Alex Moazed and Nick Johnson wrote the book on disruptive platform business models built by Amazon, Alibaba, Uber, Airbnb and many more, called, Modern Monopolies: What it Takes to Dominate in the 21st Century. They make the case that platform businesses have substantial competitive advantages over the role of distributors in the traditional value chain. In this podcast, Alex provides provocative insights from the front lines of disruption and suggests how distributors may turn a threat into a competitive advantage by launching platform businesses or creating effective strategies by participating in or countering virtual marketplaces. As the COVID-19 crisis locks in customer preferences for virtual experiences, every distributor should understand the impact and opportunities of platform businesses.
Featuring: Mark Dancer, Author of NAW’s Innovate to Dominate: The 12th Edition in the Facing the Forces of Change Series; Richard Blatcher, Director of Industry Marketing and Business Intelligence at PROS; and Alex Moazed, Founder and CEO of Applico.
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To buy Alex’ book, Modern Monopolies, visit: https://www.modernmonopolies.com/
- Alex offers insider insights for understanding the competitive advantage of platform business, and for distributors to build their own platform, or to counter them. The COVID-19 crisis isn’t just about customers migrating their purchases online, it’s about them being open to new sources and customer experiences. Distributors must understand platform businesses.
- Fundamental concept - create the means of connection between producers and customers. Can be a marketplace for products, but also services. Amazon vs. Uber. Many distributors are thinking about services and should factor in platform models. It’s not just about competing with Amazon
- Alex talks about industry-specific vertical marketplaces in addition to the what distributors recognize as the endless aisle offered by Amazon. In a way, this is (very roughly) similar to broadline vs. specialty distribution. That frame is at least a starting point. It should make distributors curious about how platform businesses operate … and to evaluate as an opportunity or threat.
- Alex offers advice for a distributor to get started — smart small and test. The first is very comfortable for distributors. Testing is, for many, new. More importantly, distributors don’t have to start from scratch. There are partners and tools from the tech community that distributors can leverage. Platforms are going to happen … if you don’t join, enable and own a piece of it.
- Alibaba started as a place to barter. The opportunity for distributors is to incorporate their industry’s defining way of doing business into a platform model. Distributors should have an advantage in doing that.
In this Episode:
[01:59]: About platform businesses models
[04:55]: About vertical marketplaces
[10:10]: How to start towards creating a vertical marketplace
[14:48]: Broadline distributors vs Specialist distributors
[19:15]: How to get paid for services
[23:35]: A strategy for participating in platform businesses
Richard Blatcher: Well hi everybody. Welcome to another part of the series, which PROS is sponsoring, organized by the National Association of Wholesalers-Distributors, the NAW. Based around the Innovate to Dominate, the 12 series in the Facing the Forces of Change research and publications. So I'm really delighted. We're at the NAW executive summit, which is the annual summit in Washington and I'm with Mark Dancer, who is the author of the research and the publication, and Alex Moazed, who's the founder and CEO of Applico. ...
Alex, thank you so much for joining us and spending the time to be with Mark and myself. Maybe you could just introduce yourself, and to the listeners and the viewers just give a little bit of background on you, your publication, your famous book and Applico as a company.
Alex Moazed [1:59]: Good to be here. I co-authored this book, Modern Monopolies, which came out a few years ago. We launched an ETF with WisdomTree last year called PLAT, which puts all these public platform stocks into a basket, and what Applico does is help large traditional enterprises figure out how they can own a part of the platform future. Either by spitting out separate platform entities, acquiring tech companies, and turning them into platform companies or partnering with tech companies that want to be platforms or are becoming platforms, and just helping traditional enterprises have more of an ownership stake in that future state of a platform world.
Richard Blatcher: Now you use the word platform. I work for a software company and we probably have a different definition of platform to use. So maybe you could just dig into what you define as a platform from that business model perspective. You also talk a lot about the marketplaces, so maybe you could dig into some of those dynamics.
Alex Moazed: So platform businesses describe companies that they don't own the means of production, they create the means of connection. They have two customer groups: they have a consumer on one side and a producer on the other. So if I'm Uber, that's customers and drivers; Airbnb, that's renters and homeowners. If I'm Apple, it's people who have iPhones and app developers; YouTube, it's people watching videos and the third party content creators.
