The ‘Uber Of Nothing’ Is Coming

Uber Dials Back New Engineering Hires

Payment’s Next Big Thing: The “Uber Of Nothing”

”I’m about to sneeze. May I have a Kleenex, please?”

“I have a headache. Do you have an Aspirin?”

“Quick! I cut myself and need a Band-Aid.”

Kleenex. Aspirin. Band-Aid. It’s not as if a person making the request for a tissue, pain reliever or bandage was specifically asking for a Kleenex, Bayer Aspirin or Band-Aid brand item. But, over many decades, these three brand names achieved such dominance in their categories that they became the most natural way for people to refer to all products in that category.

So natural, in fact, that the original brands can no longer protect their copyright.

Now, every Kleenex and Bayer Aspirin and J&J Band-Aid wannabe can go crazy making copycat products — and legitimately use the original inventor’s name to establish a mental frame of reference as they scheme to get customers to switch to their brand.

I was reminded of this phenomenon recently after scanning a bunch of stories that described a variety of “disruptive” innovations in payments.

iHeartDogs — The ‘Uber’ of dog walking”

Stripe — The ‘PayPal’ of mobile”

Cookies — The Venmo’ of Europe”

Now, it took a few decades — like nine of them — for Kleenex and Band-Aid and Aspirin to devolve into generic trademarks.

But unlike the relatively straightforward task of figuring out how to make a better Band-Aid, stronger pain reliever or softer facial tissue, the Uber and PayPal and Venmo wannabes face a much tougher task.

How to actually become the Uber and PayPal and Venmo of their category.

Since devising the platform business model that underpins the successful deployment of an Uber, a PayPal and a Venmo-esque business looks way, way easier and takes way, way longer to accomplish than innovators think.

In other words, invoking those brand names is probably the first and last easy thing that those platform wannabes will ever do.

PLEASE, DON’T TRY THIS AT HOME!

Technology, cloud computing, the diffusion of mobile devices, the many location-based technologies that mobile enables and an ever-growing supply of APIs and SDKs all make it incredibly tempting and even easy to start a “platform” business. Books and articles today abound about how platforms are the slick new models that will rule the world — tempting businesses with a “winning” formula for devising new and disruptive businesses. Platforms, they write, are as magical as the unicorn businesses they have spawned. And if your business isn’t one or planning to become one, then be prepared to fall prey to one that is.

Enterprising entrepreneurs are keen to drink that Kool-Aid. What’s not to love about a business that can allegedly make billions in a few short years?

So, ideas abound about how their platforms will become the next Uber or PayPal or Venmo of their category. And how they will turn those ideas into companies that can IPO and be worth billions in no time flat.

Add to that the fact that investment returns in just about everything today are so pathetic that VCs with big bank accounts don’t mind tossing a few million here and there to these platform wannabes. What’s so bad about investing a couple of mil (when you have a couple hundred mil) in the Uber of Dog Walking? Compared to the alternative — losing it in the market anyway and/or being taxed on whatever returns they might manage to eke out — the downside doesn’t appear too threatening.

Worst case — VCs lose it all. But until they do (which they inevitably do), they have some interesting stuff to talk about at cocktail parties.

And someone to reliably walk the dog for as long as it lasts.

PLATFORMS AREN’T NEW AT ALL — IN FACT, THEY ARE AS OLD AS DIRT (FLOORS)

Platforms, though, aren’t new; in fact, some of the earliest examples of platforms are the covered marketplaces where merchants would assemble to hawk their goods and consumers would come to buy them. The Grand Bazaar in Istanbul dates back to 1455 and is one of the oldest and largest examples of its kind.

Jonathan’s Coffee-House in Change Alley in London was the basis of the London Stock Exchange. There, in 1698, John Castaing posted stock and commodities prices and enabled the physical exchange of securities.

A few centuries and a personal computing age later, there’s the Windows OS. In 1985, Microsoft released its first (not so popular) version of Windows — an operating system that enabled applications to deliver functionality on a variety of personal computers.

Over the years, outdoor bazaars became main streets which morphed into malls and now online marketplaces where sellers and buyers meet to do business.

Coffee shops morphed into clearing houses and physical exchanges which morphed into electronic exchanges where buyers and sellers make trades in less time than it takes to blink an eye.

Software platforms today bring developers and a range of devices together to provide new and valuable functionality to PCs and video games and smartphones and tablets and voice-activated Echo’s and thermostats and cars — and soon just about anything that can connect to the Internet.

It’s also true that the tools available to innovators today make platforms easier than ever to create. There are lots of places where developers can even get a readymade template. One enterprising entrepreneur launched a do-it-yourself “Uber for X” toolkit for $400. Now, 48 hours and $400 later, you too can be the proud owner of a platform ready to launch your very own “Uber of X!”

But all the $400 toolkits in the world can’t magically get all of those “Uber for Xs” to ignite and scale.

