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 ~


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:


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 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:


[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.


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?


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.


*    *    *

Digital Payment in Japan

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


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.


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.



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


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.

Eslite Xinyi

Today, I went to Eslite Bookstore in Uni-President Int’l Building in Taipei. I spent roughly an hour there and decided to buy a few books. Then, I turned to (not associated to Eslite) where I’m pretty sure I can get better price to order books and expect to pick up the parcel at 7-ELEVEN close to my place. I don’t know how many people do this but it’s quite natural for consumer to enjoy book discovery provided in physical store but to place order at place where it has price advantage.

The business model of this physical marketplace operation is rent arbitrage. Using the bookstore as the anchor to attract traffic, operator leases the marketplace from landlord and collects fix rent and turnover rent from other retail and F&B tenants. Opportunity cost of in-house anchor (Eslite bookstore) can be considered as costumer acquisition cost for overall marketplace. As I can feel clear business leakage in anchor’s operation, I’m not sure whether the operator figures out how to monetize lead generated to the online bookstore or tries to capture the economics of order flow. ( opened in 1995 and the marketplace started the operation in 2006)

The most ironic is that Uni-President Group is not only the landlord but also has economic interests in the online bookstore and 7-Eleven.


Mercari (4385.JP) – Initial Analysis

Mercari (4385.JP)

[November 25, 2018]

* Initial Analysis *

Business Model

The primary product level business model of Mercari is mobile app-based C2C marketplaces. Mercari’s C2C marketplace app portfolio has dominant market position in Japan. Mercari is trying to penetrate overseas markets with operations in US & UK. The US operation is still in early stage with GMV of US$ 71M in 3Q18 with MAU and other operation metrics undisclosed. The company now focuses on scaling up the US operation. The status of UK operation is unclear. Based on how the company reports, it seems the contribution from UK operation is neglectable.

Mercari has other ventures / initiatives such as Merpay (digital payment service) and Merchari (bike-sharing) to build a so-called ecosystem. The rationale behind building up an in-house payment system is quite obvious as commission expense currently accounting for around 1% of GMV in CY3Q18 (or ~ 10% of Net Sales) in Mercari Japan. Merely on the cost saving side, the more Merpay gets adopted by users, the more on-going commission expense Mercari can save. The business model of bike-sharing is unclear. Hopefully, it will not become a cash-burning initiative.


Group level business model is that the company uses cash generated by Mercari JP (a more mature cash cow) and money raised in IPO to fund other cash-burning “stars” such as Mercari US/UK and Merpay. Mercari acquired CARTUNE, a community service focusing on cars, via share exchange in October 2018. (One rationale behind the acquisition of CARTUNE can be found in Borja Moreno de los Rios’s post on Marketplace Liquidity) Mercari is also doing corporate venture capital (CVC) focusing on sharing economy, C2C businesses, and other ventures that aim to create a more active global marketplace.


Currently, Mercari adopts a straight forward 10% take-rate on GMV as its primary revenue stream. Going forward, it might implement different take-rates on vehicle parts as those components have high unit transaction price. The management’s attitude toward current take-rate level is that it’s reasonable. Mercari might be able to raise the take-rate by providing other value-added service in the future.

Unit Economics

Mercari doesn’t disclose enough information on number of transactions so user behavior information such as transaction frequency and unit transaction size are missed. The participants at C2C marketplace can switch sides (overlapping between seller and buyer), so MAU is suitable as an unit measurement of transaction activity.

Below are monthly metrics only disclosed for FY3Q18

  • Number of Seller:                    2.0M
  • Number of Listings:              24.6M
  • Number of Transaction:      10.6M
  • Number of Buyers:                 3.1M

Mercari JP App downloads have already exceeded 70M while the MAU is only around 11M. To increase MAU, Merccari probably has to focus on user engagement. In terms of ARPU, transaction frequency might be increased by better curation, facilitation or community building. Unit transaction size depends on listing category and profile of user base (age, gender…).

An idea to increase good velocity (how many times a good has been changed hand): seller can leave a length-limited digital note on the item (virtual id) and can check the accumulation of notes when it changes hand with another note in the marketplace.

The unit economics shows that Mercari JP has potential to have a profitable growth when it further scales up if the competition is not fierce in the market. The healthy unit economics doesn’t mean this C2C marketplace has competitive advantage or is immune from competition.



Mercari JP has very high brand awareness and adoption among flee market app users in Japan. According to Macromill’s survey in CY2Q17, 94.0% of flee market app users responded they use Mercari. With the huge gap between app downloads and MAU, the implication of high market share is that the JP MAU expansion is a not task of user acquisition but user conversion and engagement.