So when I say platform it's describing the business model, one type of a platform company could be a marketplace for products like an Amazon or Alibaba or now there's a lot of other vertical specific marketplaces like Farfetch is also in PLAT, which is a marketplace for luxury designer goods. You could also have a content platform like YouTube, or development platform like the iPhone, but they all fundamentally focus on creating value by facilitating the exchange of value, as opposed to being the linear equivalent where you are creating or licensing or reselling some kind of product or service.
We contrast this against Netflix a lot, where Netflix is spending $12 billion a year, maybe more now, to license or create all of their own content. All of that content sits on their balance sheet and it's not an asset light model, which is what you tend to see with these platform businesses.
So that's what we focused on, and then B2B distribution marketplaces, our product marketplaces, are the natural predominant form of a platform model in this industry that is coming into it from all angles
Richard Blatcher [4:55]: For the benefit of the folks that couldn't get to Washington, to the summit, and to hear your really interesting presentation this morning, you also talked a lot about the importance of verticalization. You know, these vertical marketplaces and opportunities that are becoming increasingly important. So maybe you could talk a little bit more about that.
Alex Moazed: With platforms, they have a winner take all type of endpoint, right? Once they hit a level of maturity, this thing called critical mass, you tend to see there's only one or two dominant players in a given market. But what we've seen in B2C retail in the US and also in China, in B2B distribution, is you see the overarching kind of general category winners like an Amazon in the US or Alibaba Taobao in China. But then underneath that you see vertical specific winners, one or two dominant winners in a given vertical. So in consumer retail, in the US you have two really big sneaker marketplaces, GOAT and StockX. You have Farfetch, which also bought one of the sneaker marketplaces, and Farfetch doing luxury goods. You have, in China, B2B marketplaces. You have a number of unicorns in China that is a dominant marketplace for agriculture or for metal or for plastics or textiles.
So you're naturally kind of seeing the demand and supply, which is unique to that vertical, I only want these kinds of products and I only supply these kinds of products, that those natural kind of industry lines hadn't existed. Now you're seeing marketplaces build out specific tools that cater to the needs of customers or suppliers in those industries. In the US, the two largest tech startup B2B marketplaces are actually in the agriculture vertical. Called Indigo and FBN, Farmers Business Network, they both have over a billion dollar valuation and so they are helping grain and the different, say soybeans or agriculture products that a farmer is growing on average from the farm to the end customer, which could be a craft or cheese or making cereal or macaroni and cheese. It changes hands six to seven times and everyone needs their cut when they touch it for those six to seven times.
So how can a marketplace centralize the different players, bring the farmers, bring this disaggregated, this fragmented supply, bring pricing transparency into a centralized market, create standards around quality, here's the quality of the grain or the feed or these kinds of things, and provide a lot of tools to farmers and make this a very sticky... It's a market place, but it's very vertical specific. This is a direct threat to companies like Cargill, ADM, and there's a number of others of the more traditional kind of distributor model in the Ag industry.
Richard Blatcher: And you said, I mean it's both a threat and an opportunity for those companies, right? And you say that China's ahead in that kind of the vertical B2B probably two, three years to the US is that a fair?
Alex Moazed: Yeah, China's platform economy, I'd say in financial services, healthcare, communication and messaging, as well as B2B is at least a few years ahead from a trends standpoint. You can kind of look at what's happening there, like short form video and what we saw or what you see with healthcare marketplaces, what you see with AM financial and Alipay and what you see with these vertical specific B2B marketplaces. Eventually, maybe not exactly, but you see these things then happen in the United States or in other emerging markets.
Alex Moazed: So China definitely has a couple of years in B2B and when you start to look at the world and say, Hey, yes, I'm going to have these big tech monopolies come into B2B distribution, but I could still be the marketplace winner in my vertical. You know, that to me is a tremendous opportunity. You don't need to say we're going to be the marketplace for everything, but if I'm an existing incumbent distributor in a specific vertical, you have a lot of advantages on the demand supply, product, inventory, data, value added services, brand, trust and your balance sheet that you can use to take a more ownership or direct role in the marketplace future for your vertical.
Mark Dancer [10:10]: If you were talking to a distributor, a leader of a distributor of the leadership team, and they heard that and they understood that and they wanted to talk with you to get your advice about how to actually start towards creating a vertical marketplace in my industry. So I get the concept, maybe I'm awake enough to do that, but I want to actually start moving in that direction. What would you advise them to do?