That’s where a little history — and a lot of economics — can help. Not to mention the wit and wisdom of the two economists who’ve been working in this field for the last two-and-a-half decades and with a variety of platforms old and new. David Evans and Dick Schmalensee have a new book, “Matchmakers (Harvard Business School Press, May 2015), which presents the good, the bad and the ugly of platform businesses.

And a bunch of lessons about their future prospects — if we really understand what’s made them work for millennia.

Starting with…

WHEN IT COMES TO PLATFORMS, THE PAST IS PROLOGUE

There are four things that all successful platforms share.

One: They make it incredibly easy for different groups of customers to get together and do business.

Fundamentally, platforms have made it easy for one group of stakeholders with a real need to get matched up with another group of stakeholders capable of addressing that need for them. Platforms are matchmakers in their most basic form.

It’s the devil in the matchmaking details, though, that will make or break a platform.

It’s relatively straightforward to solve the problem for the person with the skinned knee who runs to the medicine cabinet to grab a Band-Aid.

Platforms have dependencies that they have to manage carefully.

Customer A only values the platform if there are enough Customer Bs available to her when she has that problem. And Customer B is only interested in the platform if he knows that there will be a steady stream of Customer As to make it worth his time and trouble to be part of that platform.

Uber wouldn’t have gotten very far if it had a lot of passengers but few drivers to take them where they wanted to go. And drivers wouldn’t sign onto Uber if they didn’t think they’d get enough paying customers.

In fact, balancing that supply and demand is something that Uber — and all platforms — have to watch like a hawk. It’s why if you cancel a ride with Uber, it now pushes you a survey asking why. One of the questions it asks is whether the wait was too long since getting the balance of supply and demand is critical to its ongoing success.

But that’s not all that platforms have to do.

Two: Platforms have to operate at scale.

Successful platforms have to match enough of those stakeholders with each other so that the platform develops traction and momentum and scale.

And, to use our word, ignition.

That’s really important. Traction and momentum and scale and ignition are the path to a profitable platform.

And operating at scale means that platform operators have to know which “side” of their platform they need to get on board first in order to attract the other side.

It’s why Uber’s stroke of brilliance was realizing that black car drivers had a lot of idle time between gigs and the incentive to make money during those periods of downtime. And focusing on a particular city where it could get critical mass rather than trying to boil the ocean. When it launched in San Francisco, Uber had a network of drivers with cars to get passengers with the app excited to use it. More passengers who loved the experience brought in more drivers who wanted to make money during their idle hours — in San Francisco and with a replicable model that’s expanded now to 400 cities worldwide.

PayPal had eBay in the late 90s and early 2000s. EBay gave PayPal a customer base of millions to leverage and get on board. When it decided to move off eBay and become a payment type for online merchants, it had those consumers to offer to merchants as an inducement.

Yet, for PayPal to increase its usage, it needed more and more merchants for those consumers to shop and find PayPal online, and for merchants to be interested, it needed more consumers to sign on or activate their existing PayPal account.

That consumer/merchant two-step has characterized PayPal’s path in retail payments over the last decade — balancing the need to give consumers more places and more reasons to use it and merchants more reasons to add it to their sites.

And for it to monetize its platform.

Three: Platforms need a business model that can make money.

The business model is jet fuel that will ignite the platform and enable it to scale.

It’s also the trickiest part of being a platform.

Making the wrong decision can throw the platform into a death spiral where the revenue-generating side of the platform leaves for greener platform pastures.

Or condemn it to a life in platform purgatory from which it may never emerge since neither side contributes enough value to the platform to deliver a profitable business.

Uber has threaded this needle repeatedly over the years. When it lowers prices to attract more consumers during off-peak times of the year, some drivers balk and threaten to quit. When Uber started, it took a lower percentage of the fare from drivers than it does now — as a way to get them on board. Uber also has to worry about launching line extensions to monetize its platform without cannibalizing its core business and losing drivers and passengers.

You don’t have to be a high-tech platform to suffer from the platform business model blues.

Newspapers continue to struggle to sort out ways to monetize their platforms in a digital age and a plethora of free content.

Shopping malls are reassessing how they can shore up their business model as they adjust to the new normal of customers moving online and away from trips to the physical store.

Card issuers contemplate new models as competition grows for top of wallet in a digital age and decisions about what consumers value and how much they’ll pay — if anything — to access it.

The rookie mistake, though, is to assume that one side of the platform always has to be given free access — assuming that, at some point, free can be turned into a fee.

Uber charged both sides at the jump and passengers an even higher fee than a traditional taxi ride.

Apple, whose operating system and APIs give developers the incentive to create apps for the App Store, charges both sides, too. A customer has to buy a (pretty pricey) Apple product to get access, and developers pay 30 percent when someone downloads a digital good. (Of course, fee apps don’t pay, and for now — let me repeat, for now — apps that sell physical goods and services like Uber don’t pay.)

