Home TradeMe: Big Fish In A Small Pond

TradeMe: Big Fish In A Small Pond

68% of New
Zealand’s Internet traffic is to online auction site TradeMe, CEO Sam Morgan and Development Manager
Rowan Simpson told me when I visited their Wellington office last Thursday. TradeMe is
New Zealand’s version of eBay, even down to the color scheme. But it’s more than just an
auction site now – over the past 7 years it has expanded into major verticals like jobs
and motoring. Also it’s probably NZ’s biggest social networking platform (even though
it’s not strictly speaking an SNS).

Even considering all that, when TradeMe sold for a cool $700 Million dollars earlier
this year – to Australian media company Fairfax – the price tag astounded many people in
NZ and Australia. That’s NZ dollars, but at the time it amounted to nearly $500 Million
US dollars. To put that into perspective, it was a deal worth approximately 15 times
more
than the much more hyped sale of Flickr to Yahoo the year before.

But TradeMe only operates in New Zealand, a tiny country of about 4 Million
people – so how on earth did it command such a high price?

In this exclusive interview with TradeMe CEO Sam Morgan ($220 Million richer after the
sale to Fairfax) and Development Manager Rowan Simpson, we discuss how TradeMe became so
dominant in the NZ market and how localization is a big part of their success.

The interview is edited for length. We started by talking about what makes TradeMe so
successful…

Sam: “I guess the thing that is sort of unique about TradeMe and the New
Zealand market really, is the fact that you can have one brand that can diversify so
much. Even a market the size of Australia, you see one guy leading the property segment,
one guy leading the motor segment, etc. Whereas in NZ, the population is ready for
e-commerce and the good things about the Web – but unfortunately there aren’t a lot of
things that create standalone business models to generate enough revenue to be successful
in a market this small. So the way it’s kind of panned out in NZ has been much more about
us expanding continually until we find the edges of what we’re possibly able to do. We’ve
basically just grown and expanded horizontally into new areas. Launched a website, people
joined, they told their mates, keep growing and growing and growing. We’ve always been
awed by the growth and running to keep up. And we’re still growing and running to keep
up. We’re doing nearly a billion page views per month. For New Zealand, that’s 60% of all
of the ones served out of NZ – so it’s a lot.”

Rowan:68% actually.”

Sam: “That’s of all the ones tracked by Nielsen, so it’s not everyone
everyone. But definitely all the big sites and most of the ones with any business
model.

So we’re now at a point where some of the things we’re trying to do really well are to
make sure the site is easy to use and ensure our engineering side (running of the
servers) is tip-top as well. And that’s a major, major piece of work – to run that sort
of traffic, at an auction site especially where you’ve got competing bids and all those
other kind of dynamics you need to deal with.”

Richard: Recently you got sold to Fairfax. The sale price amazed a lot of people
and even in comparison to some of the deals in Silicon Valley, it was a pretty big deal.
So how did that deal come about in a small market like NZ with only 4 million
people?

Sam: “I think the thing that really surprised people was actually that we
[TradeMe] earned as much money as we did [i.e. from day-to-day business]. And that
valuation is a manifestation of that – it’s a multiple of that. So if you look at the way
we were valued, it’s not the same level as you’d get at Google – by any stretch. As a
multiple of revenues, or profits. This year we’re forecast to make $45M in profit, so if
you take a reasonable multiplier on a fast-growth company doing a profit of $40-50M
profit, that’s kinda the number you get to. So I think it’s just an amazing business and
generates an amazing amount of money – and the valuation is simply another way of saying
that. But unfortunately it glosses over the fact that it’s actually a great business as
well.

The impression is that we’ve done this marvelous deal that’s just talked up a tinpot
business to be worth $700 million dollars, and pulled the wool over some guys eyes. But
it’s real, it’s a serious serious business – that’s just what businesses of this nature,
that generate this sort of money, are worth.

The other thing is 1.7% of the advertising revenue in NZ is online – $20-30 M of a $2B
market – so if we’re [i.e. NZ] to reach the level of the US, which is about 10%, then 10%
of a $2B market is $200M. And we [TradeMe] own 70% of it, so it doesn’t take you long to
convert the advertising revenue potential, which is the material part of our revenue
today. So if the Internet [in NZ] gets 10% of the advertising spend, and we get half
that, that’s $100M of revenue just by itself. And at the moment we’re doing $4-5M, so the
growth potential – ok it is only a market of 4M people, but if you’re the only fish in
the pond, it’s a pretty nice situation to be in. We don’t have the level of competition
as in the US or Australia, so the returns you can earn in this market with a site like
TradeMe are very good.”

Richard: Social software is a big part of what I write about on R/WW and it’s
playing a big part in today’s Web – we’re seeing a lot of companies building social
networks and platforms, to expand their user base. Obviously the success stories are
MySpace and YouTube – and those kinds of companies. On the local scene, TradeMe has done
a lot in that respect as well – it’s been a large part of your growth. So how much of
your success do you attribute to that social networking platform?

Rowan: “It’s a reason why the site has got as big as it is, purely because
people were telling their friends about it. It’s a large part of it, but obviously
execution is the other side of that coin. The site needs to be solid and easy-to-use, and
all of those kinds of things as well.

