The September clash between Facebook and the Norwegian newspaper Aftenposten over the Vietnam War photo showed the platform’s dominance in distribution of news is posing risks to freedom of the press.
Facebook’s entry into online classified business, announced on October 3, is posing even bigger risks to Aftenposten’s future. The platform challenges the profit centre of its publisher, Schibsted.
In 1999, Schibsted launched its first classified Web site in Norway, then it expanded internationally. At the end of 2015, it operated marketplaces in 28 countries. Classifieds business brought in US$704 million, or 37% of the group’s operating revenues and 81% of profits.
The Norwegian company, together with South African publisher Naspers and German company Axel Springer, have become global leaders in online classifieds — stars in a disrupted newspaper industry and icons of digital transformation. Naspers and Axel Springer have been later to the game than Schibsted, and, since 2010, have built their positions mainly through acquisitions.
Today Naspers is running classifieds platforms and B2C marketplaces in more than 40 countries. In the financial year ending in March 2016, this business brought in US$546 million in revenue, according to my calculations. Axel Springer runs its classifieds business in nine countries. The segment brought in US$844 million, or 23% of the group’s revenue last year and 55% of profits.
These three companies with print heritage stand out in contrast to the world’s other two largest classifieds marketplaces, Craigslist and eBay. The digital native companies disrupted newspaper classified advertising in the United States in the late 1990s and early 2000s, but their international expansion has been slowed down by the successes of German, Norwegian, and South African newspapers.
The global online classifieds market is rich and keeps growing, as more people go online and start selling and buying there. Goldman Sachs, an investment bank, estimates the market will grow up to US$47 billion by 2020.
Marketplace gets a button
No wonder Facebook wants to get a share of this pile of money. Last week, the Internet giant introduced Marketplace as a feature on its social network available in the United States, United Kingdom, Australia, and New Zealand.
Facebook wants to capitalise on Internet users’ shift from desktop to mobile, so it gave Marketplace a prominent spot on its mobile app — the shop icon at the bottom of the screen, previously occupied by the Messenger. The desktop version will be available in the coming months.
This is not the first time Facebook has tried to enter the e-commerce business. It used to run the Marketplace app on the network from 2007 to 2009. However, it lacked expertise and couldn’t break through Craigslist’s dominant position in the United States, so it outsourced the service.
In recent years, Facebook also tried to introduce online stores to the network, gift shops, and “Buy” buttons in its News Feed ads of fashion brands, but they have not caught on. Maybe people simply did not want merchants in their social temple?
For some reason, Facebook believes this time it is going to be different.
The platform claims the new Marketplace is a natural development, as its users have already started to buy and sell with each other using Facebook Groups. The company noticed last year that in some markets, in Indonesia, for example, people started to use the network as a local Craigslist. So it rolled out Facebook Local Market as a test in Australia. Now it is claiming it is just building on people’s existing behaviour.
“More than 450 million people visit, buy, and sell in groups each month — from families in local neighbourhoods to collectors around the world,” Facebook’s Mary Ku said in the blog post.
Sellers can list a new or used item for sale in just a few steps without leaving the Facebook app. Buyers can filter goods by location, category, or price. They are encouraged to message the seller for more information using the Facebook Messenger app, and then meet in person to pay and collect the item.
As of today, Facebook doesn’t handle payments, nor does it charge any transaction fee. It’s not organising delivery either.
On these markets, winner takes all
While the first news reports on the Facebook Marketplace focused on Craigslist and eBay as potential targets, the service is going to expand to additional countries in the coming months. So Facebook is going to challenge the icons of the newspaper digital transformation too: Axel Springer, Naspers, and Schibsted.
As the Financial Times noted, online marketplaces offer to publishers almost everything online news sites do not: fast growth, high margins, and high barriers to entry.
In 2015, revenue from classifieds in Axel Springer increased by 47%, in Naspers by 24%, and in Schibsted by 19%. Their established, market-leading sites enjoy up to 80% market shares and EBITDA margins of 40-60%, according to the companies’ annual reports.
Obtaining market leadership is difficult, but once established, it seems to be easy to retain, due to the so-called “network effect.” It’s a phenomenon whereby a service becomes more valuable to users when more people use it.
There’s basically so much activity on the platform — or liquidity, as economists say — that both buyers and sellers have confidence they will be able to find a product they are looking for or find a buyer interested in what they're selling.
In such a case, why even bother using a competitive service? This is why markets with the network effect often have dynamics that allow “one winner take it all.”
Once the clear leader is established, some competitors leave the market, allowing the winner to raise prices and spend less on marketing. The business is capital light and maintenance cheap, hence the enormous profit margins.
