Brands, Marketplaces, and the Battle to Win the Consumer
Like it or not, every industry is being disrupted by technology, and the watch industry is no exception. The ability to connect with consumers directly through the internet is fundamentally changing the way companies think about the industry and how to compete. Many types of companies — watch brands, watch media companies, and re-selling marketplaces—are aiming directly at consumers to take advantage of the new dynamics at play.
This article takes a look at these market dynamics, the players, and the potential outcomes for brands, marketplaces, and media companies.
Aggregation Theory: A Primer on Winning the Consumer
The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make out-sized profits in a consumer market is to either gain a horizontal monopoly in one of these three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-internet era the latter strategy depended on controlling distribution. For example, in the watch industry, a company or brand would manufacture watches and then build out an exclusive network of distribution, namely by signing on authorized dealers to sell the company’s watches on the ground.
Ben Thompson’s Stratechery is probably the most influential and insightful technology analysis blog on the internet today. The framework upon which he bases much of his analysis is what he calls “Aggregation Theory.” It’s his explanation for how the internet has fundamentally disrupted the old model of supply + distribution = crazy profits (or, in the watch industry, manufacturing + authorized dealers = $$). Since Thompson explains Aggregation Theory better than I could, I’ll quote his original post about it at length:
The fundamental disruption of the Internet has been to turn this dynamic [distribution integrated with supply] on its head. First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale.
This has fundamentally changed the plane of competition: no longer do distributors compete based upon exclusive supplier relationships, with consumers/users an afterthought. Instead, suppliers can be commoditized leaving consumers/users as a first order priority. By extension, this means that the most important factor determining success is the user experience: the best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle.
Thompson is saying that an internet company (or, the “aggregator”) disrupts an incumbent market by first building a superior user experience: doing a job a consumer needs done better than any current players in the market. This allows them to aggregate consumers (and the demand they create) in one place. For example, first Amazon made it super easy to click a few buttons and order a book online. Consumers heard about it and soon stopped going to physical bookstores. This drove old publishing houses crazy because they no longer had control of distribution — Amazon did. Instead of owning supply and distribution, like old publishing houses, Amazon owned the consumer relationship and distribution. This meant suppliers (publishers) were effectively commoditized, meaning consumers didn’t really care from whom they were buying goods. Once Amazon had aggregated enough consumer demand, it started selling items besides books, becoming the “Everything Store” that Jeff Bezos always envisioned. Suppliers were all forced to compete on a level playing field — Amazon.com — and were left to compete on prices to make a sale. Great for the consumer, not so great for the supplier. And while publishers are in a race to the bottom, Amazon is collecting piles of profit.
Thompson goes on to describe this dynamic at play with a number of companies disrupting incumbent markets: Google and publishers, Facebook and advertising networks, Amazon and retail, Netflix and media, Uber and taxis, Airbnb and hotels. He notes the temporal order in which these disruptions occurred: first came Google and Facebook which are companies that deal in obviously digital goods — moving around bits of information (text and images) is easy and cheap. Netflix came next, as more media and content moved to the internet.
Finally, the industries without an obvious digital component were disrupted. Airbnb, for example, helps travelers find rooms in the physical world. But, Airbnb was able to digitize trust that travelers previously only had in hotel brands that had built up decades of brand equity. Hotel brands essentially deal in trust, licensing out their brand name to property managers around the world and giving travelers the confidence that a Marriott in Chicago is basically the same as a Marriott in Chengdu. In the pre-internet world, this meant they could integrate that brand trust (distribution) with vacant hotel rooms (supply). But Airbnb was able to build the same trust with users by building a killer app that made it super easy to find a cheap room. Same with Uber: hailing a car is a physical act, but Uber digitized this dispatching process, as well as trust (i.e. trust that your driver won’t be a serial killer and will get you from A to B).
The lesson of internet business is this: first, build a product with a superior user experience that brings consumers/users onto your network or platform, and suppliers will come soon enough, competing to serve them and win their business. “Build it and they will come,” as a movie once put it.
Cool, But What About Watches?