Alex Moazed: I think the key is to start small and get out in the market and do some tests, right? You can try out how to stand up a marketplace in a week or two. There's a lot of off the shelf tools that you can use. Give a small team very little time and very little money, as I think John was also saying, is where you want to start, but you can test out the opportunity for how a marketplace could work in your industry for, Hey, how advanced are consumer expectations? Is someone interested in using my rinky dink marketplace that I stood up in a couple of weeks. Oh great, okay. Maybe consumer expectation is at a point where we could capture this or maybe no one wants to use it because their expectation is much more mature and we're going to need to make a much more significant investment to get into this space.
In general, I would say doing anything entirely from scratch is probably too big of a challenge to overcome and there is a pretty lively tech startup ecosystem, not necessarily all marketplace startups, but there are tech startups that provide tools, SaaS products, tools for suppliers and sellers and distributors. There are e-commerce, linear e-commerce sites that have demand, they're not a marketplace because they don't have third party supply. So they still have good digital demand. So I think what you need to do is do small tests to validate the opportunity and at the same time explore the assets you have today. Figure out where the gaps are of where you want to get to and how you could accelerate that trajectory by buying one of these tech startups and getting to demand or supply or both much faster.
Mark Dancer: For that vertical market to take off, distributors frame of reference would be when I have a new product or a new service, I can design something that sounds really good to the customers. Customer might tell me they want it and they need it, but the hurdle is willingness to pay. You invent something great and they never want to buy it. Right. Is that analogous to a virtual marketplace or is there some way to think about how you actually do it: I've done some experimenting; I've done some trialing. How do I try to cross the threshold to having something that could actually have some traction and grow?
Alex Moazed: So I think, two things there. If you're trying to do some, what we call manual hacks to test out a marketplace model, you're putting up products, you're driving ads, you're setting up template websites, and then you're making a bunch of phone calls and unscalable things to see if you can source supply. Just kind of understand what the needs are. You should be able to see, can you do five core transactions? Can you actually close five deals in two or three weeks? That'd be one example of a test. Then I think generally some of the thinking is what every platform does with their technology, they give the technology away for free in exchange for access to the network or the ecosystem. So what are the software tools that maybe you already have in house or maybe there's a really great tech startup with a great tool that a lot of distributors like using in your vertical?
The kind of classic platform play is, I buy that company and I either get rid of the SaaS fee, subscription fee, or I subsidize it because I want as many suppliers to come on board and use my tool because my ultimate play is to have those suppliers put their inventory into my marketplace. So if you already have any commerce presence, that can be a great approach to say, how do I now get a bunch of suppliers to put their inventory into my website? Oh, they're already using this tool. Great. Here's the tool for free. Now I get the existing suppliers, a bunch more suppliers, and I give them a way to monetize their inventory. So you kind of commoditize the compliment, give the tech away in exchange for access to the ecosystem.
Mark Dancer [14:48]: A platform business, if I've listened and understood a bit of what you're saying, can sometimes win because it has a huge selection of products and it has a fair or perhaps the lowest price and that's a huge, huge competitive advantage that distributors might not be able to match. In a vertical marketplace, distributors used to talk about, when I started working 20 years ago, there were two types of distributors. There was a broadline distributor and there's a specialist distributor. The broadline distributor was roughly analogous to a big platform that sells lots of things everywhere, anytime; and the specialist distributors did a smaller version of that, smaller selection of products… but they really tried to compete on their product knowledge or their application knowledge… or sometimes it was just, our commitment, we're going to be here to help you keep your business up and running, whatever it takes. Does that line of thinking apply for distributors who are trying to translate what you're saying about vertical marketplaces and others and is there a better way to say that in the platform world?
Alex Moazed: Yeah, I would say it's similar in the sense that the general versus specialized. I think the difference is that the vertical specific marketplace would theoretically combine both the broadline and specialist distributor inventory into one centralized marketplace respective to that overall industry of B2B distribution. So that broadline distributor, just at a high level is probably going to have much more inventory, which would be susceptible to some of the large tech monopoly marketplaces to come in and take some of the more commoditized products that are more broadly applicable to an entire industry, and it's usually the kind of, maybe it's pack and shippable. If it's heavier stuff, it gets a little bit more complicated, but if it's pack and ship and it can be centrally fulfilled, then that stuff is usually some of the first things that the marketplace tries to adopt and get a foothold on. Certainly, say on Amazon and how they penetrate some of these new B2B verticals.
