Facebook + Venmo = $75B Informal Economy and a Lesson in Network Effects
moats on moats
Having recently moved to a new area, I’ve been using Facebook Marketplace and Venmo to furnish my place. Which has made me curious, how much second-hand commerce do the two platforms facilitate? My best guess is around $75B annually. Here’s my back of the envelope math:
On Facebook’s Q1 earnings call, the company said Marketplace now has 1B monthly visitors (insane, I know).
I assume a power law distribution, such that 15% of Marketplace users account for 85% of GMV on the platform. I estimate the average power user spends about $35 a month. Just an estimate, but I think it's in the ballpark after observing the activity of a few power-user friends.
Power users: 15% of 1B -> 150M users. At $35/month -> $63B annual spend.
If $63B is 85% of all GMV, then total GMV is $63B/.85 = $74B total.
I haven’t done enough work on Facebook as a business, but Marketplace has to be adding a new leg of advertising growth. It’s made previously dormant users like me addicted to the product again.
For Venmo (and Cash App I should add), facilitating the next generation of Craigslist-style commerce is a material opportunity. Venmo has recently added a "selling a good or service" toggle for transactions. It's a clear attempt to earn a cut on business transactions, which are increasingly happening on the platform. Smart for Venmo, because if they can levy a ~1.5% tax on ~$75B in GMV you have $1.1B in revenue. That $1.1B falls straight to the bottom line because marginal costs are effectively $0.
Apart from the practical utility, using FB Market and Venmo has also been an instructive lesson in competitive advantages, something I’ve been obsessed with understanding as a novice yet aspiring investor. While books help, nothing beats a real-world example for driving a concept home. In the case of Facebook and Venmo, the lesson has been in network effects. Put simply, a network effect is the concept that the value or utility of a network increases with each additional user (think of YouTube and Airbnb, for example).
example 1: FB Marketplace. I deleted my Facebook 6 months ago because I was tired of doom scrolling. However, a month ago I recreated a bare-bones profile for one reason: to buy and sell things on Marketplace. As much as I dislike the core FB product, Marketplace is the THE best place to transact used items, and it’s not close. Marketplace, which was launched in 2016, is a great example of Facebook rolling out a seemingly mundane product that increases the lock-in power of the platform exponentially. It made a reluctant user like me come back to the app, and likely stay for good. This lock-in capability is built upon network effects → the more sellers on Marketplace, the larger selection of goods for me as a buyer → the more buyers, the more potential customers for me as a seller.
I want to put a finer point on Marketplace’s network effects. Marketplace has indirect network effects. In other words, they’re not one-to-one. That is, me specifically using FB Market doesn’t directly benefit a particular seller in my area. However, taken in aggregate, every new user to the market increases the number of eyeballs searching for products and thus increases the attractiveness of the market to the seller. Likewise, the addition of a particular seller doesn’t increase the value for me as a buyer, but in aggregate, every new seller adds to the collective value for me as a buyer because it provides a larger selection.
It should be noted that while Marketplace has indirect network effects, the core Facebook app has direct network effects. That’s because if you are on Facebook, I can communicate with you, a unique person. In the case of Marketplace, you as a seller may offer a car for sale, but chances are I can get a comparable car from another seller.
example 2: Venmo. Naturally, because cash is dead (almost), I’m using Venmo to transact goods on Marketplace. Venmo is a quintessential example of direct network effects. That is, the presence of a particular person on the network adds direct value to me. If Person X is not on Venmo, I can’t pay them and the network is worthless for this transaction. If Person X joins the network, it becomes infinitely more valuable for me in this particular instance. Direct networks effects are very powerful as there can be a viral adoption curve as users immediately experience the benefit of joining or having a friend join the network. For example, imagine you have a good friend that lives in a foreign country and the only way to communicate with them is through WhatsApp. Chance is you’re going to get the app.