Hindsight : March 2018

What's Behind Door Number Two? It Better Be You.

We live in a platform-to-platform world. And if you don't have one, meaning, if you are not Amazon or Google or Apple, you'd better make sure that you've got a spot on one of their internet life rafts, or risk being swamped.

By Howard Tullman

CEO, 1871@tullman

The value of any asset is in part a function of scarcity. That's also true of highly-desirable partners. Scarcity permits a limited number of those players with early access to, or control of, scarce assets to exercise an overwhelming competitive advantage in the marketplace and to withstand the attacks of even far larger and better-funded entrants for extended periods of time.

The base case for this market scenario that most easily demonstrates the necessary pre-conditions and the consequent impact on the players took place many years ago in the airline industry at the very beginning of the era of frequent flyer programs. What ensued was a highly-competitive game of musical chairs with cross-industry partners taking the place of the chairs. The winners got dates and the wallflowers got screwed.

In that case, American Airlines quickly and quietly linked its mileage rewards program to regular purchases their members made using their Mastercards. In the points-acquisition frenzy of those early days, this new perk was immediately perceived and appreciated by the AA program members as an additional and painless way to accumulate frequent flyer miles without altering their day-to-day spending. United promptly responded by cutting a deal with VISA. And here's where things got very interesting because American Express - probably the best and highest-value card marketer at the time - found itself without a major airline marketing partner and thus unable to respond with a comparable competitive offering.

Over the next several years, Amex lost millions of cardholders and billions of dollars in terms of spend as even its most loyal cardholders shifted to the cards that provided frequent flyer miles, which became a kind of currency. Turns out that not many Amex customers were interested in accumulating miles on Midway or Southwest airlines or getting travel credits on Greyhound bus trips. And, as a result, VISA's growth exploded, and it blew by Amex, which topped out at about 1/3 of the number of VISA cardholders.

I call these arrangements "cross-industry blocking alliances" and we see similar kinds of behavior in real estate locations as well. In the early 2000s, UPS bought the Mail Boxes, Etc. chain of some 3,000 stores, intending to turn them into UPS outlets. A couple of years later (probably having little choice at the time), FedEx acquired the Kinko's chain of about 1,200 stores and these days all we see is the FedEx name on these outlets. Just recently, FedEx partnered with Walgreens to further extend its physical locations and depots and, of course, CVS buying Aetna is another version of the market extension strategy.

Interestingly enough, we also just saw a related, if more modest, turf fight in Chicago involving the same two airlines. American threatened to not renew its operating contracts at O'Hare Airport with the city's airport authority because United (the home team) had been assigned more new gates than American. Dedicated and assigned gates are a finite and scarce asset at any airport. The more gates you control, the more flights you can offer, the more passengers you can serve, the timelier your departures, etc. So, this was a highly-sensitive competitive issue for American. The faceoff was resolved fairly quickly when the airport authority allocated a few more "shared" gates to American.

The rule of thumb is that, as soon as a marketplace becomes effectively oligopolistic (dominated by a few channel providers - either buyers or sellers), you can expect to see a growing number of these kinds of exclusionary deals and partnerships. The frightening thing today is how quickly the digital world is being locked up and dominated by a few players.

So, you might ask, what does this have to do with you? In a word, the domination of the digital gatekeepers is going to be far worse and more pervasive than what we've seen before and, as more and more digital marketplaces become oligopolistic, and more and more industries are dominated by one or two massive platforms, we can expect to see a world where you - as a digital seller/provider - will no longer control the front door to your own store.

Amazon's Marketplace is a fairly obvious example of this new approach. How much would any vendor have to spend to try to pull customers to their stand-alone e-commerce website when more than 2/3rds of all the high-value product searches in the U.S. now originate at Amazon - and notably no longer at Google? And, even if you got the customer to your site, how realistic is it for you to try to manage the back end of the transaction when Fulfillment by Amazon (FBA) can handle everything from inventory management through delivery automatically?

This new competitive environment isn't about building B2B or B2C businesses, it's all about P2P - platform to platform - and the platforms (basically the places where the customers live their online lives these days) are getting fewer and fewer. Your job is to figure out how to get in and stay in the game. If you're fast, desirable and in the right place, you might get to ride along with the big guys, BUT they will increasingly control the consumer experience (the "front door") and you'll be Door Number 2 at best. This shouldn't come as new news - it's a FAMGA world - and we just live in it these days.

So, this is your wake-up call. If you aren't thinking about this issue and how you'll play in this new environment, where someone else controls the primary customer experience and owns the principal connection to the consumer, you'll wake up one day when the music stops and you won't have a seat at the table or a business. If you aren't developing open APIs and deep links and working to be sure that they are readily and easily accessible from within these other social and commercial environments, you are in for the rudest of awakenings. And soon.