58.com – Initial Thoughts

58.com (WUBA.US)

[August 23, 2019]

* Initial Thoughts *

Background

I came across this stock when trying various online stock analysis tools. I listened to its 2Q2019 earnings conference call and briefly reviewed most recent company presentation. I found 58.com interesting because of its business model and new business initiatives such as 58 Town and Zhuan Zhuan (used goods marketplace) since they are to some extent related to my Pinterest analysis.

Business models

58.com and 58 Town are classifieds focusing on cities and rural areas respectively. One of the key concept for this type of platform is liquidity / density on each category / vertical. Eventually, the platform tends to concentrate on certain categories (58.com as example: jobs, real estate, used goods, automotive, and yellow pages and local services). Another concept is that certain verticals in the horizontal marketplace might be better served with dedicated products – described as unbundling / rebundling craiglist.

Unbundling

unbun

Source: The Gong Show by Andrew Parker

Rebundling

dead-unbundle

↓↓↓

rebun

Source: A CROWDED SPACE by Josh Breinlinger

What 58.com is doing

58

Current challenge and opportunity

  • Macro headwind has negative impacts on certain categories such as housing and jobs.
  • There are some progress on 58 Town and Zhaun Zhuan. 58 Town has shown trajectory similar to 58.com in early stage per management team. The go-to-market strategy of 58 Town is social graph-based and has a an official “node” on each “town”.
  • 58.com’s business models are well-understood and not very exciting. The company faces competition at different degree on each vertical / category. The entry barrier is not from technical side but from indirect network effect. Experience in execution and traffic / brand of 58.com are asset for vertical player incubation.

Next Steps

  • Some initial analysis and talk to management team next week if possible
  • Revisit Mercari (Japanese used goods C2C marketplace player)
  • Pinterest business model analysis on parallel

Mercari (4385.JP) – Note on Category Deepening, Product Enhancement & Marketplace Stickiness

Mercari (4385.JP)

[December 25, 2018]

* Note on Category Deepening, Product Enhancement & Marketplace Stickiness *

Following series posts on Mercari (initial analysis, withdrawal from UK) and its related topics (network effect and digital payment service), this notes examines Mercari recent marketplace deepening/expansion/enhancement initiatives and also does an ideation exercise on user generated content (UGC). The UGC might benefit the marketplace in several ways such as creating more stickiness on user base even though switching cost between platforms is low and increasing traffic internally and externally which might alter purchasing frequency on certain categories and create monetization potential (lead generation, advertising, or even create another marketplace) once the content on particular product/subcategory/category has accumulated to certain level.

[Acquisition of Michael Inc. via Share Exchange]

On October 18, 2018, Mercari announced the acquisition of Michael Inc. which owns automobile-related social network service, “CARTUNE.” CARTUNE has built a community and accumulated automobile related UGC. Mercari aims to increase the listing of automobile category (liquidity) by leveraging CARTUNE’s community. With the benefit of hindsight, the timing and mechanism of the deal benefited the Buyer.

The Company is pushing ahead with its efforts to enhance every category on its C2C marketplace, “Mercari”. The Company, among others, has been making efforts to increase the distribution volume of items in the automotive categories, including the launch of services that allow users to list automotive parts for sale in July 2013 and automobile bodies for sale in May 2016.

Michael has plentiful information concerning automobiles and automotive parts posted by users and off-line and online communities composed of users across a wide range of age groups through the operation of its automobile related SNS service, “CARTUNE”.

The Share Exchange enables the Company, together with Michael, to combine the automotive categories of the Company with the user base, communities and operation know-how of “CARTUNE” of Michael and thereby accelerating the enhancement of the automotive categories with an increase in the number of automotive parts listed for sale.

While the move is quite reasonable and the integration on the technical side should not be difficult (though I’m not a technical guy), the monetization method of marketplace might not be compatible with social network. Simply put, the interaction between users  fostered by the social network makes it easier for them to transact outside of the marketplace if the benefit of marketplace does not significantly exceed the transaction costs incurred offline, particularly for high value automobiles and automotive parts.

artune

If potential buyers can check onsite and so can they transact offline.

actlist.PNG

It seems Mercari has plenty listings under automobile categories but we can expect liquidity and transactions cluster in certain subcategories. As a market participant, I would be curious about the integration and initial post-acquisition results.

autocat.png

[AI vision proof of concept shopping experience for the Vuzix Blade®]

On December 20, Vuzix® Corporation, Mercari, Inc., and Mercari R4D announced the start of a AI vision proof of concept shopping experience for the Vuzix Blade® AR Smart Glasses. (Mercari announcement in Japanese; Vuzix announcement in English)

Below is the prototype demo video.

