In major cities throughout the United States, taxi medallion prices are tumbling as taxis face competition from car-service apps like Uber and Lyft…The average price of an individual New York City taxi medallion fell to $872,000 in October, down 17 percent from a peak reached in the spring of 2013, according to an analysis of sales data. Previous figures published by the city’s Taxi and Limousine Commission — showing flat prices — appear to have been incorrect, and the commission removed them from its website after an inquiry from The New York Times…In other big cities, medallion prices are also falling, often in conjunction with a sharp decline in sales volume. In Chicago, prices are down 17 percent. In Boston, they’re down at least 20 percent, though it’s hard to establish an exact market price because there have been only five trades since July. In Philadelphia, the taxi authority recently failed to sell any medallions at its asking price of $475,000; it will try again, at $350,000.
As evidenced by the above comments in the November 27th New York Times article titled “Under Pressure from Uber, Taxi Medallion Prices are Plummeting”, Uber is having a highly disruptive impact on the taxi industry. Since Uber was founded only six years ago, the company has expanded to 230 cities in 50 countries and is adding 50,000 drivers a month.
In my search to understand how Uber is able to achieve such an accelerated rate of disruption, I came across a Harvard Business Review article (HBR) written a decade ago by Anita McGahan titled “How Industries Change”. The article was actually recommended to me by Thomas A. Stewart, the former Editor of HBR and author of “Intellectual Capital”, who I shared my research report with. In the article, Ms. McGahan observes that “radical industry evolution is relatively unusual” and cites three catalysts: 1) mass introduction of some new technology; 2) regulatory changes; and 3) changes in consumer tastes. As I discussed in the first article of this series “I. Beyond the Depths of the Corporate Ocean…”, all three of these catalysts (the second being reactionary) are leading to the rise in the Collaborative Economy. It’s interesting as in the article, Ms. McGahan states that an “industry generally evolves along just one trajectory at a time” but I think Uber has emerged from left-field as a disruptive threat to both the taxi industry’s core activities (as it poses a more attractive alternative to both drivers and passengers) and is a simultaneous threat to its core assets (i.e. the premium-priced taxi medallions which created artificial scarcity). And in this case, I don’t think it will take a whole decade for the change to play out as I think Uber is achieving an unprecedented form of accelerated disruption as the switching costs for both suppliers and buyers are low (the only obstacle being regulatory constraints).
Uber has been highly criticized and controversial as of late, as highlighted in the recent November 18th Fortune article titled “A Brief History of Uber’s Controversies”. However, if the company is able to improve its corporate culture and evolve into a more mature company, it should succeed in its ambitions to evolve into a complex transportation logistics company. By leveraging the global structural asset base it is building to be the dominant player in Delivery Services, it could pose a potential disruptive threat to the highly fragmented local courier companies as well as the dominant incumbents UPS and Federal Express.
“Our guests don’t want the Airbnb feel and scent…Airbnb doesn’t really compete with the Four Seasons because its amateur hosts can’t match the level of hospitality his hotel’s professional concierges offer, and its customers expect a “level of service that is different, more sophisticated, detailed, and skillful.”
This statement by Christopher Norton, EVP of global product and operations at the Four Seasons, in the March 21st Fast Company article titled “What Hotel Operators Really Think of Airbnb” epitomizes classic denial. But the reality is that Assets companies, like Airbnb, could prove to be highly disruptive over the next decade as they are creating a long tail in the asset rental/lease market that is starting to rival the assets of the corporate players. For example, it took Hilton Worldwide nearly a century to grow to its current base of 11 brands operating 4,200 hotels in 93 countries with total availability of 690,000 hotel rooms. In comparison, it took Airbnb only six years to amass a base of 975,000 accommodation listings in 190 countries.
Although Airbnb is a lesser threat than Uber, I think it is also a threat to the hotel industry as hotels are becoming less relevant to customers and it is a threat to their core assets (i.e. their real estate assets and brand capital). And interestingly, the hotel industry is powerless to play defense by investing further capital to renew its assets as the size of the head (i.e. 4.9 million guestrooms in the US travel accommodation marketplace) is less than 4% of the size of the tail (i.e. the 133 million homes in the US) and there is a very low marginal cost to bring these personal assets (many of which offer a higher level of fidelity) onto the global balance sheet to compete against corporate assets. And considering Airbnb’s current 148,000 listings in the US equate to only 0.1% share of the housing stock, its potential to disrupt the $163 billion annual revenue US lodging industry is massive.
