Amazon, Facebook, Google – Blockchain offers businesses new chances against big platforms
- 12. December 2017
- Posted by: Collin Müller
- Category: Strategy
The Web was good for competition and free trade
In the last 20 years, the Web has broken up many old, encrusted structures in trade. Today’s online platforms make it much easier and faster for customers to access products and services. Many new companies only emerged because they had easy access to customers through digital distribution channels that would otherwise have remained closed to them.
That’s why today we have a much wider range of products available on the net than we could have imagined a few years ago. And countless products are much cheaper today because digital processes have made efficient processes and global sourcing possible.
But the growth engine of online commerce is no longer running smoothly…
Large platforms control consumer markets
In many markets, huge, quasi-monopolistic middlemen are well-established, offering new competitors no space.
Who wants to rival Amazon as a newcomer in e-commerce? Or who would start a search engine against Google now? Or a social media platform against Facebook and its subsidiaries?
Especially small and new companies cannot compete with the large platforms. But even established players are often unable to cope with their market power and are pushed to the edge from their formerly strong positions.
Next, B2B markets will be centralised
The market for goods and services for end customers (B2C – Business to Consumer) is firmly in the hands of a few large platforms.
But currently, the big platforms are also pushing into the market for B2B trade (B2B – Business to Business) between companies. Amazon no longer primarily sells to end customers but also has its own B2B marketplace with Amazon Business. Uber, which started as a taxi service, offers a delivery and logistics service.
Soon, the markets for trade between companies will therefore be dominated by large platforms, too, so that the free market and equal opportunities in this segment will also be at risk.
Why is it that individual large platforms can control global markets? And why is that a problem?
Big players continue to grow because of network effects
It is obvious that the larger the choice, the more attractive an online service is for customers. Customers look for the widest possible range of products at a retailer. And a social media platform is all the more attractive the more other users I can meet, with whom I can chat and exchange content.
In addition, an online retailer with high revenues can secure better purchase prices and can therefore also offer its customers products at a lower price than the competition.
Newcomers to the market are confronted with the almost unsolvable problem that they can neither lure customers with a larger supply nor with lower prices. The large platforms almost always offer the most attractive marketplace for suppliers and customers. Like black holes, their gravitation pulls suppliers and consumers onto their platforms and they are steadily increasing in mass.
Centralisation hinders free market access
But it is not only the obvious economies of scale that are a problem for fair trade. The big middlemen also control who is allowed to participate in the markets on their platforms.
On the one hand, it is completely intransparent for most users how a platform brings providers and consumers together. No one knows how the Facebook algorithm selects content and compiles it into an individual newsfeed for each user. And no one can really be sure that all rooms at AirBnB are offered fairly and on an equal footing.
On the other hand, Google, Amazon and many others use their market power and force providers to buy a good presentation on their websites. Only if you book advertising, you can secure a promising position within the products presented. The large platforms practically charge fees for market access.
To create equal opportunities, it should be possible for new entrants to easily join a digital marketplace. And network effects should not lead to a drastic disadvantage for small market participants.
Bitcoin has demonstrated how this could work…
Blockchain technology removes power from large platforms
Bitcoin has already done it in the financial world. In the decentralised Bitcoin network, secure money transactions between completely foreign persons are possible without banks. All participants trade directly with each other. Bitcoin with a value of more than five billion euros are moved every day without a central authority controlling the transactions.
The Bitcoin blockchain ensures that all transactions are executed correctly and securely.
And unlike the traditional banking system, anyone can join in without having to ask for permission or apply for an account.
But blockchain technology cannot only be used for money transfers. It is also possible to organise the trade of goods or services via a blockchain network.
On a blockchain marketplace, market participants no longer submit their offers and requests to a central platform such as eBay. Instead, sellers publish their product offerings in a blockchain accessible to everyone who is interested in the marketplace. And buyers use apps of their choice to search the blockchain for a suitable product. With cryptocurrency, the blockchain marketplace can also process purchase and payment directly.
All market participants act as equal peers. There is no longer a central intermediary who determines who trades with whom, who can see which offers and who receives which prices. Anyone can contact anyone directly.
Blockchains can therefore ensure equal opportunities because everyone can participate in the network. No one has to ask for permission. Everyone plays according to the same rules of the game, which are publicly accessible, and the consent of the majority of participants is required to change them.
OpenBazaar is a peer-to-peer marketplace that already partially implements this approach. The actual trading does not yet take place via blockchain technology but via other serverless algorithms. However, payments are made entirely via Bitcoin.
By opting for end-to-end encryption and dispensing with central servers or payment service providers, anyone on OpenBazaar can trade virtually free of charge and securely.
Markets will gradually free themselves
New decentralised markets naturally suffer first and foremost from the problem that they have to create a critical mass with appealing offers and many potential customers. Every new marketplace will have to fight against the superior size of established online platforms such as Amazon, Uber or Ebay. Every new marketplace must be attractive at least for some pioneers to develop enough momentum to grow and to gain more and more customers and suppliers who are willing to check out the new possibilities.
There are two ways that could lead to the gradual establishment of blockchain trading networks.
On the one hand, there are the so-called leap-frog effects. Products and services for which there is no online market, yet, would not first be traded on a central platform, but would instead opt for a blockchain-based solution from the start. This could apply, for example, to niche products for collectors or very special industries. It is also conceivable that in less developed regions of the world, centralised e-commerce markets are not created in the first place, but that fair and efficient decentralised models are used from the start.
On the other hand, many providers on today’s central platforms cannot be satisfied with their strategic position. It would be highly attractive for them to offer their products in parallel in blockchain trading networks. Initially, they will generate only small sales there. But expanding the business is worthwhile, as they can save transaction costs, gain full transparency of market developments and can influence how their offer is presented. As soon as a product category reaches a critical volume of decentralised trading, the competing centralised market with all its disadvantages is likely to collapse quickly.
For both variants we need flexible but easy-to-use protocols, blockchains and decentralised applications. As soon as these are available, traditional, central e-commerce will be quickly replaced by decentralised markets.