I don’t see much advantage of wearing glasses to do product search, discovery, or comparison over using the camera on smartphone.

If the stuff got commercialized eventually, my prediction is that it is unlikely to get wide adoption. Mercari will need to spend on customer acquisition and probably subsidize early adopters (price the product below cost or even give away for free). The churn is expected to be so high that the incremental customer lifetime value on power users (heavy users or addictive buyers) cannot cover the upfront customer acquisition costs and the ongoing retention costs (probably in the of form benefits given to users). My use case for this product is customer engagement tool which is free giveaway to power users.

The real asset is AI vision which is able to recognize the item and match with existing listing. Maybe at some point in the future, they will pivot hardware that the software is running on.

[Ideation on UGC]

One of challenges that marketplaces face is that their users can multi-home. In other words, the switching cost between platforms for users is relatively low (while sellers  on the marketplace might find their transaction / review records valuable because it gives them credibility). Unlike technology platform or standard, marketplaces generally do not have lock-in effect on users. This is why marketplaces have to focus on user engagement and mechanism design that makes the platform stickier for users. I think community (social aspect) and UGC are two keys to increasing C2C marketplace stickiness (but still difficult when facing disruptive pricing). As discussed above, there might be conflict between the interaction in community and the monetization method of marketplace. Thus, here I focus on pure UGC where users have to invest their time and efforts to create content, but ignore the social aspect surrounding UGC. The problem of the setup is in reality the ignorance of social aspect might lead to insufficient incentive for content creator to contribute.

While Mercari as a whole has already gained enough liquidity, the density across categories might differ significantly. The UGC experiment should start with specific product that has enough liquidity or users’ interest (via survey).

Below is my illustration of UGC mechanism attached to specific product.

merillustrate

Steps:

0. Decide a category and build an UGC infrastructure that is easy to create, store, present content for creators and easy to consume for consumers. Open the UCG feature to existing marketplace users.

1. Start with 1 or just a few products which either have liquidity or potential buyers/sellers and figure out what kind of suitable UGC types might interest users.

2. Solve the chicken-and-egg problem from supply side by providing in-house created contents first.

3. Observe the reaction, keep records and see whether the feature is gaining traction

4. Expand the UGC feature to other products / categories and open the feature to public.

There will be various curation/modification/fine-tuning in the process. Once the content has accumulated to certain level, the benefits clearly show up.

For example, the UGC on cast-iron cookware are recipe, product reviews, maintenance tips etc. The content can attract outside traffic which might flow to Mercari C2C marketplace and to other websites (Mercari can capture this by setting up a B2C marketplace or incorporate B2C into existing marketpalce). UGC might increase propensity to purchase and the purchasing frequency on Mercari. Consider monetization after UGC has meaningful traction.

Basically, each category, subcategory or even product can be viewed as a vertical. The category-by-category approach in UGC platform building will help the company  better understand  each category. Probably the company might find better ways to serve some categories. It might be hard for a startup to compete with Mercari on whole C2C marketplace but focusing on particular category is much more feasible. What inevitable is emerging competitors will try to attack on specific vertical and eat away that GMV.

[Side Notes]

When analyzing Mercari as a whole and looking at initiatives it is taking, I cannot help relating it to giant Chinese or US internet companies. Why? Because Mercari is pursuing many opportunities (what they present sounds fancy). This reflects in various subsidiaries and related websites. Coupled with aggressive talent acquisition, I believe the environment within the group must be “vibrant”. While the environment might be chaotic, what it gives Mercari, its shareholders and potential financial/strategic investors is the optionality.

Pursing many challenging opportunities is ambitious but the concept of density / critical mass might be also applicable to human capital / research and development…

~ My Related Posts ~

Mercari (4385.JP) – Initial Analysis

Networks can still be beaten

Entering a market where existing platforms have network effect working

Mercari (4385.JP) – Note on Withdrawal from UK

#Mercari

~ Corporate Event ~

FY2019.6 Q2 Financial Results Announcement (15:00 JST)

Mercari (4385.JP) – Note on Withdrawal from UK

On December 18, 2018, Mercari announced it will withdraw from UK market.

At a meeting of its Board of Directors held on December 18, 2018, Mercari, Inc. (the “Company”) decided to dissolve and liquidate Mercari Europe Ltd and Merpay Ltd, our subsidiaries in the UK.

