Tuesday, June 27, 2006
Industry Note: Jellyfish and Edge Competencies - Liquidity
Scott K writes a brilliant post to which I will defer and point you.
From a strategic pov, note the marginal benefit vs marginal cost of liquidity; it is the fundamental source of advantage in this model, and the imbalance in that equation tells us not just that attention scarcity is very real and will continue to be arbitraged with greater and greater efficiency across consumer markets, but also that there is plenty of room for micromediaries like Jellyfish to continue to blossom (=I'm impressed, nice one guys).
As I understand it Jellyfish splits the CPA fee with the customer. A Jellyfish competitor (JC) keeps the whole CPA amount for himself. Thus it seems like that buyers should gravitate to Jellyfish because they get half the money that would otherwise go to the intermediary comparison engine service.
However, since the JC doesn't have to split his fee with the customer he can just lower the CPA fee he charges to match the NET result of Jellyfish.
Let me try to illustrate an example here of why I have some misgivings of the Jellyfish model:
Canon POWERSHOT-S3IS 6.0 MegaPixel Camera retails for around $500. Let's say the wholesale price is $350. Let's say a retailer budgets up to 10 percent of the retail price in advertising and promotion or $50.
If the merchant uses Jellyfish he can expect to effectively sell the camera for $475 ($500 - ($50/2)). If the merchant uses a JC he can STILL expect to effectively sell the camera for $475. Why? Because the JC will lower his CPA fee to only $25 in order to level the playing field with Jellyfish. The merchant can plough the fee money he saved and reduced the price of the camera to match Jellyfish's NET price.
Therefore, the merchant would have two advertised prices ($500 for Jellyfish & $475 for non-Jellyfish). The merchant has to do this or else his margins will be unreasonably squeezed. He wants at the end of the day to have (ex-advertising) gross margins of $100 for the camera regardless of which comparison engine a customer used. Remember, the comparison engines are paid a $25 CPA fee.
Jellyfish might just make this process more complicated for the merchant and his customers. He might not like the way Jellyfish forces him to account for two advertised prices. As the new entrant, Jellyfish might have a hard time convincing merchants that they'll actually sell more stuff while keeping their margins the same.
Then how do you explain the fact that the after receiving a HUGE traffic spike, the site is actually declining in traffic:
Based on your logic it should be increasing in adoption, not decreasing. Could it be because Jellyfish's entire value proposition is based on theory? In the real world, it looks like just another discount shopping site to 99.99% of the people out there who don't care that Google makes so much money.
This is why economists/consultants make lousy entrepreneurs/VCs.
That is a great comment. But I think the point is to make the value chain more efficient by removing risk.
Dude...I think it's a tad bit soon (< 1 month) to declare Jellyfish "dead". It's kind of inane thing to say.
In any case, my argument was about attention, risk, and reward. We can make many critiques of Jellyfish in particular. It should be blindingly obvious that there is a gap between economics and execution.
Final note - who makes a great investor? You're assuming from the outset that VCs are great investors. In fact, if you were in any way meaningfully part of the venture economy, I think you would know that the track record of most VCs is pretty dismal.
Thx for the comments guys.
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