Sharing Disruption

Posted on October 8th, 2015 by David Laidlaw

The “Sharing Economy” is a new phrase for very long-standing types of transactions. Investopedia defines the phrase as “an economic model in which individuals are able to borrow or rent assets owned by someone else.” The Sharing Economy is a bit of a misnomer since sellers are renting their assets or services in return for payment rather than freely ‘sharing’ their resources with others. Uber is the most successful example of a company in this space. Uber allows individuals to hail rides from their mobile phones. This service adds a tremendous amount of convenience since it is much easier to get a ride when necessary and the cost of the trip is estimated beforehand. The cost estimates increase the trust
accorded to the service since riders are less likely to be subject to price-gouging by unscrupulous cabbies.

Aside from the vision necessary to create such a business, Uber and businesses in the sharing economy would not have developed without a number of technological advances. Mobile phones with GPS signals enable riders and drivers to connect without problems. Additionally, tremendous computing power is necessary to match customers with drivers throughout the world. The service also requires high speed wireless networks distributed throughout cities and suburbs.

Services such as Uber are incredibly disruptive to traditional business models such as taxi services that compete for the same users. Why would anyone wait for an extended period for a cab with its typical inadequacies when it’s possible to get an Uber driver within minutes? Similar disruption is taking place in the hotel industry due to the challenge presented by companies such as AirBnB. AirBnb provides a platform for individuals to rent their homes or apartments to strangers. Renters and guests are rated
so that both parties are comfortable with the arrangements. Hotel chains such as Hilton and Starwood are no longer able to raise rates without consideration for the competition from AirBnB and
others.

Traditional businesses and governments are fighting back. France is bringing criminal charges against Uber’s two top executives in Paris for operating a taxi service that relies on drivers who do not
have professional licenses. We assume that accommodations will eventually be reached since the demand for these services is greater than the ultimate power of the entrenched interests.

The presence of these companies creates risks to existing business models. During our research process, we now investigate whether a particular investment could be subject to competitive threats from sharing-based enterprises. On the other hand, opportunities may arise from companies in this space. Uber, which is still private, has been estimated to have been valued at roughly $50 billion. While
we would be hard pressed to pay this much for a company that is only expected to generate $2 billion in revenue in 2015, other companies may be more reasonably valued.