Disrupting the Disruptors

With breakthrough apps and start-ups changing the way we carry out every day activities like hailing a cab, we assess the merits of some of these so called "disruptors"

In May 1937 the Hindenburg burst into flames whilst attempting to land after its maiden commercial voyage. The tragic event not only claimed the lives of 36 people but it also dealt a fatal blow to commercial airship travel, a movement which was at the forefront of both transportation and hospitality. Today the landscape of everyday life is being dramatically altered by breakthrough apps and start-ups to the extent that even the most commonplace of activities like renting a flat or hailing a cab have been seemingly changed for good. The question remains however that, barring an unforeseeable disaster as in 1937, can these so-called disruptors be stopped?

Typically consumer behaviour is fast changing giving many businesses a short shelf life; fads like the Walkman and minidiscs come and go, but sometimes a company will prove to be an exception rather than the rule and change the way the game is played.   Taking Uber and Airbnb as two examples, it would seem that they have the wind firmly in their sails and are on course to revolutionize the automotive and hospitality economies. To put in perspective the impact these companies are having, let’s consider that Airbnb averages 425,000 guests a night which over the course of the year brings a footfall 22% greater than all Hilton hotels.[1] Meanwhile Uber has expanded to 250 cities, reached a valuation in May of $50 billion which is greater than the market capitalization of top US airliners like Delta Air Lines and United Continental [2], all in just 5 years and without owning a single car.

One key factor which favours the growth of these companies which form part of the wider “sharing economy" [3] movement is demographics. The younger user base gives them longevity of consumption of their products; they also can “piggy back” off the launch pad provided by progression in smartphone technology.

Advantage Disruptors...it would seem

*U.S. workers 16-24     Sharing Economy data from 2015 to 20.05.16, U.S. economy data from 2006 to 20.05.16

Source: Bloomberg

One wonders what can possibly stop this runaway train. The founders of Uber and Airbnb both have revolutionary ideas; however, as with many other revolutionary ideas, governments and regulators move at a much slower pace and could stifle growth. For instance Uber was banned from taking any profit in Germany in 2014 and 2015 unless they officially registered all their drivers with the German Government. It is also unclear about overall accountability and liability should an accident occur on the road involving Uber drivers given that Uber themselves do not own the cars. This occurred in San Francisco when a young girl was hit and killed by an Uber taxi driver in 2013; Uber refused to accept responsibility for the accident as there was no passenger in the car at the time; the girl’s family sued the company following the incident.   

Uber has had its activities halted in over 41 cities during its short life

Source: Bloomberg

Another point of focus is that the sharing economy is built on trust. In a recent survey conducted by PWC in the US, 89% of people agree that businesses like Airbnb are based on trust between users and providers. As a result there is obviously potential for abuse of the system. For instance, a report was published by the New York state attorney general that found that 72% of the supposed “homes” available in New York City on Airbnb were in fact unregistered hotels taking advantage of the online platform. One single commercial user exploiting the Airbnb network made $6.8 million in less than five years.[4] The potential risk is that sharing economy could go into structural decline if consumers lose faith in the taxi drivers or property owners that they interact with.

It is hard to see current trends reversing. The fact that in May this year alone Apple has launched itself into the car-booking fray with its recent $1bn acquisition of Didi in China, and the world’s first commercial jet pack was unveiled,[5]  is indicative of the radical industry change occurring. The scale of the sharing economy means that we cannot see a Hindenburg-type disaster having such a catastrophic impact on the sharing economy as it did on the airship industry.  First movers that are able to invest substantial capital in a formula that is popular with consumers are likely to continue to grow. Our challenge is to identify those companies and to assess the valuation placed on the shares. 

By Jonno Ross

Risk Warnings

The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions.  The information provided does not constitute investment advice and it should not be relied on as such.  All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise.  Capital security is not guaranteed

[1] Price Waterhouse Cooper – Consumer Intelligence Series “The Sharing Economy”

[2] Price Waterhouse Cooper – Consumer Intelligence Series “The Sharing Economy”

[3] The Sharing Economy can be defined as a market for consumers and businesses to trade goods and services through the use of smart phone technology and the internet, in some cases without ever exchanging ownership of the end product.

[4] New York State Office of the Attorney General - http://www.ag.ny.gov/press-release/ag-schneiderman-releases-report-documenting-widespread-illegality-across-airbnbs-nyc

[5] http://www.martinjetpack.com/sales/manned-jetpack0.html

Jonno Ross - Funds Distribution

Jonno joined Waverton in November 2014 to support our Fund Distribution team. He is responsible for funds support along with business development for all Waverton Investment Funds. Jonno graduated in July 2014 from Exeter University with a degree in Spanish and French. He holds the CFA UK Level 4 Certificate in Investment Management.