MKT Awareness

Let alone marketplace differentiation (UI/UX…) / platform management, for a new entry or existing competitor willing to burn cash, price cut and subsidy (on shipping fees) are effective tools to make its marketplace another home for new users. If there’s no effective strategy to tackle multihoming behavior, price competition will just make everybody miserable except for users. With cash raised from IPO and access to capital market, Mercari is in a better position when competitors start price war.

The competition brought by Sea Group’s (SE.US) Shopee in Taiwan E-commerce market eventually led to the privatization of PCHomeStore (4965.TW) via share buyback by its parent company, PCHome Online (8044.TW).

Onlookers from other markets might think the straight forward take-rate ia unsophisticated. In addition to commission, there are various revenue sources a marketplace can charge its users.

  • Listing fee ($/listing)
  • Payment process fee (x%)
  • Other premium service

Growth Strategy

[Mercari JP]

Mercari describes Mercari JP as being in stable growth phase and Mercari Overseas & other initiatives like Merpay as being in investment phase.

The profitable growth of Mercari JP is critical to Mercari’s master plan. The management thinks 30% to 40% annual growth is healthy for a marketplace in stable growth phase at current GMV of JPY 99.0B in FY1Q19. It’s futile to guess how long the high growth can sustain. What’s really important is to identify source of growth and resources required to support the growth. As discussed in the unit economics, the source of growth includes:

  • user conversion (re-activation / retention)
  • unit transaction price
  • transaction frequency

If the company only focuses on users acquisition,  it can run TVCM, launch CRM program or even do M&A deals. There’s much more to be done besides merely spending the money.

Someone in the company needs to decide which advertising channel is effective to acquire / re-activate users , what kind of CRM program retains users and increases listing /transaction activities, what complementary community that fits in Mercari’s ecosystem…

Internally, other teams need to lead and execute initiatives to improve UX/ customer satisfaction / platform stickiness…

To increase transaction activity on the C2C marketplace, probably strategies on community / social aspect / user generated content on the platform might work (my gut feeling…). Anonymous delivery is key to increasing social aspect in C2C marketplace. (The survey about Mercari JP’s satisfying features below was conducted by Mercari)


Human capital is indispensable to support the profitable growth of the marketplace. It’s relatively difficult for outsider to evaluate the workforce quality (while some Mercari’s talent acquisition activities have been reported). Mercari only discloses headcount information. It seems Mercari’s talent acquisition is heading in the right direction. How much value the increasing workforce can generate depends on the leadership of senior management.


*50 new graduates joined Mercari JP on October 1st. and assume zero churn on workforce in FY2Q19.

As most of user behavior improvement initiatives are data-driven, Mercari might focus on talent acquisition of engineers specializing in data science and algorithm.

[Mercari US & Merpay]

It seems Mercari US is experimenting on advertising channels (offline & online). The Q&A session transcript revealed that Mercari US’ GMV has not reached the critical level (they determine the number is Monthly GMV of US$ 100M). In term of investment scale in US operation, Mecari targets to maintain current level before operation getting to critical level mentioned above or GMV growth becoming stronger.

As long as we remain on track toward achieving this, we will continue with the current level of investment, but if we begin to fall short, we may reconsider our strategy. On the other hand, if the GMV growth becomes stronger, we will consider increasing the investment amount.

The timetable of Merpay is not disclosed. By leveraging existing marketplace, the adoption of payment service system should be easier. That said, we might see some incentives offered by Mercari to get users onboard at launch of  Merpay.

Projection (Intellectual Exercise)


Metrics and information not shown in the table above:

  • Mercari JP MAU will increase to 18.9M by FY4Q2024
  • Non-Mercari JP operation will break-even in FY2Q2024
  • If there’s no fierce competition in JP, no significant cash burn on Mercari Overseas / Merpay, no radical CVC investment, Mercari will not need external financing to grow the business. Since it’s hard to predict competitive environment, Mercari is likely to sit on the cash position.

DCF Valuation based on the above projection is around JPY 2,850 per share as of November 25, 2018. (10% WACC / 3% Terminal Growth / mid-point discounting / Excl. Long-term Investment)

What to Bet and What to track

  • Bet on Leadership of management team and its execution
  • Mercari JP’s ARPU (GMV/MAU) improvement
  • Mercari US’s GMV traction
  • Merpay’s development
  • Without further information access I think it’s relatively difficult to have a conviction on this stock.

~ Related Posts ~


~ Material ~

~ Corporate Event ~

FY2Q19 earnings release is scheduled at 3pm or later Japan time on February 7, 2019.