And when technology companies are solving different problems, they usually have very different financial models, different technology road maps and different cost structures. Changing models, therefore, become that much more difficult over time. And that’s what Lightbox discovered while evaluating Droom in early 2015.
Here’s how we see the online used automobile landscape.
First, there are horizontal classifieds. This is a age old model of sellers advertising to buyers, popularized by newspapers and brought online most famously by Craigslist. Goldman Sachs estimates that the online classifieds market will be worth $47BN by 2020. The technology products they create need to help buyer find the right ads. They are more to do with search and advertising methods. As a business model, companies in this space tend to prioritize user traffic over revenue generation early on. They generate revenue mainly through advertising or sometimes through premium listings. Eventually, most countries see massive consolidation which finally leads to one or two large companies who then command tremendous power over pricing, leading to very high margins. And their able to maintain these margins because there’s a very high barrier to entry. In India, some have made a case saying that it might not be a winner take all market. Perhaps, but I doubt we’ll have more than a couple of large players. The two companies that control this market right now are OLX and Quikr.
Then, we have vertical discovery platforms. I like the word ‘discovery’ rather than ‘classifieds’ when it comes to vertical plays. In order to differentiate from horizontal classifieds, vertical players need to give consumers a more granular, exhaustive experience. In India this is like Cartrade.com. In order to truly differentiate from horizontal classifieds, verticals need to be a lot more innovative with search technology, product innovation, and a constant stream of updated high quality content. Technology product these companies develop need to, first, help consumers make a decision and then connect them to the right ads. The revenue model is not too different from horizontal classifieds. They generate revenue mainly through advertising as well as lead generation. And the pattern of consolidation in a region is also very similar to horizontals. When Lightbox first started evaluating Droom in 2015, there were 5 or 6 funded companies in the vertical discovery space. Today, there are two.
Ninety percent of venture money invested in the used automobile space in India has gone into these two models. Models that earn money through advertising and create technology products that help in a decision making process. Neither model emphasizes transactions. And that was a critical aspect for our initial evaluation of Droom.
Finally, there are marketplaces. Droom is a marketplace. Marketplaces are very different to classifieds. And they don’t compete with either the horizontal players or the vertical ones.
Marketplaces, at their core, connect buyers and sellers with the sole purpose of completing a transaction. In order to do that, marketplaces need to create an environment of trust and transparency which hopefully provides a better experience than what’s available offline. As a result, the technology products marketplaces build are very different to what classifieds build.
Marketplaces don’t need discovery tools because most visitors know exactly what they want to buy. Instead, Droom builds products that help buyers and sellers feel comfortable transacting online. For example, Droom has a product that highlights the reputation of the seller, another that helps determine a fair price for the car, and yet another that helps potentials buyers get an auto-inspection done. Also, unlike classifieds, marketplaces monetize by taking a cut of the transaction, not by advertising.
So will online classifieds become marketplaces or vice versa? I get asked this question a lot. And the short answer is no. In the history of the Internet, to the best of my knowledge, no classifieds company has ever converted into a marketplace. And the reason is that they are very different businesses. I don’t think leaders in the classifieds space need to either. Classifieds is a huge space solving a critical problem. It takes significant amounts of money and the stakes are very high - because 9 times out of 10, it’s a winner take all game. It’ll be tough to try and win that game while also pivoting to a marketplace. And the same goes for marketplaces. Droom is solving a $100BN problem. And that’s just India.