Open Marketplaces Deliver the Best User Experience

Open Marketplaces Deliver the Best User Experience

Open Marketplaces are built to improve user experience first, and to collect revenue second.

If the year 1999 was the age of the Internet search, the year 2019 is now the age of online marketplaces. Everyone wants to build one, everyone wants everyone else to think that they have one, but only a handful of platforms end up making a positive difference via network effects. The truth is marketplaces are rare and building marketplaces is incredibly hard. An online marketplace either creates value by improving the way a product or service is sold (ex. Craigslist) or develops an entirely different market of goods and/or services (ex. Airbnb). Regardless, of the development strategy the marketplace picks, a true marketplace does not sell a product or service, but rather facilitates the sale of products and services of others.

As soon as the marketplace develops and sells self-generated product or service, the marketplace is no longer objective. For this reason, companies that sell self-generated products and/or services work with a different unit economics and are excluded from this discussion (ex. Redfin).

What is an Open Marketplace?

One of the core revenue generators for selling a product of others is a rake or a markup. A rake is typically defined as an amount that a marketplace receives without ever having to pay for the product up-front (ex. Booking-dot-com has a 20% rake), where a markup is typically added by a retailer after it purchases items for re-sale, mostly in bulk (ex. retailers typically use a 50% markup on merchandise).

An Open Marketplace, by definition, has a zero rake on any goods and services; Open Marketplace never buys items for subsequent resale either. An Open Marketplace is an independent source of information that treats purchases and negotiations for goods and services as digital content, regardless of any present monetary value. Open Marketplaces are very rare ever-elusive online unicorns because they tend to truly operate as Internet media companies and can only grow in mega-markets.

Today, the list of Open Marketplaces is highly limited due to the enormous difficulty of building them. Google Search, for example, is in a continuous battle with itself to be an Open Marketplace, as it looks to balance unbiased search with rakes on various products and services across almost every market vertical imaginable. Despite these flaws, Google Search, in many ways is designed to function as an Open Marketplace for many consumer verticals, even if it sometimes fails to achieve the intended goal due to inherent drive of pay-to-play on the Internet.

Craigslist is another example of an Open Marketplace, for obvious reasons, it is a lite marketplace model designed to connect people with different needs in very different verticals. Craigslist primarily makes money in a single vertical - job postings, which allows it to keep the rest of the service free from pay-to-play influence.

Facebook Marketplace is a recent example of the social Goliath looking to develop an Open Marketplaces experience. With a model similar to Craigslist, Facebook Marketplace uses social media network effects to help facilitate classifieds interest without having to rely on a rake. Facebook Marketplace, however, sometimes chooses to facilitate services offered by Raked Marketplaces, such as in housing services sector.

This is where the list abruptly ends (except maybe Bing Search and Yelp!) Almost every online marketplace, in their current form, is raked.

Disruption of Raked Marketplaces

Raked Marketplaces are a temporary shortcut and do not belong on the Internet in the long-term. As Internet users, every one of us pays a fee to access this massive network each month. The access we pay for is a privilege, not a right.

As part of our paid access to the Internet, we expect our experience online to be transparent, mobile-friendly, fast, convenient and open. We expect to interact with other Internet users and Internet services knowing full well their true intentions and business models. We expect to build new knowledge and form our opinions with solid, unbiased information. We expect to purchase products and services free from third-party pay-for-play influence and hidden fees. We expect privacy and transparency.

Unfortunately, these expectations are impossible to meet when dealing with Raked Marketplaces. Every single Raked Marketplace operates on an instant gratification principle – a sale is made, revenue is generated. Open Marketplaces, on the other hand, are only paid once the network effects have been established and only via axillary services, such as relevant ads or optional premium services.

For example, while Craigslist is largely free to use, in theory by charging employers for job postings, it yields pay-to-play results for that vertical. While Google Search aims to be unbiased, Google Ads pay-per-click process yields a highly biased experience (so much that some people now refuse to go online without ad-blocking software.) Every Internet service must generate revenue, but an Open Marketplace generates revenue by separating the user experience from the revenue source, where a Raked Marketplace aims to tax the user experience with fees directly.

One of the great examples of a Raked Marketplace is Yahoo! before the Google Search was first developed. All Yahoo! search results in their early days have traditionally suffered from pay-to-play without disclosure to users, leading to spam-filled output. Google Search was able to disrupt Yahoo! with a lite and unbiased search engine approach, via intuitive PageRank content valuation algorithm. This product has since grown into a conglomerate of many Internet tools and services almost everyone on Earth uses daily.