As mentioned in my Mercari initial analysis, UK operation basically could be ignored based on how the company reported in its earnings release. The decision is not a surprise.

In the UK market, the Company established Mercari Europe Ltd in November 2015 and has leveraged the knowledge possessed by the Mercari Group to expand the Mercari C2C marketplace service in the UK. However, since the business did not scale as quickly as we hoped, the Company has decided to dissolve and liquidate its subsidiaries Mercari Europe Ltd and Merpay Ltd.

While the company stated the rationale behind the decision was that the business did not scale as quickly as it had hoped, the fact is that Mercari Europe Ltd spent 3 years and around GBP 11 million in customer acquisition costs, infrastructure and other fixed costs but the marketplace was almost not gaining any traction in terms of monetization. According to Nikkei Asian Review, unlike versions in Japan and US where the app adopts rake monetization, the UK version is free to use. This might provide some insights for entrants who want to challenge Mercari’s C2C marketplace leading position in Japan.

Mercari EU

The good news is that while the successful experience in Japan didn’t help the company penetrate the UK market, it does help them make timely decision to abandon the market and stop loss at a controllable level. The company probably concluded that marketplace would not go anywhere without even more aggressive customer acquisition and user subsidy. Then it became a resource allocation question. It is a safer bet to concentrate resources on a market with some traction hoping the marketplace can speed up to reach critical mass.

While the loss to be incurred from discontinued operation in UK is relatively small compared to Mercari’s market cap and cash raised in IPO, the stock price performance has been quite weak. What concern investors most might not be extraordinary loss incurred but the prospect of Mercari’s global expanse plan, how much cash it has to burn for US operation to reach critical mass and whether the unit economics in US is healthy enough for the operation to be profitable at scale under fierce competition.

Mercari Stock Price

Per Mercari’s announcement, it adopts different approaches to planning, development, operations, and marketing for each region. This means while the monetization methods in Japan and US are similar, the path to reach critical mass might be quite different.

If I were the investor, apparently my focus will be on US operation in next earnings release assuming Japan operation is on track and market dynamics doesn’t change significantly.

*    *    *

Potential strategy and timing for entrant targeting Japan market:

  • Different monetization method (free to use with advertising)
  • Users subsidy
  • Category focus
  • Community focus & communication facilitation (as this is not a rake model)
  • Timing: when Mercari US is scaling up and other competitors in the market react aggressively

*    *    *

~ Materials ~

海外子会社の解散及び清算並びに特別損失の計上に関するお知らせ

Notice Regarding the Dissolution and Liquidation of Overseas Subsidiaries and Recognition of Extraordinary Loss

~ My Related Posts ~

Mercari (4385.JP) – Initial Analysis

Entering a market where existing platforms have network effect working

~ Corporate Event ~

FY2019.6 Q2 Financial Results Announcement(15:00 JST)

Entering a market where existing platforms have network effect working

The title of this post is very generic because I observed or studied cases in different industries that new entrants want to penetrate markets where incumbents already have their network effect working.

By leveraging its resources or capabilities, new entrants might be willing to acquire “users” (depending on dynamics of business, platform might want to focus on particular side of users) by providing monetary subsidy or aggressive pricing.

Digital Distribution in Gaming (PC/Mobile)

If we put the recent “price war” between distribution platforms chronically, it looks like below:

[STEAM]

On December 1, 2018, Steam announced it would introduce tiered revenue split mechanism based on revenue level to its long-time 30% rake on games sold on Steam.

  • “When a game makes over $10 million on Steam, the revenue share for that application will adjust to 75%/25% on earnings beyond $10M”
  • “At $50 million, the revenue share will adjust to 80%/20% on earnings beyond $50M”
  • “Revenue includes game packages, DLC, in-game sales, and Community Marketplace game fees”

Some smaller developers think the adjusted mechanism is still in favor of larger publishers and developers who are more likely to hit those revenue thresholds.

Charts below illustrate STEAM rake schedule and overall rake on game revenue.

Steam

Steam Overall Rake

Not every developer/publisher on the supply side of the platform are equal, STEAM clearly wants to focus on those with hit games and hopes their pipeline can keep network effect working.

As shown in the announcement about the new revenue share tiers posted on STEAM community:

It’s always been apparent that successful games and their large audiences have a material impact on those network effects so making sure Steam recognizes and continues to be an attractive platform for those games is an important goal for all participants in the network.

