01 2 / 2018
The downfall of middlemen businesses
I think we’re at a really interesting time with technology. We are going to see a lot of software “middle(wo)men businesses” be replaced. Payment processing companies. A lot of marketplaces. Businesses where there are two sides and some company sitting in the middle who doesn’t provide much value – these are the kinds of companies that are going to be disrupted soon. On the flip side, this is a great time for entrepreneurs who are just starting out and thinking about new opportunities.
But let’s take a step back for a moment run through a quick history of the web.
Since the 90s, software companies have moved away from desktop software - CD ROMs, floppy disks, and whatever else we use to rely on that we cannot even remember anymore. Software moved online, and data is now stored in the cloud - not on a local server in your office. This is/was a good thing. It’s incredibly convenient to be able to access software anywhere in the world with any computer or mobile device. But it’s now become also a bad thing. We’ve seen the rise in hacking of databases. (Thanks Equifax for leaking everyone’s SSNs!) We’ve seen some companies get to be so big and they have all of your data. Some of these companies are selling or giving away your data to other people without you knowing about it. Maybe it’s ok that Yahoo! mail got hacked, and those hackers can have fun with all of my Groupon daily coupons and other newsletters. But, it’s become clear that this model isn’t perfect for everything.
This is where blockchain technology comes in. What if instead of one company holding all of your data in a central database you flip the model around? Instead, why don’t we make data available and open in the public with privacy settings that you, as the consumer, own and control? And every transaction is also made public with redundancy so that there are no disputes about what records have happened. And what if to accomplish this, we rope in a lot of people who can be these nodes of information in this distributed ledger instead of one party?
In the beginning, blockchain sounded like it could only applied to niche use cases that required a lot of security and privacy. But actually, I think this can be applied to a lot of use cases for other reasons – to connect two sides in transactions.
For example: take ad networks. Ad networks have advertisers who want to buy ads. And publishers who want to make money by serving ads. And the ad networks who sit in between will often take 20-70% cut. In other words, if I’m a marketer buying an ad at $100, the publisher might receive anywhere between $30-$80. Some ad networks are incredibly valuable – they provide useful targeting and ad serving technology. Others are not and just take a massive cut in between.
Now imagine a world where someone built ad tech and offered it for free to match advertisers and publishers? They take no fee in between. I guarantee you that the ad networks who provide no value will be wiped out quickly, because marketers will all flock to buy ads that are significantly cheaper. And publishers would prefer to make more money.
So let’s say we start this company – call it Hippo Ads. With blockchain, we can do this with Hippo Ads. We will rely on others to be information nodes – we won’t need a central database. We will provide the software to keep track of the ad buys and who gets what payments. We also provide software to match advertisers and publishers. AND, we take no fee for this.
And here’s how we make money: we can offer a currency called Hippo Coin. You can only buy ads and get paid with hippo coin. And there’s a limited supply of Hippo Coin. We at Hippo Ads will hold some of the coins that we’ll vest upon hitting certain milestones. And since there is a limited supply of Hippo Coin, if this ad network gets to be so valuable – i.e. everyone wants to buy and sell ads, then the value of Hippo Coin against the dollar goes up, and we employees and founders at Hippo Ads will make money by holding some of that currency and making a good product / service.
So now we take this train of thought a step further. Any two sided platform or marketplace that takes a fee in between could potentially be disrupted by applying the same model. Right?
Now, not every marketplace or two-sided platform will be disrupted. Let’s say you have a marketplace and you are charging a 15% fee in between the two sides. If your customers are finding your service valuable and are happy to pay you that fee because you provide great service or great product / technology, then you likely won’t be disrupted. But if you find that people are trying to skirt you to save money, then this could be a better model and something to either adopt or watch out for from would-be competitors. In addition, there are other criteria to consider:
1) Old industries won’t adopt this model in the near term
Because utility tokens are so new and hard for most people to work with, the industries that will be disrupted first will be the ones where the two sides are quite tech savvy.
2) Tackling tech savvy, fast-moving incumbents is not a good strategy
I see blockchain companies trying to use this distributed ledger model to take on their “centralized” counterparts who are also still very mobile, well-funded tech companies who will be able to either counter by either offering a token themselves or will outpace building both sides of the marketplace faster.
3) Latency is a strong consideration
Although a lot of two sided marketplaces and platforms don’t need information transmitted in real-time, some use cases have serious latency considerations. Programmatic ad-serving, for example, has to be super fast. Consumers won’t wait around for 5s for a banner ad to show up. And blockchain won’t serve these use cases well.
Just some things to think about as you either pursue your next opportunity or look at who is chasing you.
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