For Local Tech, Fragmentation Is a Problem to Solve — Not Avoid

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Handshake Black White Woodcut CircleIn the early 1950’s, IBM sent a proposal to American Airlines, suggesting that the company use a computer to help automate the way travel agencies booked tickets with the then-rapidly growing airline. Today, the fruit of that project, the now-independent Sabre, is on the verge of an IPO. Every year, the company processes hundreds of millions of airline reservations, serving as the lynchpin which passes information between the travel booking sites like Kayak and Hipmunk, and Delta, American Airlines, and hundreds of other airlines.

The company’s success over the past half-century, and its impact on the growth of the travel technology industry as whole, provides a roadmap for an emerging local technology industry, which has proven it can innovate but remains hamstrung by the inefficiencies implicit in a fragmented marketplace. Too often, the local technology community seems to produce warring city-states, suspicious of partnership and indifferent to wider coordination. What it needs — and what has started to develop over the past few years — is a federated collection of companies, each of which solves one part of a larger problem and relies on the others to build what they cannot.

For local tech, fragmentation is a problem to solve, not avoid
A big part of the problem is that unlike the ecommerce boom of the 2000’s, the local technology sector is not starting from scratch. Even Uber (often held up as a disruptor) is building on occupied land — they’re serving the 233,000 taxi and limo drivers in the U.S. as well as a host of the existing taxi dispatchers. Today, these companies are largely focused on replacing the intermediary industries — the media, marketing, and technology tools that business and consumers have used to buy and sell goods locally for decades — not the sellers themselves.

Consider the retail trade, an industry which still has a massive local presence, and one that many tech startups have targeted. Sure, Macy’s and Williams-Sonoma are big businesses with large marketing and operations budgets, but according to the Census Bureau more than half (58%) of the retail establishments in the U.S. are run by companies with less than 20 employees. Whether it’s viable today or not, that market — these small-to-very-small businesses — hold the key to the local technology industry.

The point is that fragmentation is a problem local technology companies need to solve, not avoid. And, that’s starting to happen — there’s been a noticeable increase in the number of partnerships, ecosystem-driven startups, and overall coordination among the companies looking to help us buy and sell stuff in the real world.

Let’s quickly address why coordination is even necessary. A few decades ago, the big firms which sold to local businesses — the yellow pages and local media companies as well as the newer payment, point-of-sale and various operations services providers — largely operated as independent entities. And, they did so for good reason. Media companies controlled a large enough swath of the marketing spending in each market that the cost of a sales force returned on itself handsomely. Meanwhile, the operations companies — firms like Micros and FirstData — relied on independent sales organizations, which largely made their margins through added installation and system management costs, not by a fixed commission.

But more importantly, the price of coordination — driven primarily through the cost of moving of information — was simply too high to merit meaningful partnerships between companies. However, in a connected marketplace, the cost of moving information is free, so partnerships and integrations scale marvelously. Once the pipes are hooked up, it doesn’t matter whether ten or ten thousand messages are sent an hour. In many ways, partnerships and integrations are the local web’s killer app — the feature that lets the industry pull away from legacy models.

Yelp’s platform push, and what it means for the industry
Trends may shape markets, but it’s the actors that move them. And last summer Yelp made waves when the company announced a new business initiative aimed at integrating companies with commerce capabilities — everything from food ordering service to salon booking — into the company’s core product. The decision sent a message to the industry: go build the services for businesses and we will deliver our users.

“In the early days of a company, you don’t always want to partner, and I think that was the case with Yelp,” Mike Ghaffary, who joined the company as director of business development in 2010. “[The role of partnerships] is something that has been building slowly. Hiring me, and the period since then, has certainly reflected the reality that Yelp has grown up as a company.”

Today, the company has built platforms around both content and transactions, and last week opened a third part of its business to partnerships: sales. The firm announced a partnership with YP in which the Yellow Pages spin-off will sell a stripped-down version of Yelp’s branded business listings product to the company’s small business clients. It’s the largest reseller agreement which Yelp has made so far, and while Ghaffary stresses that the company’s core subscription product can only be purchased through Yelp directly, he offers some insight into the logic: “If we have 120 million uniques and they have demand from advertisers they want to fill, there’s a natural incentive for Yelp as a publisher [to allow them] to access that inventory.”

The key issue here is whether these agreements preclude competition in other areas. And if, by entering into an agreement, these companies establish a clear segmentation in the market between firms focused on generating consumer demand and those focused on creating marketing services. “Can a company can do both?” asked Ghaffary rhetorically. “That’s a different question.”

Coordination: a sustaining or disruptive innovation?
Yelp’s efforts have undoubtedly shaped the market, but they also reflect a broader development within the local technology industry as a whole — the adoption of the API. In many ways, the API is the lynchpin — the enabling technology — that allows companies to scale partnerships efficiently and develop the more autonomous third-party communities which have helped firms like Facebook and Twitter scale key assets quickly.

“A few years ago, the plumbing did not even exist to think about these types of partnerships. But it’s just getting easier to do those things because everyone made a big push to build APIs over the past three to five years,” said Darren Clark, chief product officer at YP, speaking about the company’s recent agreement with Yelp. “What you’re seeing is that a lot of the pipes are getting laid down for things beyond advertising and that’s driving a programmatic approach where people are trying to figure out how they can do platform partnerships around data and content.”

The question for the industry is whether existing companies like GrubHub can adapt, or if new companies — built for coordination — will reshape the market. To borrow from Clayton Christensen, the academic and renowned author of The Innovator’s Dilemma: will coordination be a sustaining or disruptive innovation in local?

In the food ordering sector, one company,, believes it can be both. Founded by David Bloom, a veteran of American Express, the startup wants to build a Sabre for the restaurant industry by developing an independent API — a semiconductor of sorts — that helps connect brands, developers, and other consumer-facing services with the back-end ordering systems of the millions of restaurants across the U.S.

“Fragmented markets struggle to grow and scale because of the inability for systems to communicate with each other, and that forces everyone who participates in the market to start from scratch,” said Bloom. “If I want to go compete with Seamless, I’ve got to go hire a guy to go to sell to local restaurant, and replicate the work that someone else has already done. It creates this incredibly inefficient marketplaces, where everyone is equally inefficient”

Over the past year, the three year-old company has grown rapidly. The company saw 1 million calls to its API in the past 60 days of the year — twice the amount it had seen in the previous three years since its founding. And, with 20,000 merchants using its platform, the firm now has a substantially larger reach than GrubHub or Seamless offered before the merger.

Bloom believes that by standardizing the way restaurants and developers interact, the company can dramatically accelerate innovation within the food industry. He’s less explicit about the impact on existing players — whether its Grubhub in ordering or Opentable in reservations. But, he believes that while the growth of these companies might not help the company’s cause, openness and scale aren’t incompatible.

“When any one service provider dominates one aspect of a business, there becomes less of an incentive for that service provide to play nicely with others. OpenTable dominates online reservations and some might say it has hampered innovation and driven up cost,” he said. “But I don’t care if GrubHub is huge. That’s great. Let’s just open up all of these other platforms to innovate and drive growth in areas that Grubhub wouldn’t tackle.”

So what’s an example of an area, which Grubhub wouldn’t tackle? Try pharmaceutical sales catering. The company is working with a pharmaceutical company to build out a reporting module for ordering lunch — and Bloom is excited. He says the market is a multi-billion dollar opportunity.

Steven Jacobs is Street Fight’s deputy editor.

Related Content: #SFSNYC — Why Partnerships Are Key to the Future of Local