The case for user ownership of online marketplaces (part 2)
What works well about the web2 playbook and where it goes wrong
Welcome to to part 2 of this post! You can find part 1 here.
It turns out that I had fewer words to say about the pros and cons of the web2 playbook than I thought, and I considered holding off on this until I finish parts 3 and 4 so I can post it all in one shot.
Then I remembered the entire audience for this newsletter consists of a handful of my friends, and I’m experimenting with publishing on a schedule of sorts, so please excuse the short post.
(P.S. hello friends, thank you so much for taking enough of an interest in my work to follow my ramblings on the internet! I love you all.)
What works well about the web2 playbook and where it goes wrong
“Online marketplaces create value by bringing people together” is one of my favorite lines from part 1 this post. To me, it succinctly captures online marketplaces’ wonderful capacity to facilitate collaboration between total strangers.
It also helped me realize that in the web2 playbook, marketplaces are not only bringing together supply and demand, but also bringing together users and investors.
In fact, I’d argue that bringing together users and investors is the real innovation in the web2 playbook. Think of it this way:
The thing that the internet and the aggregation model changed is not the basic function of a marketplace (of connecting supply and demand). Though this is a wonderful function of marketplaces, it has been around for literally thousands of years before the internet existed.
What the aggregation model did change is the upfront investment required to launch a new marketplace, as well as the potential upside from launching one successfully.
This created both the opportunity and the motivation for users and investors to work together, and the web2 playbook was born.
Cooperation between users and investors is critical to the web2 playbook. Without it, there’d be no investors to foot the expensive bills to bring the initial supply and demand together, no value to users, and no online marketplace to speak of.
And with that, we have a new lens through which to evaluate the web2 playbook: how well it facilitates cooperation between users and investors.
The part that works
To see how impressive it is for the web2 playbook to bring users and investors together at all, imagine you were given these raw ingredients and had to figure out how to get these two groups cooperating:
I don’t know about you, but to me that would be like one of those brain teaser puzzles from a job interview that I would not pass. I certainly wouldn’t have been able to solve it as elegantly as the web2 playbook does:
Get investors to contribute money for the promise of future profits
Convert money into minimally viable level of usefulness for users
Continue to grow in usefulness as more users makes the platform more useful, which attracts more users in a virtuous cycle
When it’s ready, convert usefulness back to money in order to deliver on initial promise to investors
Through this lens, the web2 playbook facilitates cooperation between users and investors using money as a conversion tool between the different things that these two groups value.
It’s a brilliant bit of deal-making and coordination, if you ask me.
Where it goes wrong
As a general rule, cooperation needs to remain valuable to all parties involved in order to be sustainable. Since the goal here is to keep investors and users working together to create value, ideally there’s a way for value to flow to both groups, or at least a way for the two groups to take turns receiving the rewards of cooperation.
But in the case of the web2 playbook, value flows to users only at the beginning of an online marketplace’s lifecycle. When the marketplace grows to the point where it begins extracting from its users, value disproportionately flows to investors, and users no longer get back a fair share of the value they are helping to create. This imbalance leads to a one-sided relationship that leaves users with little incentive to continue cooperating.
In other words, the problem with cooperation between users and investors in the web2 paybook is that it has an expiration date. It lasts for only one turn. After that, the vast majority of value is captured by investors whether the users like it or not, and not surprisingly, most users don’t like it one bit.
This creates an opportunity for online marketplaces to make cooperation between users and investors more sustainable by 1) fixing the power imbalance and 2) making cooperation more rewarding for users.
I look forward to diving into how I think web3 tools can enable this in the next post.
This has been part 2.
Coming up in a future post:
How user ownership in web3 upgrades the old playbook
How better playbook → better outcomes
Until then, thanks for reading!