The same logic applies to Getaround and RelayRides, which along with private chauffeur companies, Uber, Lyft, and Sidecar, are starting to disrupt the car rental companies. According to the Auto Rental News Fact Book 2014, there are 1.964 million rental vehicles in the US vehicle rental marketplace, which is less than 1% of the 254 million registered vehicles. Given the average vehicle sits parked 95% of its life, there is the potential for a very long tail as owners start to view their vehicles as an easy source of passive income, disrupting the $24.5 billion car rental industry. And at the same time, a structural shift from ownership to access would reduce future new vehicle demand, negatively impacting sales of new vehicles. We note that last year, there were 15.6 million cars and light trucks sold in the US at an average price of approximately $31,000, equating to total sales of over $480 billion.
The bottom line is that Uber and Airbnb have become such a disruptive force that they are the target of deafening protests from the highly ensconced hotel and taxi industries in cities around the world as they threaten to erode the incumbents’ following traditional economic moats:
- Low Cost Producer. The incumbents’ high fixed cost structure (which provided them with process and scale cost advantages) puts them at a competitive disadvantage to Collaborative Economy companies that are able to source raw material (i.e. assets, goods, services) at close to zero marginal cost by enabling people and businesses to efficiently monetize their under-utilized assets, goods, and human capital.
- High Switching Costs. Consumers have grown tired of the inefficient and impersonal experience in procuring cookie-cutter assets, goods, and services from soulless companies. But now they are no longer held captive to corporate incumbents as the Collaborative Economy enables them to transact beyond the depths of the corporate ocean. This enables them to access a much greater depth and variety of assets, goods, and services and have a more unique, authentic, and personal experience.
- Intangible Assets. The value of the incumbents’ brand names is depreciating in this new Social Era of transparency, authenticity, and engagement. The Collaborative Economy companies create long tails in their respective markets by replacing artificial institutional trust with social capital. They achieve this by democratizing the tools of production and distribution and connecting supply and demand by capitalizing on the filtering efficiency of social networks and facilitating trust through dual accountability systems (i.e. both sides rate each other).
- Network Effect. Unlike corporate incumbents that seek to constrain supply to keep prices high, the Collaborative Economy companies are creating structural assets that appreciate in value as they attract more sellers and buyers of assets, goods, and services to their platform, leading to the ultimate network effect.
“We believe investors may be naively assuming directory companies will be able to simply shift their advertising clients from print to online and maintain their current high level of free cash flow. However, we believe the 2006 business book by Rod Beckham and Ori Brafman, “The Starfish and the Spider“, provides a note of caution and a dose of reality. According to the authors, “starfish” organizations, such as Napster (NAPS-NASDAQ), Craigslist, or Wikipedia, which rely on the power of peer relationships, are causing an increasing threat to traditional “spider” organizations, which have weaved their webs over long periods of time, slowly amassing resources and becoming more centralized…We believe one of the authors’ key principles of decentralization: as industries become decentralized, overall profits decrease, provides a note of caution for directory companies.” – “Yellow Pages No Longer a Conservative Investment: Downgrading to SELL” – Barbara Gray, CFA –Analyst, Consumer/Diversified, Blackmont Capital – January 4, 2008 (YLO.UN-TSX-C$13.98)
I still remember writing this research note back in January 2008 when I decided to go against consensus and put a highly controversial SELL recommendation on Yellow Pages (YLO-TSX). Although it seems like an obvious call in hindsight (the company re-capitalized to avoid bankruptcy less than five years later), most investors back then were still steadfast in the long-held belief that directory companies were a source of predictable and sustainable cash flow.
Just as the democratization of content led to structural disruption in media-related sectors last decade, the emerging democratization of goods and services by Collaborative Economy companies will lead to structural disruption over a much wider range of sectors. And as foreshadowed by the plummeting price of taxi medallions reported by the New York Times, the dominoes are starting to fall…
And the stakes in this game of dominoes in the new Social Economy are high. As evidenced by the rumored valuations of $40 billion for Uber and $13 billion for Airbnb, the higher the rate of disruption, the higher the rate of value acceleration.
Disclosure: I have a SHORT position in Medallion Financial Corp (TAXI-NASDAQ).
Note: This is the fourth of a series of articles based on excerpts from my recently published in-depth 55-page research report titled “A Deep Dive into the Collaborative Economy“. Here are the links back to the first three articles “I. Beyond the Depths of the Corporate Ocean…“. “II. Economic Abundance: Where the Long Tail Meets the Blue Ocean”, “III. How Collaborative Economy Companies Create Value“.