What High Delta Markets Tell us About the Platform Economy

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In Articles, Business, High Delta Markets Posted April 28, 2016

(A view of the Lagos skyline from the roof of ccHub, an incubator and coworking space in Yaba. Photo taken by Jeremy Kirshbaum.)

This post originally appeared on the Institute for the Future blog at http://www.iftf.org/future-now/article-detail/what-high-delta-markets-tell-us-about-the-platform-economy/

High Delta Markets, sometimes called “frontier markets,” are global areas of high volatility and, often, growth. High Delta Markets include much of Sub-Saharan West Africa, Indonesia, and Tier 2 and 3 cities in India or China. “High Delta” refers to the mathematical symbol for change over time. These markets are constantly shifting and changing economically, politically, socially and technologically. The so-called “informal sector” of their economy often dwarfs the so-called “formal” sector. Small-scale entrepreneurship (kiranas, bodegas, kiosks, etc.) drive commerce and large companies rely on these entrepreneurs to distribute their product.

These properties of small-scale entrepreneurship and distributed, informal work increasingly characterizes America and Western Europe (low delta markets). Look to Uber, Lyft, UpWork, AirBnB and countless others as proof. Business models in High Delta Markets are resilient, and built to benefit from volatility and diversity. They also provide an important glimpse into understanding the future of low-delta markets.

Before digital self-employment platforms like Uber existed, High Delta Market businesses harnessed the trust of social connections, rather than technology, to achieve similar ends.

Take, for example, the company FanMilk, producer of FanIce ice cream.

FanMilk is one of West Africa’s most iconic brands. In the 7 countries in which it operates, the recognizable honking sound of the FanMilk horn can be heard everywhere,. The real innovation underlying FanMilk is its distribution model. From a humble beginning with only 30 employees, FanMilk grew to 1,700 employees and engages with more than 25,000 agents and vendors. FanMilk operated a ‘platform economy’ long before the term was coined.

FanMilk’s growth was possible because they utilized existing networks of trust to scale. FanMilk wholesalers ride bikes with branded FanMilk baskets out front. Nearly anyone can be a FanMilk agent because no deposit is needed to take out a bike—the agent is paid a fixed rate for the amount they sold at the end of the day. All that is needed is a third party guarantor who knows both the wholesaler and the agent, who can vouch for the person taking out the FanMilk bicycle for the day. What FanMilk accomplishes with this network of guarantors, Uber accomplishes with background checks and its mobile app to guarantee its drivers.

(Photo taken by Jeremy Kirshbaum)

In the above picture, this agent is set up by the waterside because he thinks people will get hungry for a snack. FanMilk did no work figuring out where he needed to go; they let him use his knowledge of the particular area to find the best sales. By creating an opt-in agent network built on connections of trust, FanMilk scales in fragmented markets. For perspective, it earned 170 million dollars in revenue in 2013.

FanMilk, in modern terms, created an “opt-in platform for gig workers,” without the use of technology. With a network of micro-entrepreneurs, there is no need for a top-down map of where ice cream is demanded in a city. People come to FanMilk when they think they know of a small pocket of demand, and then take FanMilk there on their own, to sell in their own language. The network is flexible and mobile—as demographics and transport shift, the network can adapt nearly instantly without any central coordination by FanMilk.

This business model is not uncommon—similar variations of it are used by companies like Nestle, Unilever and Procter and Gamble to distribute their goods in so-called “informal markets.”

Another example of platforms for work based on trust in social connections are “hawala” payment networks. Hawala networks, most common in North Africa and the Middle East, provide another example of scalable platforms. In a hawala network, money (or debt) is transferred through networks of trust, without the need for anything other than a mobile phone (or, historically, a letter). Let’s say a man in Cairo wants to make a money transfer to a friend in Islamabad. He finds a member of a hawala network in Cairo, who contacts an associate in Islamabad. The man in Cairo pays the hawala member in Cairo, and the hawala member in Islamabad hands the same amount to the recipient in Islamabad.

(A hawala network agent making an exchange. From https://www.flickr.com/photos/imtfi/5475525375)

The transfer is made without any computer, bank, or other intermediary. The members of the hawala network record the amounts on an ongoing ledger kept between them. They have faith that the ledgers are the same and accurate because they trust one another, perhaps through family connections. These hawala networks are able to scale without the use of technology, and have been used as a reliable method of transferring funds in the Middle East, Horn of Africa, the Indian subcontinent, and North Africa in parallel with the traditional banking system.

In both examples (FanMilk and hawala networks) we see how networks of trust create scalability across countries and cultures, to create durable, pro-volatility business models.

In companies like Uber and AirBnB, the trust lies not in networks of human relationships, but in technology-facilitated relationships. However, the underlying principle is in many ways the same. This similarity reveals an important facet of the future of work and the platform economy in low delta markets

The “freelance economy” and “gig-work,” is not a phenomenon caused by smartphone technology. It is a business model created to cope with volatile and uncertain employment environments. That platform-based work is now outcompeting centralized models in Europe and the United States is a bellwether that these markets are becoming more uncertain and complex. They are a symptom of changing cultural norms, not a driver of them. We know this because the same business models, without the aid of technology, have been used in volatile, uncertain environments for decades.

Over the next decade, High Delta Markets will generate new disruptive business models, as well as new technologies to support them, and Silicon Valley (and other global innovation hubs) will continue to pioneer new platforms and technologies. To understand the bigger picture of disruptive change on a global scale, we must study both these landscapes, to understand how they will benefit each other, and disrupt one another.