Raked Marketplaces are relatively easy to build and difficult for Internet users to avoid during an Internet paid marketing revolution. A Raked Marketplace can operate on a low success rate, yet offer high returns to investors and founders. Similar to a Spam email, a Raked Marketplace needs only a few users to take in the bait while targeting a much larger Internet user base via paid ads. Often a Raked Marketplace will continually turn the rake revenue into ads, arguing for a thin veneer of an unbiased approach or a fair matching service that, in reality, is nothing more than a pay-to-play product and a false proposition.

In another approach to promote a Raked Marketplace, Amazon Home Services has an enormous reach and it operates on a 15%-20% rake. Theoretically, all services from Amazon Home Services should be that much more expensive, but the company unilaterally fixes prices for all participants, leaving consumers with fabricated savings and service providers with a take-it-or-leave-it no upfront costs offer. This is an example of a process that can only be broken down with an application of antitrust law in the United States.

User experience vs. consumer experience

Often Raked Marketplaces, such as Amazon Home Services, say that they obsess over consumer experience. That statement is debatable since almost all Raked Marketplaces technically can only offer a "blind" match to consumers. Open Marketplaces truly obsess over the entire user experience. The key difference here is that unlike a Raked Marketplace, an Open Marketplace treats the sale of goods and services as content. From a content point of view, to help one user to buy a car is, theoretically, just as valuable to an Open Marketplace as helping another user to sell a home. To build a successful Open Marketplace, the service must ensure that all parties to a transaction are happy, where a Raked Marketplace will often abuse the supply side to gain favors from the demand side.

In that sense, Raked Marketplaces often "forget" that there are two sides to any transaction and that parties on each side are both users of the platform. For example, a Transportation Referral Network, UBER, consistently aims to set prices lower for independent drivers in their network to attract more consumers to use the service, but that motivation largely ignores the fact that each driver is an independent user of the platform as well. With a set rake for each transaction, UBER operates as a Raked Marketplace and further subjects supply side to a price-fixing scheme.

An Open Marketplace for ride-hailing is difficult to build, since, by definition, it cannot place a direct rake on the drivers’ services. However, it is possible, for example, to facilitate such experience with a separate payment processing fee that requires a driver and a rider to use a single and a highly efficient payment processor. As long as Raked Marketplaces, like UBER, are allowed to set rates for independent drivers unilaterally, an alternative experience is impossible to develop because UBER will always be able to unilaterally lower prices as a way to remove competition. Price fixing is always cheaper to build and maintain than competitive network effects.

The power of an Open Marketplace

There is a very big distinction between the impact scale of a marketplace and revenue scale of a marketplace. Amazon is, by far, considered by many as one of the most profitable marketplaces on Earth, but at the same time, Craigslist and Yelp! may be considered just as powerful as Amazon when it comes to the overall impact on business practices in the United States. Opendoor, for example, made a big deal to take down just a single Yelp! page due to hundreds of negative reviews.

In another comparison, Alphabet is worth about the same amount as Amazon (close to $1 Trillion Market Cap in 2019,) but the power of Alphabet far outweighs the power of Amazon, when we consider the impact on the development of the Internet between the two companies. Amazon is a drop in the ocean of information that Alphabet curates. Wikipedia is not a marketplace, but the impact of the user-generated articles there far outweighs the revenue the company receives in donations.

The reason for a massive advantage in impact is simple: Open Marketplaces deliver unbiased content and Raked Marketplaces do not. Amazon largely owes its success to skirting sales taxes, efficient vertical distribution, low-cost reliable shipping, and economies of scale of cloud computing. Google largely owes its success to being able to organize information efficiently by changing the way information is delivered from pay-to-play philosophy of early search engines (ex. Yahoo! Excite, etc.) into a largely unbiased output.

The power of an Open Marketplace is far greater than anything a Raked Marketplace can deliver, simply because all Internet users place unparalleled value on accurate and unbiased content.

Development of new Open Marketplaces

Founders who build Open Marketplaces rarely do it for money alone, we do it to create impact. Raked Marketplaces provide far greater certainty of revenue, but very little impact. For HomeOpenly, our efforts yield an ability to save housing industry from having to pay tens of Billions USD in kickbacks each year, which directly lowers the cost of owning a home for almost every single residence in the United States.

While HomeOpenly can never compete with Opendoor based on revenue per user, there is no question in my mind that an overall impact of a technology company killing home-flipping and referral fee schemes in the industry is much more important than revenue alone. The reason for that is the organic power of an Open Marketplace comes with an ability to deliver the superior user experience. For example, Google is on the mission to organize the world's information and make it universally accessible and useful. HomeOpenly is here to help our users to make their opportunity of homeownership transparent, affordable and open experience. Open Marketplaces are built to improve user experience first, and to collect revenue second.