In 2015, the classifieds leaders joined forces in emerging markets to monetise them quicker. For example, Naspers and Schibsted made a truce and launched joint ventures in Brazil, Indonesia, Thailand, and Bangladesh.
Is all this going to be a high enough barrier to stop Facebook’s expansion?
It might be. Many companies have tried over the years to replace Craigslist, the dominant platform in the United States. Despite its 1990s-style Web site design and ancient user experience — some say it’s ugly, boring, and awful to use — the site retained the market position and nearly 80% profit margin!
No, that is not a spelling mistake. In 2015, Craigslist generated US$300 million profit from US$381 million revenue, according to estimates by AIM Group, a consultancy.
Facebook’s entry strategy
Facebook has some advantages while challenging the classifieds leaders:
• Classifieds marketplaces, especially the horizontal ones that cover many categories like jobs, real estate, or cars, compete with other online sites for attention via reach and user engagement.
Facebook has amassed the biggest and one of the most engaged audiences in the world with 1.7 billion users who spent, on average, 45 minutes per day on the site. By expanding into marketplaces, Facebook is basically building another platform upon an existing one, the strategy of so-called platform envelopment. It proved to be very successful for Facebook Messenger, as the service grew from a feature to a standalone app with one-billion users.
• Interestingly, despite its global reach, Facebook has launched Marketplace in micro-markets of neighbours or art collectors, as it has used Groups as a vehicle. By focusing on small, existing communities and their natural behaviours, Facebook is not really building new marketplaces from scratch. Rather, it is reducing efforts and costs of transactions that have already started to take place.
Focus on micro-markets helps to achieve the liquidity sooner within certain categories of products or geographies, so users might use Facebook for future transactions.
• As Internet users switch from desktop to mobile, Facebook leads the pack with 90% of its user base accessing News Feed on mobile. This might be transformational for the Marketplace experience, as users can take pictures or videos with their smartphones, and don’t need to upload them via desktop computers anymore. Geolocation built in phones helps to filter offers by neighbourhoods and facilitate meetings to close the transactions.
Some big classified sites haven’t transformed yet to mobile and may be vulnerable; for example, Craigslist doesn’t even have an official app.
• Facebook’s login, a social network structure and long stance against users’ anonymity, provides transparency to users who engage in the Marketplace transactions. These might be helpful in building trust between potential buyers and sellers, and providing safety measures to transactions.
Who knows, maybe anonymous trading that results in trust concerns is the biggest vulnerability of Craigslist and similar sites today?
• As all activities of Facebook users are logged, any transactions on the platform might improve the platform’s Big Data operation. Today it has plenty of information about its users and about their interests. However, it does not have lots of information about people’s intentions. Studying their Marketplace behaviours might change that and improve both the Marketplace matching and targeting for brand advertisers.
• Facebook has experience in providing easy-to-use tools and analytics to its business partners like brands. Pricing advice, reputation scores, transactional history, dashboards and analytics, and mobile payments could radically improve the Marketplace experience.
Other Facebook products like sponsored posts might be useful too; for example, people could pay to boost visibility of their ads right in the News Feed.
Alternatives to the American giants
After a public outcry in September, Facebook backed down on censoring the Vietnam War photo depicting the girl running out of the napalm-bombed village.
Schibsted’s CEO, Rolv Erik Ryssdal, fully supported its newspaper editors, but hinted that the company’s issue with Facebook was not only about the freedom of expression.
“There are several aspects of Facebook’s position that we worry about. They are capturing more than NOK1.5 billion from the Norwegian advertising market. Of this they pay — along with Google — only crumbs in taxes back to society,” Ryssdal said.
Schibsted’s CEO added he believed it was very important “the Norwegian media industry now gather to create an independent alternative to the American giants’ enormous power in the advertising market.“
A few weeks later Mathias Döpfner, CEO of Axel Springer, outlined an apocalyptic vision for traditional companies warning many would die unless they reach business agreements with platforms like Google and Facebook.
“If there is not a real, sufficient and big business model on the search-driven side … and there is no business model at all on the social [media] side, the number of content producers will deteriorate fast,” Döpfner said.
Late August, Nasper’s chairman, Koos Bekker, told investors the company’s profitability in 2017 may suffer from slowing economic growth in South Africa and “competition from Google, Facebook, and Amazon has also hit Naspers’s online operation.”
The company’s CEO, Bob van Dijk, however, saw a new opportunity in the United States to disrupt Craigslist: “A mobile-oriented generation doesn’t really want to interact with a clunky ’90s Web site …That market I think is ripe for disruption.”