Our hope is this change will reward the positive network effects generated by developers of big games, further aligning their interests with Steam and the community.

The rationale behind is the characteristics of the digital distribution platform without control of gaming experience access: Power law and long tail on revenue distribution across suppliers, and multi-homing on both consumer and supplier sides.

Two underlines in the quote above need some discussion:

  • Large audience / traffic certainly brought by marquee suppliers certainly benefit smaller suppliers. However, making the the platform attractive to marquee supplier will never be a goal for smaller suppliers. There is not much smaller supplier can do besides focusing on their own games and audience.
  • Actually, the adjusted revenue sharing system does not “further align the interests with STEAM and community” but just reduce the likelihood that marquee suppliers leave the platform. All other other things being equal, the new revenue sharing system will make marquee suppliers more likely to distribute their games on this platform rather than starting their own storefronts/launchers or moving to other platforms permanently even though they have choice to multi-home. More audience a developer has, the more economics of scale it can enjoy: bargaining power on 3rd party digital distribution or even internalize the digital distribution.

Steam Revenue

On a separate note, you can see different attitude toward developers on different type of digital distribution platform. Just look at Nintendo eShop. I know it’s console gaming, I know it’s Nintendo (with access platform supported by its strong 1st Party IP) but the point I want to make here is consumer bases / communities on the demand side for each platform are not created equal. The attitude toward existing suppliers in term of pricing somewhat reflects its consumer base behavior which is path dependent for established digital distribution platform. For emerging digital distribution platforms, besides leveraging its existing resources/capabilities/credibility…, they tend to solve chicken-and- egg problem from the supply side. Emerging platform can gain some initial traction by securing some exclusives or timed exclusives. As shown below later, financial incentive might be the easiest way to get the ball rolling. In the longer term, platform might go deeper in demand and supply side ecosystem or facilitate communication between two sides. As multi-homing is one of characteristics that digital distribution platforms share,  building lock-in factors in the ecosystem without increasing frictions might be a key to success.

The last question on the move to change revenue sharing scheme is:

WHY NOW?

[EPIC Games Store]

On December 4, three days after STEAM’s new revenue tiers got revealed, EPIC Games announced they would launch EPIC Games Store outlining several principles. Among those principles, the most eye-catching one is:

All Developers Earn 88%

In other words, the rake on this emerging storefront is only 12% for all size of developers compared to STEAM’s tiered rake system where 20% rake is the limit (overall rake is approaching 20% when gross revenue get larger).

Rake comparison

As the chat above shows, the pricing to distribute on EPIC Games Store is so attractive to all size of developers that the tendency to multi-home is inevitable. The exclusives or timed exclusives might be limited due to limited initial consumer base which represents relatively small addressable market compared to established distribution platform. Pricing aggressively is a way to secure enough initial supply and attract other suppliers later on.

EPIC Rake

By covering the 5% engine royalty for sales on the Epic Games store, out of Epic’s 12%, EPIC makes effective rake 5% higher for games using UE4 on competing distribution platforms.

This revenue split might look attractive to those who distribute their games using UE4 (not sure if any exists) at variable cost higher than 7% of gross revenue. If this platform can provide benefits similar to operating their own storefronts/launchers while saving fixed costs in operation, probably having in-house distribution channel might be hard to justify economically.

Leveraging own capabilities and being competitive on pricing are probably not enough to beat existing network effect so EPIC Games takes ecosystem/community approach reflected in principles shown in the announcement.

  • Have a Direct Relationship With Players
  • Connect with Creators
  • Developers Control Their Game Pages
  • All Engines Are Welcome

Within 10 days, EPIC Games went one step further with the announcement of their 2019 Cross-Platform Online Services Roadmap.

At Epic, our goal is to help game developers succeed. Throughout 2019, we’ll be launching a large set of cross-platform game services originally built for Fortnite, and battle-tested with 200,000,000 players across 7 platforms. These services will be free for all developers, and will be open to all engines, all platforms, and all stores. As a developer, you’re free to choose mix-and-match solutions from Epic and others as you wish.

Market Dynamics

It seems the STEAM’s new sharing revenue tiers was an attempt to preempt EPIC Games Store. However, it’s quite likely the the rake gap is so large that STEAM’s move cannot reduce the multi-home tendency.

There are other emerging platforms who might be agile enough to follow the price war in short period time.

So, Chain Reaction?