But I think when you hear a lot about web 2.0, companies like eBay and Amazon have
been short-changed in those discussions a little bit – because that’s how they’ve gotten
big as well. In terms of getting out of the way and letting users contribute content,
things that are now being talked about as web 2.0, sites like eBay and Amazon have been
doing those things for a while – and TradeMe is another example of that.”

Richard: Are you working on any social networking things to improve your
platform – any special projects coming up?

Sam: “Our project pipeline is largely defined by what people expect –
not trying to be clever. Because we’re in a position in New Zealand to look at the rest
of the world and see what is cool and what is working, we can be a little bit slower. We
don’t have to be right on the cutting edge of that stuff and disorientate our users every
ten minutes with new features – [we] make sure that when we do go out with [new] things,
they’re seriously baked into the platform. In TradeMe itself, that’s our approach. In our
other sites [maps, jobs, etc] it’s slightly different…

We’re a
really Web 1.0 kind of business. We’re a lot more 2.0 than eBay, say, but our innate
business models are actually web 1.0 business models. […] We don’t need to go and do
crazy things in order to come up with a business model. We have a business model that
generates tens of millions of dollars per year – and if we simply make it better for
people to buy and sell, by making processes better, by making it easier for you to
interface with the website, by making it work more like you expect it to work, all those
sorts of things… the yields are in our core product, and that’s what people appreciate
the most.”

Richard: In the bigger countries like America, you’ve got the big portals doing a
lot of verticals – like Microsoft, Google, Yahoo. But they haven’t really come down to
this part of the world yet and branched out. However a lot of companies in the US are
threatened by the likes of Google, thinking that they might enter their vertical markets
in the future. Do you think that’s a concern for NZ too, for example Google coming into
the online real estate market [which TradeMe recently entered]?

Sam: “I think that Google coming into real estate would be like McDonald’s
coming into the local kebab market – you know, it’s kind of unlikely. So we’re really
lucky that no one really focuses on NZ at all, because it’s so small. But typically those
large American companies don’t actually get the cultural gaps – so they serve fries
rather than rice with their meals in Thailand or whatever. So I think there are big
cultural issues there that are just not well understood. For example the Americans think
that everyone has a zip code.

I think ultimately there’s not enough of an opportunity for them, here, to localize
enough. Real estate [in NZ] might be a $5-10M per year market – it’s great business for
us, but I don’t think it’s worth the while of those big guys. I think where we’re
slightly at risk – and where we try not to do any work – is in areas that can be
delivered on from international players. So if you take applications that need very
little localization and work really well around the world, like Skype or IM clients or
Google [search] or Windows… you put a bit of language regionalisation on it, but
basically it does what it does and it works everywhere.

Whereas what we’re doing is – e.g. if I’m selling my couch, it’s really important for
me to sell it to the biggest market of people who are practically able to buy my couch…
not to the world. So that’s a very local application. We try and focus on things where we
have the ability to basically get the first mover advantage and get very very strong
locally. And customize our product to be local, where we’re the best. [But] we’re not
going to build Skype or anything, because Skype is always going to be better at that than
we will be.”

Richard: Just
on that point, why do you think eBay was never successful in the NZ market? Or did they
just not notice it until it was too late and you guys had too much momentum?

Sam: “Bit of both, they were a little late in and then they launched in US
dollars.”

Rowan: “And they had a cheesy picture of a kiwi holding an All Blacks jersey –
it just didn’t quite gel.”

Sam: “And they didn’t really spend the money. What they did well in Australia –
and they were successful in Australia – was they put some people into it, they built a
new AU dollar ‘only search Australian things’ website. They spent a shitload of money on
advertising and they basically got first mover and got on the spiral first…they never
got on their spiral here [in NZ] because they fucked up a few fundamentals, like
currency…”

Richard: Will you expand into the Australian market – even the Asian market in
future? Or will you remain rooted in NZ and that’s where your core business will be and
you won’t expand much from there?

Sam: “I think the businesses we’re in at the moment are largely geographically
confined to where we are. Auction, classifieds etc – the biggest website always wins.
There’s one already in Australia, so we can’t take auctions there really. It’s very
competitive in classifieds. There are big winners in those markets already. Same with
jobs… So I don’t think there’s anything there.”

Rowan: “In terms of new innovations, it’s very possible [we’ll expand]. We have
a lot of smart people – at some stage something might come up that’s a global application
rather than just for New Zealand. I think we’re better placed to hit markets like
Australia and the US, purely from a language and localization perspective, than we are
Asia.”

Summary

We also chatted at the end about the NZ market in general and what potential there is
for web startups in NZ, but I’ll include that discussion in my upcoming ‘Top New Zealand
Web Apps’ post – as part of my international web apps series.

In summary I think there’s a lot to learn from TradeMe’s example, particularly for
smaller countries – where being first mover and capturing key vertical markets can be the
secret to success.

But also the big countries like the US and UK can learn from this that localization
matters – a lot more than the giant Internet companies perhaps think.

About ReadWrite’s Editorial Process

The ReadWrite Editorial policy involves closely monitoring the tech industry for major developments, new product launches, AI breakthroughs, video game releases and other newsworthy events. Editors assign relevant stories to staff writers or freelance contributors with expertise in each particular topic area. Before publication, articles go through a rigorous round of editing for accuracy, clarity, and to ensure adherence to ReadWrite's style guidelines.

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