Reprinted by permission of Harvard Business Review Press. Excerpted from The Solution Revolution: How Business, Government, and Social Enterprises are Teaming Up to Solve Society’s Toughest Problems. © 2013 Deloitte Global Services Ltd. All rights reserved.
For centuries, most businesses operated under some variation of the old manufacturing model: They built a product and sold it to a wholesaler, which sold it to a retailer, which in turn sold it to a consumer. Each transaction was a negotiation between a buyer and seller.
Recently, however, economists have begun noticing the emergence of two-sided markets and networks. In these markets, an exchange connects two parties – as an Xbox connects avid gamers with game designers, Craigslist connects landlords with renters, and Airbnb connects beds with travelers.
Unlike a traditional sales transaction, the two-sided market links the creator and consumer directly and protects both. It attracts participants by providing protections and standardizing transactions, reducing the cost of structuring a deal each time.
eBay, for instance, unites sellers and buyers. To ensure a minimum standard of service, eBay lets buyers rate users. To ease shopping, it offers an internal search function. Both of these attributes, quality and search, improve with a large user base: the more participants, the more valuable they are to each side of the market. A high volume of sellers increases your likelihood of finding that 1992 Eric Lindros rookie card, and more user ratings let you know which seller to trust. And if you realize it’s a fake after it arrives? You have recourse through eBay customer support.
Successful two-sided markets tend to subsidize one side, giving the market a money side and a subsidy side. Search engines, for example, charge advertisers but not searchers.
With faster internet service and the ubiquity of mobile devices, two-sided networks are thriving. Ridesharing services, described earlier, epitomize these networks. Lyft, for example, offers a phone-based platform that enables users to geolocate nearby registered drivers and ask for, well, a lift. The company provides the platform; drivers and passengers share the cost of commuting. Drivers receive funds to offset their fuel cost and often gain access to high-speed high-occupancy-vehicle lanes. Passengers get safe, reliable transportation without the hassles of full car ownership. And the company that connects them gets a cut of the revenue.
“This shift in power to the consumer and citizens is not temporary or the product of faddish technology,” writes Simon Mainwaring in his recent book We First. “It is clearly one of the most fundamental and enduring characteristics of the modern digital world, and it will influence how capitalism moves forward.”
Transportation is just one area in which two-sided markets can address a broader societal issue. Another is retraining people in an era of exponential technology change, in which skills quickly become obsolete. To address one of society’s biggest challenges, governments spend huge amounts of money on retraining, but the results are unclear at best. In the United States, the General Accounting Office evaluated forty-seven job training programs, whose combined cost was $18-billion annually. The office noted that “only five programs have had an impact study completed since 2004 to assess whether outcomes resulted from the program and not some other cause.”
Job training schemes in Great Britain face similar criticism. According to the National Audit Office, the British government’s new training programs are “underpinned by assumptions about likely performance, but there is a significant risk that they are over-optimistic.”
Two-sided networks pose a different solution: perhaps citizens could retrain each other. In the same way that ridesharing platforms connect drivers to passengers who need a ride, two-sided markets could connect those who can teach a skill to those who need it. Indeed, numerous start-ups are building exchanges for citizens who want to trade on their expertise.
Several peer-to-peer learning companies, including Skillshare, School of Everything, and TeachersPayTeachers, understand that the best person to teach a lesson is often someone who has just mastered it. SkillKindle, a Delhi-based start-up, marries the virtual world with in-person instruction. SkillKindle classes, both in-person and via the internet, range from traditional academic subjects such as English as a second language to more contemporary pursuits such as writing code.
Avi Flombaum, a former chief technology officer of a small tech start-up in New York City, quit his day job to become a full-time Skillshare teacher, making $100,000 teaching in 2012. His success illustrates the rising demand for tech talent and a new mechanism for delivering it. A programmer by trade, Flombaum notes that Skillshare offers a lot of tech-inspired classes precisely because the market demands them.
Flombaum is proof that services such as Skillshare can fill a critical knowledge gap. “You cannot learn ‘How To Start A Blog’ in college,” he says. “Anything that’s tech, the education industry has really fallen behind on providing to people, so it just makes sense that Skillshare offers that.”
Of course, there are limits to these two-sided exchanges. Peer-to-peer training may train citizens but may fail to link unemployed workers with future careers. And today, it lacks the networking capabilities of traditional welfare-to-work training or apprenticeship programs.
These exchanges, however, are quickly growing in sophistication. Udacity, the online, open-source university cited in chapter 3, offers pupils the sort of career services once exclusive to physical institutions. It even offers an option to pass enrolled students’ resumés to one of its twenty partner companies. While Udacity is not exactly a peer-to-peer platform, many of its features resemble those of Skillshare and SkillKindle, and it’s not hard to imagine similar career services being offered to peer-to-peer participants in the near future. Platforms that specialize in high-demand skills are understandably ahead of the game, with recruiters pushing for early access to top talent. Students who take one of General Assembly’s online and in-person tech courses can get reimbursed for the tuition costs if they join one of the partner companies.
The public sector must think carefully about how it regulates this space, or risk citizen backlash. Already, regulators have been struggling to define how to manage new participants in two-sided economies such as Airbnb and Uber. The learning space, and job retraining in particular, is certain to face significant government scrutiny. Minnesota briefly prohibited colleges from offering unaccredited programs such as Coursera without first registering with a regulatory body. This prohibition lasted a day, before widespread citizen complaints about the outlawing of free online education forced the state to rescind the ruling. While the regulatory instinct often is to provide safety nets for citizens in an informal economy, such reactions can hinder the success of potent two-sided marketplaces.