Last month I finished reading China’s Mobile Economy which described China’s emerging internet eco-system mostly among Baidu, Tencent, Alibaba (BAT). What struck me from the book is how internet platform businesses are using their category dominance to expand into adjacent services. The internet today might be best thought of as a number of category verticals: search (Google / Baidu), social (Facebook / Tencent), e-commerce (Amazon / Alibaba), entertainment (Netflix / Tencent), transport (Uber / Grab / Lyft), payments (paypal / mastercard, visa) etc. For instance, Alibaba-owned Ant Financial is using data from its consumer e-commerce business to underwrite new retail loans to cunsumers. Grab is trying to expand its transportation platform into payments through existing relationship with customers. Tencent is using its WeChat chat platform to expand into online stores and payments. In each case a direct relationship to the end consumer (B2C) is being leveraged to both dominate a category and attempt to expand into new adjacent categories.
Parallels to a 19th century post office
What struck me about these platforms and their direct customer relationships is the similarities to a 18th century post office, which was perhaps the first B2C platform business. Initially postal carriers focused on a specific city / region and gradually became national entities. Like newspapers, which were a platform of delivery of news + classifieds, post offices were a platform for commerce and were regulated as natural monopolies recognizing their dominant market power and network effects. Unlike post offices, today’s B2C platforms possess zero distribution costs making them potentially much more potent than their 18th century precursors.
From innovation to regulation to entrepreneurial flourishing?
If the 18th century postal system is an appropriate analogy to the category dominant B2C platforms of today it seems the business cycle could follow a well-worn pattern of innovation, competition / regulation, then entrepreneurial flourishing.
In the period of innovation, first movers exploit the paradigm-change. For instance, railroads & canals were a paradigm-changing infrastructure innovation in the 19th century. By 1910 fully 60% of the stock index capitalization was railroad securities (by 1930 they would be mostly bankrupt). It seems the obvious implication is if an investor didn’t own railroads, they would’ve likely grossly under-performed the index during this period.
Next, as first movers dominate their category, they are either regulated as natural monopolies (postal services / railroads) or attempt to expand into adjacent categories (railroads expanding into new territories). Until the late 20th century Canadian National and Canadian Pacific, two national railways, often had tracks which ran in parallel with each other. In today’s environment Google is moving into entertainment (Youtube) illustrated the same: these two activities exist in different categories, but both rely on advertising to effectively monetize consumer attention; Google’s acquisition of YouTube brought the company potentially in direct competition with Netflix and Apple.
The third phase emerges through regulation or competition where open-access platforms provide a base for new businesses to emerge. For instance, in the case of postal services, Sears began as a mail-order catalogue which operated on-top-of the postal system and sold a range of consumer goods exceeding the selection of the main street store. Today that might be analogous to open-access API’s allowing new entrants to leverage on Facebook’s existing B2C relationships with users: for instance, Snapchat might be able to create a better social feed product built on-top-of user’s existing Facebook friend circles.