The ability for a specialist distributor in a vertical to then move upstream and go after the more broadline, I think comes down to the ability to channel the demand that they have into digital demand. So if it's a very analogue sale and everything is going through a salesperson, they might have a concept of buyouts, right? They might have salespeople taking calls, yes, we sell our specialists catalog product, but these customers probably need five other things that we don't have.
So what are the ways that you can translate analogue demand into digital demand? That's one of the first steps. So if you give a marketplace solution to sales reps, for example, and rather than the clunky way that they're doing buyouts today or whatever you call it in your industry, that could be one example to say, Hey, what are the SAS tools in my industry that are really good to help sales reps upsell or sell products that we don't specifically stock whole in our warehouse? Great. Could we go buy that company and then expand the product catalog of this, which is really just a sales tool. Turn that into a marketplace. And now I give it to all my, if I've got 500 salespeople, now all my 500 salespeople, if 30% of my business is this buyout kind of distributor to distributor type of business, okay, can I turn $150 million of that analogue demand into digital demand? Maybe.
Point is, there's a lot of these kinds of different hacks you can test that stuff out in a few weeks and say, maybe this works. What does the landscape look like? Are there any tech startups doing this or is it completely barren and we have to build it from scratch? You know, that's a whole other set of decision making around that.
Mark Dancer [19:15]: I love the idea of, you use hacks and test it in a few weeks. Another traditional problem for distributors, and you know this, is that they sell products and their financials are based on the margins of those sales, but they give a huge amount of value away for free, or at least it's towards something huge. So they give banking essentially in their terms. They give product advice, application advice, lots of other things that they provide to their customers. It's a cost for them, but they don't get paid for it because their margin is based on the products they sell.
I'm wondering, if a distributor who's thinking creatively about the opportunity to join or create a vertical platform, whether they should be thinking about not starting with eCommerce. Of creating a place where people who have things, and people who want things to come together, the physical product, whether they should think about a platform business around answering customer questions or providing banking services or something else and kind of flip the model so that they can make margins that they're interested in, which is not tied to the competitive margins of selling products.
Alex Moazed: So, I mean there's a lot of ways to arrive at it. That's actually how Alibaba started with Taobao and T-mall China was they said, Hey Chinese people like to barter and talk to people on the phone before they buy something. And there was eBay, which was also in China at the time. EBay took a transaction fee, so you sell something for 100 bucks, eBay wants its 5% or whatever it was. That meant that if eBay lets buyer and seller talk, then they're just going to transact outside of the platform and now you have platform leakage. So eBay didn't want to let you talk to each other. Alibaba said, we're not going to charge any fees for the first three years. Buyer, seller, feel free to talk, share information, transact outside of the platform, we don't care. We just want to be a meeting ground to help you meet one another and exchange value.
Ultimately, they've kind of kept away from charging as a percent of the transaction, instead having an advertising model. So now, as the platform has a lot more demand and traction, in order for you, it's like Google search, but to find product suppliers and sellers basically. You need to pay for ads and listings and for promoted features and special features. That's their model, it's an ad model.
There's a lot of different ways to structure what we call the core transaction, which is what I think you're getting at. You know, in some way or another, distributors need to sell more product. The way that you are enabling them to connect to the customer, there's a variety of ways to go in and do that: test out different interaction models, see what tech startups are already doing in the market, learn from that or acquire it, copy it or some mixture of all of those things and figure out the best way forward.
But every one of these industries is so unique and so different, especially when you look at it on a vertical-specific basis. I think that's another big advantage, literally just inherent in having vertical focus, is that the tools and transaction model that is going to be deployed by an Amazon or Alibaba, etc., is going to be for that general multi-vertical model. So if you can find ways to customize or modify the attraction model that better serves the vertical, that's a fantastic differentiator.
Mark Dancer: Excellent.
Richard Blatcher: And of course it's selling more product profitably, which is key for a distributor.
Alex Moazed: Yeah, you've got to sell more products.
Mark Dancer: Questions? I've been dominating for a bit here.
Richard Blatcher: No, I mean that's the innovate to dominate. That's absolutely fine, isn't it?