Even payments cards charge both sides. Credit cards come with interest if consumers revolve their balances. Debit cards attached to a checking account usually require a minimum monthly balance to avoid being charged a monthly fee, and prepaid cards have a similar model. In all cases, merchants pay a percent of the transaction to accept the cards.

But “set-it-and-forget-it” business models don’t work either. Platforms must constantly monitor what’s happening around them and tweak their models in response. Otherwise, risk someone latching onto the money side of their platform, which can trigger a downward spiral.

Four: A platform’s work is never done.

When all you hear about are the success stories and unicorns and multi-billion dollar IPOs with scant revenue streams to support the valuations, it’s easy to ignore how long it’s taken successful platforms to scale.

And how the work of keeping a platform’s equilibrium is really never done.

Venmo is a massively successful P2P platform that has become a verb with millennials who wish to pay each other after a trip or a night out. In Jan. 2016, Venmo had its biggest month ever — as users “Venmo’d” $1 billion to each other.

Venmo is also a seven-year-old “overnight sensation” which has lots of users but not a lot of profits.

Venmo was established in 2009 and acquired by Braintree in 2012 for roughly $26 million. Yes — you read that right — $26 million. It became part of PayPal when it acquired Braintree.

Yet, even as it turns seven, PayPal admits that Venmo isn’t setting any land speed records for minting profits. And it doesn’t expect it to either. Venmo’s consumer network is an asset that PayPal can use in many other ways. And Pay with Venmo is one of the strategies that it believes will help monetize the tens of millions of users who use Venmo today and pull in merchants who wish to tap into an already actively engaged millennial crowd.

Venmo’s mothership, PayPal, will be 18 this fall.

It’s been an 18-year march to gather ~170 million consumers and 13 million merchants online. It was also well-positioned to ride the popularity of mobile as a shopping channel over the last five years — as PayPal’s digital utility on a mobile device allowed its appeal to consumers and merchants to strengthen.

The most underestimated aspect of operating a platform business is how long it takes for a platform to get to scale. To be successful — where success is solving a problem for multiple groups of customers and where that value can be monetized — platforms must build up a critical mass of customers so that the platform can operate at scale.

And do it before something (or someone) else comes along that makes the platform proposition irrelevant.

It’s also why most innovators with platform ambitions should think again.

THE PLATFORM PARADOX

It might be that the biggest injustice that’s been done to platforms over the last few years is the oversimplification of what it takes to be successful. And suggesting that to be a relevant business today one has to adopt a platform business model.

Don’t get me wrong — I love platform businesses and the complicated creatures that they are. I’ve launched a few and advised many, many more — it’s a business construct I know very well. I know that when they work, they are genius.

But I also know that for every success story, there are thousands of failures. And many more on life support that you never ever hear about.

And that it’s the hardest thing that any business will ever undertake.

Even the biggest companies in the world — many of whom operate successful platforms — have found launching platforms daunting. Mobile payments — Apple Pay, in particular — is Exhibit One. As is NFC as an enabling payments technology in the U.S. The telcos with hundreds of millions of consumer relationships thought it would be easy to launch a new payments system called Softcard until it wasn’t. And merchants with access to millions of consumers thought it would be easy to launch a payments scheme called MCX until they discovered that consumers had to find value in a new payments method and that all participating merchants did too.

The most prominent VCs in the world, who see a thousand pitches a week, have also found out the hard way how complicated platforms are to scale and monetize. Online lending marketplaces are platforms whose model is starting to show signs of strain. As are the hundreds of delivery platforms who can’t scale because there’s too much supply and not enough paying consumers to drive the demand. Not to mention the hundreds of “Uber of Xs” who have found that actually being an Uber is a lot harder than saying that you’re just like it.

Not everyone has to be a platform to be successful. But that doesn’t mean that all is lost for innovators with platform ambitions.

It may be that the best opportunity to make money from a successful platform is to become part of someone else’s successful platform — leveraging their scale and access to monetize your business idea.

Here are some examples.

Netflix isn’t a platform, but it’s built a massive business as an app (it’s not a platform, it’s a reseller, because it pays for the content up front and then makes it available to people).

Oracle is another example of a company that’s worth a lot by building applications for other folks’ platforms.

Electronic Arts is an example in games.

An entrepreneur might do better building inventory for Airbnb than starting the Uber of plumbers.

And the list goes on.

I’m not suggesting that you should drive a limo for Uber instead of starting your own platform — although, frankly, the expected payoff might be higher. Of course, it would be great being the Uber of Something.

But a lot of entrepreneurs are more likely to be the Uber of Nothing and burn up a lot of VC cash, because they think platforms solve all problems and ignore just how hard being a platform is.

If I only had $1 million for every payments platform that has gone up in smoke in the last 10 years, I’d be writing this, or maybe not, from my very own island in the Caribbean.

And I wouldn’t have even needed the Uber of Private Jets to get me there either.