Published on September 13, 2021
“There's a very special role for a site like Etsy in a world that's becoming more and more commoditized." - Josh Silverman, Etsy Investor Day, 2019A scaled two-sided digital marketplace is a rare commodity. The network effect typically leads to a winner-takes-most dynamic where market leaders are significantly larger and more profitable than competitors. Etsy had a taste of such profitability last year; GMS grew 100% to $10bn and the company generated $600m FCF, a ~35% FCF margin. The underlying quality and economics of a marketplace at scale are clear; the big question we have been focused on is just how big Etsy can get? We interviewed a Former VP at Etsy to understand the GMS opportunity and potential limitations to scale.As with any e-commerce business, understand the threat from Amazon is essential. We only need to look back to 2015 when Amazon launched Handmade, an online shop for craftspeople to sell to Amazon’s customer base. The executive shares insight into why Amazon wasn’t a threat to Etsy:"I would say that Amazon did not invest in the Handmade brand to set expectations for consumers that you could go to Amazon to find unique items from a real person. That's just not what your expectation of shopping on Amazon is, and that's not what they've been focusing on. If you haven’t created that permission structure for the brand, it’s just not going to exist. Also, they haven't necessarily invested in it from a pure product and buying experience perspective. It's hard to find Amazon Handmade, and when you're in there, it feels like Amazon, for the most part..they haven't invested in it as a destination for people to find unique items from real people, and that just isn't, in my mind, what consumers are thinking about when they think about Amazon."Amazon didn’t ‘create the permission structure’ for Handmade to exist. It didn’t have consumer mindshare in handmade goods. Both Amazon and Etsy were built to exist in a certain part of the consumer’s mind; Amazon is the online ‘everything store’ and Etsy is built for individual entrepreneurs to sell unique, handmade products online. When a company already owns a certain space in the consumer’s mind, it’s very difficult to change.Amazon didn’t invest enough for Handmade to truly exist. Over 30% of Etsy’s products are customisable and in 8% of transactions the buyer directly engages in conversation with the seller. The functionality to facilitate such transactions on Etsy is very different to Amazon's frictionless, one-click purchase mentality. The listing pages on Handmade look similar to a core Amazon product page and the seller chat button leads to Amazon’s standard chat bot. The Handmade shopping experience does not foster the human connection that Etsy is built upon. Although Amazon may offer sellers access to huge demand, it’s fundamentally a very different proposition for both buyers and sellers.But how could the threat of Amazon change at scale? Handmade was launched in 2015 when Etsy had ~$1.5bn GMS. As Etsy scales to $20 or $30bn GMS, how could Amazon compete? Is it even worth their time? In 2020, Amazon’s net income was over double Etsy’s GMS. We believe if anything is going to move the needle, it’s likely grocery or healthcare - not designing a ‘high-touch’ buying experience for handcrafted products.Etsy’s strength is Amazon's weakness: a unique selection and a differentiated shopping experience. The company mission is ‘Keep Commerce Human’ and the whole experience is optimised to share the seller’s unique story. Everything is built around human connection and unique selection. This is Etsy’s permission to exist. As soon as they lose this, they lose their identity.