Mark Dancer [23:35]: Interview the dominant, is that it? Let's go in a different direction. I think you've helped distributors understand Amazon and Alibaba and Walmart and their plans, so if you were chatting with a distributors leadership team and you were to tell them that there are more options now where they can choose to participate, not to create, but to participate. What advice would you give them on, should I go for all of them? Some of them? It's a temporary strategy, it can be a long-term strategy. Just what would their virtual, what they're going to participate on platforms, what is the strategy?
Alex Moazed: I think I'd say most people at this conference, no one raised their hand that they disagreed, by the way, this morning. There's going to be some kind of platform future in B2B distribution and some kind of platform future, I'd say, in every vertical besides the electronic industry. Everything else besides the electronic vertical, I think, has enough fragmentation on the supply side that it's certainly susceptible to these marketplace dynamics. For the electronic industry, really just Arrow and Avnet. There's four or five chip manufacturers, and they're all in cahoots with each other, and because the manufacturing is consolidated and tied up, it's very hard for a marketplace to penetrate that. But that dynamic pretty much only exists in that specific area and there's plenty of fragmentation in just about every other part of B2B distribution.
If you look at a partnership model, you can say, okay, what are these startup marketplaces in my space? Do I think some of these have promise and if you're the head of that startup marketplace and you look at all of the assets that I'm talking about, that traditional incumbent distributors have, and you're the CEO of that marketplace, you would drool at the prospect of having access to the demand, the supply, the product inventory, the value added services, the brand and trust that comes along with that. The balance sheet, right? Any one of those things or some mixture of them. The CEO of a startup marketplace is going to be very interested in having a conversation, not just for capital, but more so about how do you solve their biggest challenge, which is that chicken and egg, how do I get demand and supply and vice versa.
The other side of the coin is that there are going to be some very, very big players getting into this who are threatened by an Amazon doing what they did to B2C in B2B. I think there are big logistics companies and fulfillment companies that have a lot of things at stake where they don't want to have Amazon having the same level of dominance in B2B because that will be very bad for their logistics fulfillment business. So there's that side of it. Who are the service providers that are going to be marginalized? If you have one big dominant marketplace like we've seen in B2C, I think you have PE firms that own distributors, that own manufacturers, that could then say, we own distributors and manufacturers, we could roll these things up, do a centralized marketplace. We can have manufacturers only list their inventory exclusively on the marketplace. You could start to kind of tie up some key supply, some really kind of high priced inventory as a lure to bring people to that marketplace.
There are a range of different partnership models that you could be partnering up with, another distributor of a similar size of yours and then buy a company together or partner up with any of those other large companies. The point is that if you could help solve for the chicken and egg problem, that demand and supply problem, which you can, how can you help whatever that dominant marketplace is that's going to come into your vertical, cause it's going to come into your vertical, how can you own a piece of that and help them get there. Because it's inevitable, so you might as well own 10 or 20% of it or whatever it is. Then you can use that marketplace to actually help your core business and have the best integration with the marketplace and you now have created enterprise value for your shareholders by using these assets at an opportune moment.
Mark Dancer: Love it. I think I've heard you explain some of that before and I have this joke I've used with distributors to try to explain it. There's a rushing river going down the middle and there's a marketplace or a disruptor on one side and a distributor on the other side, and the distributor calls out to the marketplace and says, how do I get to the other side? And the marketplace says you are on the other side. Cause distributors need to know they bring some things to this equation and they can have conversations about partnerships, right? Especially with startups and others.
Alex Moazed: Yeah, and I think there's a big gap in that dialogue and kind of wanting to explore this and the first step is saying, Hey, this is an inevitable future state. It's a very rare point in time where you can say with an extremely high level of conviction that this is what the future's going to look like. I don't know who exactly the marketplaces are going to be, but there's absolutely room for vertical-specific marketplace winners in B2B and it's more of a question of who's going to get there and how can you get a piece of it or own it outright.
Richard Blatcher: On which side of the river are we. Well, Alex, thank you so much for your time and your insight and expertise. We will share your contact information and how they can purchase the book and get in touch with you if they'd like to engage with you further. Thanks again for your time and hopefully we'll speak to you again very, very soon.
Alex Moazed: Thanks for having me.
Richard Blatcher: Thank you, Alex.