So what does this have to do with watches? As I said at the top, watches are not immune from the impacts of technology and the internet. Watches decidedly fall in the final category of industries being affected by the internet: businesses with an obvious digital component. But, as Airbnb and Uber illustrate, the internet is now coming for these businesses in the way it came for easily-digitized businesses before. Right now, there’s a battle to win consumers, and it’s playing out on the internet every single day.
There are three general types of companies competing to win the consumer and aggregate demand in a way Amazon, Airbnb, Uber, and dozens of other internet-first businesses have done in other industries.
First, are the watch media companies. Led by Hodinkee, these companies are winning consumers by producing editorial and content that draws consumers eyes and attention. The media companies then monetize this attention in one of two ways: (1) selling advertisements to watch brands, or (2) selling goods to these eyeballs through an associated shop, often highlighted by limited-release watches or collaborations (Swatch x Hodinkee, anyone?).
Second are the watch brands themselves. Many brands are re-inventing themselves for this brave new world of ecommerce and internet-first retail. Some brands like (Richemont-owned) IWC allow consumers to buy watches online, shipping directly to the buyer’s home. No more spending an afternoon at your local authorized dealer, sitting in a lush leather armchair, sipping a cappuccino and looking at the dealer’s latest wares. A company like Mr. Porter is an interesting take on this model: it’s an editorial-driven ecommerce site, now owned by Richemont, that allows users to buy online. But, some brands (cough Rolex cough) still live by the authorized dealer model, making consumers sit on a waitlist for the privilege of purchasing the hottest new stainless steel sports watch. Hardly optimizing for the user experience, but part of this hobby is the thrill of the chase, right?
Third are the selling marketplaces. People have been selling on eBay for decades at this point, just as people have also been selling directly to other watch enthusiasts on forums (and now, through Reddit and Instagram as well). But, the last few years have seen a surge in watch-focused marketplaces all hoping to aggregate consumers in one everything-store marketplace. German Chrono24 is still the biggest, but companies like StockX and Watchbox are also taking slightly unique approach to the marketplace concept. Some of the biggest internet companies are built around the marketplace concept: Amazon really took off when it opened its ecommerce platform to third-party sellers, Google Ads is essentially a marketplace for advertisers to find captive consumer eyeballs, and Uber and Airbnb are both marketplaces in their respective industries. This approach is obviously appealing because it doesn’t take the capital investment of producing great content like watch media companies or building out a manufacturing process (and establishing a brand) like watch brands. In Silicon Valley parlance, it’s a “scalable” solution: it’s not that much more difficult to serve 100,000 compared to 1,000 consumers.
Winners, Losers, and Consumers
Companies of all three types have had success. Hodinkee’s Ben Clymer has admitted that after he realized Hodinkee had aggregated consumer demand and was moving the needle for brands’ sales, he said “fuck it, let’s sell our own stuff.” Watch sales are perhaps Mr. Porter’s fastest growing segment, and it’s continually bringing new brands onto its ecommerce site. To be clear, these ecommerce sites still rely on the “authorized dealer” model (Mr. Porter and Hodinkee have to become authorized dealers before selling new watches of a brand), but it’s a clear departure from the old days of trekking to your local A.D. to see what was in the watch case. And, the model focuses first on creating a superior customer experience, and then deciding what to sell them. Chrono24 sees 7 million unique visitors a month, and after years of resistance from brands, some are even selling their own pre-owned watches directly on the platform now.
Where does this leave consumers? Well, it’s never been easier to buy the watch you want, when and where you want it. While no company has managed to completely aggregate consumers the way Google, Amazon or Facebook have, that’s likely for the best given the substantial problems these companies have seen. Sure, having one dominant player makes it easy to know where to find exactly what you want, but giving that much power to one company or platform is dangerous.
Additionally, it’s unlikely one company or platform ever could aggregate consumers in the way the large internet platforms did. Some consumers are always going to want the new Rolex or Patek Phillipe that only exclusive authorized dealers can get their hands on, and these brands have the cache not to give in or succumb to the dynamics at work in the broader market. These brands will always be able to control the distribution of their watches, and truly differentiated suppliers are hard for marketplaces to commoditize.
The profound shifts in the watch industry are only just beginning. Over the next few years, we’ll see winners and losers, but consumers will be clear winners as companies compete to win the attention and business of watch enthusiasts.