduce friction can indicate how likely it is to succeed.

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Matchmakers David S. Evans and Richard Schmalensee

3. How hard is the ignition problem and does the entrepreneur have a solid plan for attaining critical mass? While it
may be possible to design a platform that could deliver significant value with significant participation on all
sides, it may not be possible to develop critical mass to reach ignition and thus attract enough participants.
4. Do the prices needed for ignition and growth enable the platform to make money? If a matchmaker creates
sufficient value with its platform, the value pie should be big enough to fund subsidies needed to win the
most desirable participants and also to make money.
5. How will the matchmaker work with others in the ecosystem? Does it face related risks, and has it dealt with
them? The significance of the broader ecosystem varies across different platform ventures. Entrepreneurs
must determine whether other members of the ecosystem could help or hinder ignition and growth of the
platform.
6. Is the entrepreneur ready to rapidly modify the design and ignition strategy in response to market reactions?
Learning from the market and taking action is essential to achieve balance across multiple dimensions.
If platforms do not succeed in the first couple of years of their lives, they almost never do. When platforms
struggle to achieve critical mass, they face a significant risk of fizzling out.

Part III: Creation, Destruction, and Transformation

Moving Money

In the mid-1990s, the first mobile network operators entered Kenya. By 2006, around 7.3 million out of 20.7 mil-
lion Kenyan adults had mobile phone subscriptions, and around 73 percent used Safaricom. Safaricom adopted
a mobile money platform developed by Vodafone that enabled people to send and receive e-money via their
mobile phones. This subsidiary of Safaricom is called M-PESA.

To make M-PESA a success, Safaricom had to create a network of physi- Multisided platforms
cal locations where individuals could both deposit money into the system
are communities, too.
and withdraw it. Building a cash-in, cash-out (CICO) network from scratch
was impractical, so the company worked with existing convenience stores. Their whole reason
M-PESA had to cultivate two intersecting, two-sided platforms: one with CICO for being is to provide
agents and M-PESA users and one with senders and receivers of money. At the a place for partici-
time of its launch in 2007, M-PESA had 307 shops and agents in all 70 district pants to get togeth-
headquarters in Kenya. It had to balance having enough agents to serve cus- er. They are, in many
tomers but not so many that low profits would discourage agents. To attract
respects, like villages,
users, M-PESA developed a pricing model that encouraged senders to recruit
receivers. The key to M-PESAs success was dramatically reducing the friction cities, and countries.
associated with sending money home.

Once M-PESA gained a critical mass of users, it went on to develop other services based on its platform. For
example, utility companies and schools began accepting payments through M-PESA. It also developed its
own payment system, enabling brick-and-mortar merchants to take payments from M-PESA users. By late
2015, M-PESA comprised four intersecting, two-sided platforms: a sender-receiver money transfer platform, a
registered user-CICO agent platform, a financial services-registered user platform, and a registered merchant-
registered user platform.

Gone Missing

Multisided platforms are leading to the creative destruction of the retail business in the United States. While
luxury malls still attract customers, down-market malls are suffering. Although most retail sales are still made
in physical stores, consumers now visit far fewer stores than in the past. Customers now go to online stores to

Business Book Summaries September 20, 2016 Copyright 2016 EBSCO Publishing Inc. www.ebscohost.com All Rights Reserved 6
Matchmakers David S. Evans and Richard Schmalensee

see what products are available and to compare prices. As a result, brick-and-mortar stores have fewer window
shoppers and casual browsers.

Traditional retail stores are threatened by the subsidized side of multisided platforms. Although some businesses
have succumbed, others have adapted. Some integrate physical and online approaches to serving customers,
known as omnichannel marketing. Other innovations include the Apple Stores mobile cash-out system, in which
customers can pay associates using an iPad, as well as Bonobosguideshops, where customers try on merchan-
dise and then order it online. Bonobos approach eliminates the need for high levels of in-store inventory and
blends the advantages of physical stores with the efficiency of online commerce. The authors predict that the
transformation of retail will occur slowly, over the course of many years.

Slower and Faster Than You Think

Todays new matchmakers are using modern information and communications technology to turbocharge the
multisided platform business model. They are transforming the way business is done, but this transformation
will happen slowly over the course of decades, punctuated by bursts of rapid change. History suggests that the
current matchmakers will not be the last to stir up the business world.

Features of the Book

Estimated Reading Time: 56 hours, 272 pages

In Matchmakers, David S. Evans and Richard Schmalensee explain the complex dynamics of multisided plat-
forms and what it takes to succeed with this form of business. The book would be of interest to entrepreneurs
who want to found a company based on matchmaking principles or those who interact with multisided plat-
forms in their personal or professional lives. Charts and graphs are included throughout to illustrate key points.
Each chapter is linked to the next, so it is advisable to read the book in order.

Contents
Introduction

Part I: Economics and Technologies

1. A Table for Four at Eight

2. The Grab All the Eyeballs Fallacy
3. Turbocharging
Part II: Building, Igniting, and Operating Matchmakers

4. Friction Fighters
5. Ignite or Fizzle
6. Long Haul
7. Beyond the Castle Walls
8. Interior Design
9. Fakesters and Fraudsters
10. Fizzle or Sizzle

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Matchmakers David S. Evans and Richard Schmalensee

Part III: Creation, Destruction, and Transformation

11. Moving Money

12. Gone Missing
13. Slower and Faster Than You Think
Glossary

Notes

Index

Acknowledgments

About the Authors

Further Information
Information about the authors and subject:
matchmakereconomics.com
Information about this book and other business titles:
hbr.org

Click Here to Purchase the Book

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About the Authors

David S. Evans is an economist, business adviser, and entrepreneur. He cofounded and helps lead two consult-
ing organizations: Global Economics Group, which provides economic expertise on antitrust and regulatory
matters, and Market Platform Dynamics, which advises companies on multisided platform strategies. He is also
Chairman of PYMNTS.com, a multisided media and data analytics platform he cofounded. In addition, he has an
active academic career and has written, coauthored, or edited 10 books.

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Matchmakers David S. Evans and Richard Schmalensee

Richard Schmalensee is the Howard W. Johnson Professor of Management and Economics, Emeritus, at the
Massachusetts Institute of Technology and served for nine years as the dean of the MIT Sloan School of Man-
agement. A former member of the Presidents Council of Economic Advisers, Schmalensee is one of the worlds
leading scholars on the economics of industrial organizations and its application to government policy and
business strategy.

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