Barbara Gray, CFA – June 4, 2014 – When I was thirty and single and living in New York City, I had a dream: to return one day with my husband and push our baby in a stroller through Central Park. A few weeks ago, albeit more than a decade later, my dream came true. But we didn’t stay in a hotel and travel by yellow cab, instead we used Airbnb to book a guy’s condo on the Upper East Side and we travelled by Uber to the airport.
Ironically, although I have been on an intellectual journey for the past four years developing my Social Capital investment thesis, it was only when I undertook this physical journey (I travelled East to speak at the CFA Society Toronto event “Social Media’s Impact to the Investment Process”) and used Airbnb and Uber for the first time, that I realized the radical power of Social Capital. How is it that Airbnb and Uber have been able to build thriving ecosystems in just over five years with such significant scale and influence that they are now valued at $10 billion and $12 billion? And how have these companies 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? Two words: Social Capital.
In this new Social Era of transparency, connectedness, and stakeholder empowerment, social media exchanges are acting as catalysts to accelerate the formation of the following forms of Social Capital between and amongst its stakeholders (i.e. employees, customers, business partners):
- Bonding Capital: formation of strong ties. There is a high degree of homogeneity, as individuals tend to reinforce shared practices, norms and similarities.
- Bridging Capital: formation of weak ties. This power comes from the ability to facilitate trust by providing transparency into the credibility of individuals.
- Linking Social Capital: formation of links between vertically/horizontally-separated groups. This is the transaction and value-capture side of the equation.
As shown in Figure 1, there are three levels of companies that operate in the Social Economy. And the higher a company moves up the Social Economy Pyramid, the faster the rate of value acceleration as they are able to achieve a higher level of disruption and access multiple social value drivers.
Figure 1: The Social Economy Pyramid: Years to Reach $10 Billion Valuation Mark
Sources: Bloomberg, Company press releases
Note: $10B valuation is based on market capitalization for public companies and private valuation for Airbnb and Uber
* Starbucks took 16 years to reach $10B valuation from the date Howard Schultz joined the company
** lululemon is now valued at under $8B
Social Mission Companies such as Starbucks, Whole Foods, Chipotle Mexican Grill, and lululemon are able to access the first social value driver: Advocacy. As I discussed in my November 2011 thematic research report titled “Social Capital: A New Strategic Play for Investors: Look for Companies with Heart and Soul”, by creating Positive Social Capital (i.e. shared values and positive externalities) for their stakeholders, they are able to attract people looking to align their values with whom they buy from, work for, and work with. This leads to the creation of a thriving stakeholder ecosystem. As Social Mission companies are founded on movements and follow a blue ocean strategy, they are on the low-end of the disruption scale as they created new uncontested marketplaces.
Social Marketplace Companies such as LinkedIn and Zillow, which are also on a social mission, are able to access the first two social value drivers: Advocacy and Connection. As I discussed in my May 2012 report “LinkedIn: Disrupting by the “Power of We”” and in my recent April 2014 report “Zillow: Disrupting the $75 Billion Realtor-Centric Machine”, LinkedIn and Zillow empower professionals by enabling them to connect with one another and build Bridging and Linking Social Capital through their platforms which foster transparency, authenticity, and engagement. Social Marketplace companies, such as LinkedIn and Zillow, appear unthreatening with nascent business lines but they are both starting to gain footholds in the low-end markets and the revolutionary power of their consumer-centric marketplace platforms make them ubiquitous disruptive forces to be reckoned with.
Social Sharing Companies such as Airbnb and Uber, which have a social mission and are also social marketplaces, are able to access all three social value drivers: Advocacy, Connection, and Collaboration. The revolutionary power of Airbnb and Uber comes from their ability to harness technology to create a social sharing platform that facilitates trust by creating transparency and dual accountability. This enables individuals to form weak ties (i.e. Bridging Social Capital) with one another, leading to the personal sharing of goods and/or services (i.e. Linking Social Capital).
Airbnb, which has now processed a total of 11 million reservations, creates a compelling accommodation alternative for its guests by offering them a fun way to discover and book unique accommodations with its current base of over 350,000 hosts offering 600,000 home listings in 34,000 cities in 192 countries around the world. And Uber now operates in over 70 cities in 36 countries around the world. These rapidly expanding social sharing companies are directly attacking the incumbent hotel and taxi industries on both the supply and demand side and are threatening to erode their following traditional economic moats:
- Low-Cost Producer. The incumbents’ high fixed cost structure (which provides them with process and scale cost advantages) is becoming a competitive disadvantage as many travelers have grown tired of the impersonal experience of staying in cookie-cutter hotels and the inefficient and impersonal experience of traveling in taxis. In comparison, Social Sharing companies such as Airbnb and Uber are the ultimate low-cost producers as they have close to a zero marginal cost model as they have the potential to create infinite supply by empowering individuals to generate income from under-utilized personal assets (i.e. Property, Plant, & Equipment such as a house or car and Human Capital such as property management or chauffeuring services).
- High-Switching Costs. Customers are no longer held captive to the incumbents as Airbnb and Uber now present more attractive and personal alternatives.
- Intangible Assets. The value of a brand name is depreciating as Airbnb and Uber are creating long tails in travel by replacing artificial institutional trust with Social Capital by democratizing the tools of production and distribution and connecting supply and demand by capitalizing on the filtering efficiency of social network reviews and facilitating trust through dual accountability systems (i.e. both the hosts and the guests rate each other).
- Network Effect. Unlike hotel and taxi companies that seek to constrain supply to keep prices high, Airbnb and Uber are creating structural assets that appreciate in value as they attract more and more new hosts/drivers (i.e. supply) and travellers (i.e. demand) to their platform, leading to the ultimate network effect.
I have no doubt that the Social Economy will transform how we travel, live, work, play, and consume. And just as the democratization of content led to structural disruption in media-related sectors over the past decade, the emerging democratization of goods and services by Social Sharing companies will lead to structural disruption over a much wider range of sectors. And the secret to understanding this accelerating tectonic shift starts with Social Capital…
Disclaimer: I have a LONG position in Chipotle Mexican Grill Inc. (CMG-NASDAQ), LinkedIn Corporation (LNKD-NYSE), lululemon athletica, inc. (LULU-NASDAQ), Starbucks Corporation (SBUX-NASDAQ), Whole Foods Market Inc. (WFM-NASDAQ), and Zillow Inc. (Z-NASDAQ)