Will the Sharing Economy Cause the Creative Disruption of Hotels and Taxis?

How have hotels changed in the last 100 years? How about taxis? Not much. But people have changed. I have an MBA student who rents out his couch in the living room of his one bedroom student apartment to visitors and makes $500 a month. Pays for books and groceries! I know one couple who just rented out their entire apartment for a week in NYC and then went on a week-long trip in San Francisco with their entire hotel bill paid for by the renters in NYC. In both cases, Airbnb, was the broker that brought landlord and renters together. Uber brings car and driver together with passengers. What enabled these and similar sharing opportunities?

Complacency and loss of flexibility. The dynamics of the free market incentivizes entrepreneurs to enter the market when an unfulfilled need is perceived and if the entrepreneurs can create a solution to satisfy that need. If they guess right, they become profitable, grow, and become the kingly standards of their industry. As oligopolistic giants of their industry, there are few challengers to force substantive innovation and little incentive to obsolete the platform (brick and mortar, fixed buildings) or lower price (margins are needed to support the platform).

This is the condition that begs for entrepreneurs to enter the market, offer lower priced rooms or entire apartments, more convenient locations, and/or a non-institutional feel. As broker of housing, Airbnb, has no owned inventory of rooms or buildings. As a broker of transportation, Uber has no owned fleet of vehicles. Competing with such entrepreneurs is like competing with a ghost army. Why didn’t members of the hotel industry or taxi industry initiate such innovative business models? Schumpeter used the term “creative destruction,” in his 1942 book, Capitalism, Socialism and Democracy, to describe how successful firms grow large, bureaucratic, and less flexible in the process of innovation. The result is that alert entrepreneurs can create a business that can live in the shadow of the giants and feel relatively safe from competitive retaliation. Will hotels and taxi firms competitively respond to provide the market with what it wants, or will they seek government regulatory competitive protection?

Uber Will Help Build Market Network Effects, But Not a Brand Network Effect

A recent NY Times article argued that if Uber can find a way to lever its own network effects, it too can be a Microsoft or Google.[1] Due to its initial success, Uber is now the protest target of the incumbent regulated taxi companies wherever it begins service, around the world. While Uber will contribute to creating a market network effect, it will not likely create its own brand network effect.

First, we need to differentiate between market versus brand network effects. Networks effects refer to the increasing benefit consumers receive as more consumers buy a product or service. One example is how the early adopters of the Internet received increasing benefits as increasing numbers of users adopted the Internet and participated in creating and posting increasingly useful information, businesses, and news. This example describes market network effects derived the collective adopting the Internet, and not necessarily of a brand.

Apple is an example of brand network effects. By choosing a proprietary approach to many key business decisions, like operating systems, product, software, and accessories compatibility. Its commitment to a proprietary approach create a brand network effect; e.g., increasing numbers of iPhone adopters led to increasing benefit for any one consumer having Facetime. The strategic risk of the proprietary approach is a topic for another essay.

Can Uber become the dominant brand in its sharing economy space? Quite possibly. Can Uber gain brand network effects? Unlikely.

Uber is an entrepreneurial taxi startup service with a $250 million investment from Google. The implied valuation and the absolute size of Google’s financial commitment suggest there will be considerable momentum for brand success. The company is receiving attention now from the incumbent, regulated taxi services that are claiming Uber is threatening the viability of the traditional taxi operators. Other viable competitors exist, like Hailo and Lyft. Halo is partnering with traditional taxi operators so it may be able to survive the inevitable regulations that are sure to come. Lyft has received a $250 million investment so it can meet Uber price cut for price cut and build the industry. There may only be an oligopoly at the end, there may be market network effects, and Uber may have economies of scale, but not brand network effects.

 

[1] Irwin, Neil (2014), “Uber’s Real Challenge: Leveraging the Network Effect,” The New York Times, June 13, 2014, http://www.nytimes.com/2014/06/14/upshot/ubers-real-challenge-leveraging-the-network-effect.html

 

Can the Buggy Whips Metaphor Withstand the Disruption of Technology?

A popular story providing some solace to victims of disruptive innovations is the buggy whip metaphor. The argument is that although the horse-drawn carriage industry was diminished by the innovative internal combustion engine, a niche market for buggy whips could profitably survive because there will always be a need for them. In fact, the Westfield Whip Manufacturing Company in Massachusetts, founded in 1884, is still making whips, albeit for equestrian dressage and jumping.[1] Is this buggy whip example a useful metaphor for other disrupted industries?

My friend, Roger Christian, President of University Camera, operates an independent camera store in Iowa City, Iowa. He is one of the analog survivors of disruptive digital imaging technology. The independent operators find it difficult to compete at the scale of a Snapfish, the internet purveyor of printed images. Roger just wrote me about how the store his family shops at, part of a regional chain of supermarkets, is replacing its photo lab with a store-within-a store national chain of coffee shops. Coffee consumption is more valuable to the supermarket than the declining consumer interest in printing photos. The denouement of photo processing labs in stand-alone locations as well as in local drug stores, supermarkets, and discount store is part of a national trend. It is a challenge for even the big brick and mortar retail chains to compete successfully with the internet photo processors, particularly in the face of a declining consumer market.

Can high transaction cost brick and mortar retailers compete with the low transaction cost competitors on the internet? One alternative to competing on costs is to break down the value chain into its parts and specialize in one or only a few parts where the low cost disadvantage is not present. For example, the Timken Company, manufacturer of roller bearings and other moveable machine parts in the 1890s went from providing bearings to carriages, to automobiles[2] and today is a $6 billion market cap company with a 20+ PE ratio. These roller bearings are metaphoric buggy whips. Another alternative is to compete in product-market segments where internet companies cannot tread. E.g., in the photo industry, niche portrait services, wedding, sports photography and other special events photography are relatively secure. Providing retro cameras (called “Holga”) or offering slide processing (called Ektachrome) to small niche markets are survival techniques. These examples are “buggy whips.” The buggy whip metaphor is alive and but only surviving. A successful solution like Westfield Whip Manufacturing or Timken may not be obvious in the photo industry. I don’t think a Starbucks in Roger’s camera store is the answer either.

 

[1]Stross, Randall (2010), “Failing Like a Buggy Whip Maker? Better Check Your Simile,” NY Times, January 9, http://www.nytimes.com/2010/01/10/business/10digi.html?_r=0

[2] Ibid.