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The sharing economy, also known as the sharing economy, has been one of the most important online phenomena of the decade. This week also caused a stir on Wall Street, as the stock listings of delivery company DoorDash and home rental company Airbnb received an euphoric reception.
But for an industry that is already going crazy, there are a surprising number of unanswered questions. Of particular interest this week: Are they good deals? And given that their sometimes damaging impact on society provokes a backlash, will they do good business in the future?
This is an important transition time. Following last year’s initial public offerings by private transportation companies Uber and Lyft, prime examples of this new style of online marketplace are now in public markets.
It’s hard to argue with the impact of the gig economy. In the year before they went public, the four companies generated more than $ 100 billion in travel, deliveries and home rentals between them (although some bookings were cut during the pandemic).
Undoubtedly, the use of applications to organize informal markets has given rise to important new forms of competition and has freed up additional resources in the economy. That includes giving more people the ability to participate in a part-time workforce (this is the “work” part) and expanding the use of assets like private cars and houses (the “sharing” part).
But that hasn’t translated into profit. Even the flattering financial metric these companies prefer to be judged by (adjusted earnings before interest, taxes, depreciation and amortization) showed that all four generated losses in the 12 months leading up to their listing, with about $ 3.3 billion in red ink in between. they.
So, are your business models half or just half evolving?
While Airbnb has a solid gross margin above 80 percent, the pre-IPO range of 45 to 57 percent for the other three shows how much its supposedly “light” market models are affected by the costs of trying. generate demand.
These include the subsidies that have been lavished on consumers during fierce battles for market share. This may not have generated a clear financial return for shareholders, but it has certainly generated benefits for consumers. For many people, getting a ride whenever you want or ordering a meal from a smartphone are now just part of everyday life.
Regulation will undoubtedly further increase costs and limit the room for maneuver for companies. The benefits of labor market arbitrage, which pay lower costs for informal workers, are likely to erode as the political heat heats up. Meanwhile, city authorities are beginning to realize that it may not be in the best interest of its residents if the streets are littered with empty rideshare cars, apartments are not available to rent to local workers, and restaurants close. due to excessive fees charged by delivery companies.
The stock market has a way of exercising discipline. Even if the current euphoria rewards non-profit IPO candidates, it will increase the pressure to refine their business models. Uber’s share price has more than tripled from its lowest point in March, but it is still not above making sound financial decisions. This week, it abandoned its costly internal attempts to develop autonomous driving and flying cars.
There are two obvious routes to profitability. Consolidation has already spread through the ride sharing and delivery apps, with more to come. The survivors will be in a better position to raise prices.
The other way is to exercise their power as intermediaries to squeeze more for themselves out of the value chain. The history of the Internet has been one of relentless disintermediation and reintermediation. That is, of the newcomers who eliminate old businesses to turn them into supposedly “free” consumers, before inserting themselves as the new bottlenecks. As consumer orders aggregate, mobile apps are starting to find themselves in a powerful position.
This may not be a welcome development for some service providers being sucked into the orbit of the gig economy. Restaurants, for example, have come to rely on online ordering and delivery during the pandemic. But if a handful of apps make up a significant portion of your sales, and if those apps have the power to redirect customers to other food providers offering better terms, the results could be painful.
For investors in the new public gigs sector, it appears to be a work in progress for some time.
