When large, linear enterprises are threatened by modern monopolies like Amazon, Apple, Google, Alibaba, Airbnb and others, the most natural form of defense is to consolidate supply.
Platforms thrive off of fragmented supply chains or ecosystems. By capturing a network of producers, the platform organizes and efficiently enables transactions between these producers and consumers. Producers could be manufacturers or distributors of products on Amazon or content creators on YouTube, Twitch or Facebook/Instagram.
Two massive industries in particular have been responsible for a lot of M&A activity in recent years: media/television and retail.
But does this strategy really work to prevent platform disruption long term? Not really.
The television and media industry has been very consolidated for many years, if not decades. There are a handful of companies that own nearly all the major TV stations like Viacom, Disney, Turner, Fox, and a couple of others. As we’ve seen with Disney acquiring many of the Fox assets and AT&T acquiring DirecTV, the industry is continuing to consolidate, especially around the creation and distribution of content.
In addition to these big deals, the Discovery Channel and Scripps merged at the end of 2017. Scripps owns channels like the Food Network, HGTV, the Travel Channel and others.
TV is a mature industry that is declining due to platforms like Facebook and Google. A recent article from Bloomberg discusses why advertisers are shifting more and more ad spend to digital channels rather than TV. My co-author Nick Johnson discusses this in more depth here. When the industry is declining, M&A activity usually increases because companies can decrease synergistic costs and provide greater performance to investors. Unfortunately, with this strategy the real reason why the industry is declining still isn’t addressed.
Platforms like Google’s YouTube and Facebook Live or Instagram create new content. This content is user generated. Platforms don’t pay for this content to be created unlike traditional TV or movie content which comes at high production costs. So platforms have a steady stream of low (or no) cost content that is typically unique to the platform.
And for established platforms like YouTube, Facebook, Instagram or even Twitch, consumers like the platform’s UGC content, a lot. As a result, so do advertisers, especially since these platforms provide much better analytics, personalization and ad targeting than their traditional competitors.
By focusing on consolidating expensive traditional content, the TV and media industry is doubling down on a strategy that is quickly declining in effectiveness. Even worse, as several competitors do this at the exact same time, the cost of content will only continue to go up.
Media and TV aren’t alone. B2B distribution and retail have seen the same level of consolidation. Most recently, Walgreens acquired thousands of Rite Aid stores and is rumored to be considering acquiring the rest of Amerisource Bergen, a drug wholesale distribution company. Meanwhile, Albertson’s is seeking to acquire the rest of the Rite Aid stores not acquired by Walgreens. All of these acquisitions are aimed, often explicitly, at combating the threat of Amazon’s marketplace platform business model.
Billions and billions of dollars are being spent to consolidate supply in just one sliver of the traditional consumer retail market. That number doesn’t even include consolidation in B2B distribution like Beacon Roofing Supply acquiring Allied Building Products or AmerisourceBergen acquiring most of H.D. Smith, the pharmaceutical distributor.
Amazon’s marketplace is able to provide pricing transparency and competitive bidding to its customers by enabling third-party sellers to list products on its website. Amazon doesn’t pay for the “long tail” of inventory, providing a massive product catalog at a fraction of the cost if it had to own all the inventory itself. Third-party sellers are constantly in competition with each other to get prime placement on Amazon’s “buy box” by setting the lowest price to the consumer. Consumers get quality, selection and cost savings, all in one place.
Traditional retailers, with huge cost structures, limited inventory and declining revenue, are struggling to keep up with Amazon’s massive, marketplace-driven growth.
To further drive this point home, last week, Airbnb juts launched Airbnb Plus in 13 cities across the world to compete more directly with hotel-quality offerings. The spaces have a “100 point” checklist and offer hotel-like amenities, albeit at a higher price point than the typical Airbnb listing. What’s another industry undergoing a lot of supply consolidation? You guessed it, the hotel industry.
Marriott acquired Starwood Hotels in 2016 for $13 billion to have over 1 million rooms. In comparison, at the same period of time, Airbnb had over 2 million “rooms” on its platform.
Some hotels have tried to engage in platform innovation to fight back like Wyndham Hotels acquired Love Home Swap for about $50 million in 2017 and Standard Hotels launched a competitor to Hotel Tonight called One Night. While both of these are platforms, unfortunately, neither of them are direct Airbnb competitors. The former allows people to swap apartments with someone else who is also traveling. The latter lets you book hotel rooms rather than people’s homes.
However, unlike TV and media or retail, at least the hotel industry is trying. Major hotel brands understand that their traditional business models can’t compete with a platform like Airbnb over the long term. While they haven’t found an answer yet, they’ve at least begun to experiment with platform innovation.
Spending billions to consolidate supply is an easier decision for public companies threatened by modern monopolies than investing in their own business model disruption. But these strategies won’t prevent the disruption – at best they will only slow it down.
The endpoint is inevitable: the platform business model will gain more and more dominance. The only way for a large, traditional enterprise to truly compete against a platform business threat is to build or buy their own.
Walmart’s purchase of Jet.com is a prime example of this approach. Since it waited over 20 years to introduce a rival marketplace to Amazon, Walmart certainly has an uphill battle. That said, there are only two winners in a platform industry. So, if Walmart and Jet.com become the #2 e-commerce company in the United States, that should be considered a major success.
Incumbents in media, television, b2b distribution and retail should all look to Walmart’s stunning ecommerce turnaround as an example. Only by embracing platform innovation will they be able to compete with the modern monopolies that are taking over advertising.
Originally appeared on Inc.
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