[Discord]

On December 14, 2018, 10 days after EPIC Games Store released its disruptive rake, Discord suddenly announced that they had figured out it doesn’t cost 30% to distribute games in 2018 so it decides to reduce their rake from 30% to 10% from 2019.

Turns out, it does not cost 30% to distribute games in 2018. After doing some research, we discovered that we can build amazing developer tools, run them, and give developers the majority of the revenue share.

So, starting in 2019, we are going to extend access to the Discord store and our extremely efficient game patcher by releasing a self-serve game publishing platform. No matter what size, from AAA to single person teams, developers will be able to self publish on the Discord store with 90% revenue share going to the developer. The remaining 10% covers our operating costs, and we’ll explore lowering it by optimizing our tech and making things more efficient.

Discord let all users have access to store beta and new Nitro subscription options in October 2018. It’s unlikely that a company has venture capital firms on its cap table to roll out some major business / features without strategic simulation and operational / financial modeling. So it’s not about how much it costs to distribute games but how much storefront wants to monetize or subsidize (the new market dynamics and second underlined sentence in the quote increase the likely this likelihood) on distribution. Apparently, it’s a strategic move driven by market dynamics.

While having some advantages on the consumer side and strategy on the ecosystem, Discord still needs to at least match the rake to make their platform relevant on the supply side in this kind of price war if it has resources to do so and being supported by capital providers. Discord stated 10% rake is enough to cover “operating costs” but what’s its role in unit economics and at what scale are unclear.

Maybe we can borrow some strategic perspectives from venture capitalist.

Charts below show the rake and net revenue comparison among three platforms.

Rake 3 Comps

Rev 3 Comp

~ The Platform Being Disrupted ~

Certainly, the pricing offered by emerging platforms is disruptive. However, the reason why STEAM might be being disrupted is that if the cost structure /organization is built on 30% rake, it will be very difficult for the platform to overcome internal frictions to take timely, bold counteractions.

The introduction of revenue sharing tiers might be an early indication. It’s very interesting to see how long it takes for STEAM to make next move.

When it comes to competition among platforms, defender or passive side generally doesn’t have luxury to adopt wait-and-see strategy.

! TAKE ACTIONS BEFORE IT’S TOO LATE !

*    *    *

Digital Payment in Japan

This is basically a game of user acquisition by subsidy among fragmented, multi-homing platforms.

[PayPay]

On December 4, 2018, PayPay launched a 20% rebate program with total allowance amount of 10B Japanese Yen subject to certain T&C. The amount was used up by December 13, 2018.

[LINE Pay]

On December 14, one day after PayPay’s program ended, LINE Pay launched a similar 20% rebate program from December 14 to December 31, 2018 without limit subject to certain T&C.

[Merpay]

Mercari is planning to launch its own digital payment service next year. It definitely can learn something from user acquisition wars between PayPay and LINE Pay. With its C2C marketplaces, hopefully Mercari might be able to adopt a more sophisticated, less cash burning way to launch service.

The case of digital distribution platform shows “your margin is my opportunity” and “network effect can still be beaten.” This is one of major risks that Mercari’s C2C marketplaces might face in the future.

~ Related Posts ~

Epic Games’ Epic Battle on Storefront Space (follow up post)

Gaming-related Platform Ecosystem Competition and the Financing behind (follow up post)

Networks can be still be beaten

Mercari (4385.JP) – Initial Analysis

Networks can still be beaten

The title of this post is taken from the wrap-up of  Jeff Bezos, Jack Ma, and The Quest to Kill eBay by Steve Yegge.

As I am now focusing on marketplace where network plays a major role in the business model, I’m particular interested in competition between marketplace, invasion of a emerging marketplace, and whether the network is a competitive advantage for the company (if it is, then first mover might have advantage).

I only follow listed companies such as PinDuoDuo (PDD.US) and Mercari  (4385.JP) where they probably have proven business model and built the network have built to some extent.

One of life lessons learned in Steve’s post:

Don’t try to beat a network by making a clone with improvements. It ain’t gonna work. There is too much gravitational inertia in the original network; nobody is incentivized to leave it.

Thoughts

[PDD.US]

If competitors is an incumbent with its own network, then it can leverage the network and launch a product with different value proposition.

[4385.JP]

Depending on the market size and capital required, the potential competitor probably can build a competing network(rather than beating) with an improved network.

[Where’s the moat?]

Except the switching cost resulting form network effect, it seems not many tools left for marketplace to tackle multihoming.

My current guess is that further lock-in might be created by  non-monetary investment from users – UGC / Community depending on the business model.