On the other hand, Opendoor claims to be on a mission is to make the process of buying or selling a home as seamless as possible, but as a real estate investor, the actual mission for Opendoor is quite different: to convert cash leverage into discounted offer on a home, or to refer a consumer to a broker for a referral fee. The mission of an Opendoor is directly tied into revenue on each transaction. This comparison is not entirely fair because Opendoor is not a marketplace and I have agreed to exclude such companies from the discussion, but that distinction does not apply to Opendoor Brokerage.

Opendoor Brokerage is a Raked Marketplace (a broker referral network) that does not produce a service or facilitate the process of buying or selling homes, where it simply collects 1% in home value by referring consumers to brokers (ex. Opendoor Brokerage stipulates that Opendoor Partner Agent offers a 1% rebate to buyers. This is a price-fixing scheme because this stipulation falls on random agents who work independently for themselves). Opendoor Brokerage is an example of a Raked Marketplace that acts to place its financial interest before the financial interests of their users. This is just one example of how Raked Marketplaces exist to abuse their access to our Internet, instead of working to improve user experience.

An Open Marketplace is a BigTech Enterprise

Open Marketplaces are rare because they tend to either grow into a massive experience or go nowhere at all. All successful Open Marketplaces eventually gain positive user experience as BigTech Enterprises simply because all users love them. Google Search, for example, can get almost every single business in the world to aim for higher ranking on the platform, while being able to deliver great and free search results in scale at the same time - hence, most users love it.

Craigslist and Facebook Marketplace are looking to do the same thing with classifieds, be that as it may, short-lived content. An Open Marketplace is practically required to become a major source of information simply because it must operate in massive consumer markets on a highly efficient scale to be able to disrupt Raked Marketplaces.

Open Real Estate Marketplace

Unfortunately smaller addressable B2C markets do not get the privilege of Open Marketplace disruption, because economies of scale are not quite there. The United States residential real estate is not a small market by any means.

Consumers in the United States currently spend about $10-$15 Billion each year in referral fees paid into the highly raked industry, as well as about the same amount in excess fees for mortgages, home insurance, and maintenance real estate verticals. The main reason referral fees are such a big problem is that a real estate transaction happens to be a low-frequency and a high-price-point experience that is easily subjected to an exigent rake. Consumers end up paying for referral fees with high commissions that make it directly into their mortgages. Real estate agents who do the actual work end up losing a major chunk of revenue as well as the trust of their client. By some estimates, consumers lose about 10% in home’s total equity in any given transaction simply due to transaction and loan origination fees alone.

US residential real estate market is an ideal target for disruption by an Open Marketplace. First, it is the largest B2C market in the world that revolves around total aggregate assets valued at $31 Trillion. Second, listing commissions and home-flipping fees are the biggest pain points in consumer experience, so if an Open Marketplace can fix this process, it can develop revenue with auxiliary advertisement solutions, similar to Google Ads products. The key to this is to effectively treat all users with a fair play approach and advertised savings as plain and simple user-generated content.

Once HomeOpenly develops an Open Marketplace in scale, it will become a stand-alone homeownership portal and an alternative to every referral fee network, such as Zillow Premier Broker, Opendoor Brokerage, and Realtor-Opcity. In this disruption, neither consumers nor real estate agents will need to pay excessive fees simply to meet and negotiate with one another.

To disrupt, or to help BigTech?

As an Internet community, we must allow for BigTech products to be developed into Open Marketplaces. To break up BigTech for no other reason than it is "big and powerful" is a mistake. BigTech services built as an Open Marketplace must be empowered to disrupt a massive invasion of Raked Marketplaces on all significant B2C verticals.

The Internet was not built as a Raked Marketplace, but it will become one if founders no longer have an incentive to break pay-to-play in scale. The problem of BigTech is that some companies choose to employ price-fixing, consumer brokering, market allocation, vertical bundling, and other antitrust violations as a means to gain market share. Open Marketplaces cannot disrupt pay-to-play bias alone - we need help from the Internet community and federal authorities to enforce antitrust regulations.

As a matter of the Internet user experience, it is in our interest to empower, to use, to build, and to protect open “Google for X” marketplaces, but at the same time, make all possible efforts to stop “UBER for X” raked marketplaces from building and reaching the scale of a BigTech Enterprise.

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Published on July 29, 2019