The Future of New Business is Disrupting Old Business

The future of new business is disrupting old business
Barry Ritholtz
Washington Post, February 1 2015 




There are many lessons to be learned from Uber, the taxi- ­ and car-hailing start-up that came out of nowhere and is valued at $41 billion. Less than three years ago, Uber had zero drivers. Now it has more than 160,000 active drivers who have collected $656.8 million in fares (net of what they pay Uber).

Among the lessons, some point to the rise of the sharing economy, which also includes firms such as Airbnb, Snapgoods, RelayRides, TaskRabbit and Lending Club. Others talk about the “on-demand economy,” which creates a new class of labor that straddles the line between being self-employment and working for a firm.

I prefer a Big Picture view to get the proper perspective on these start-ups. From 30,000 feet, we see what all of these newcomers have in common: They attack an existing market dominated by entrenched incumbents that are inefficient, expensive or both.

Consider Uber. How are the cabs in your city? In Manhattan, where I work, they are rather awful. They are uncomfortable and not especially safe (who wants to slam his face into a plexiglass wall covered with metal projections?). As bad as they are, they are typically unavailable when you need one. The second it begins to rain, it is nearly impossible to find one. And what idiot decided to do shift changes at 5 p.m. — right at the start of rush hour, when swarms of riders need cars, all of whom are unavailable as they are returning to the outer boroughs for their daily change of drivers?

But the biggest inefficiency is the limit on the total number of cabs, as mandated by Taxi and Limousine Commission rules. Hence, that monopoly supply limitation thwarted competition, reduced the available number of cars and allowed the value of medallions to skyrocket. The cabs are dirty and ugly, and the service is awful, but at least they are expensive and unavailable when you need one!

Until Uber rolled in. Since then, the value of a medallion has fallen substantially. The same is true in other cities where Uber operates.

We can credit (or blame) a number of factors. Companies like Uber and Lyft are more convenient, they are cost-competitive (especially low-cost Uber X) and the cars are nicer (especially Uber Black Car). But the biggest factor is that these firms have identified economic inefficiencies in major markets. They are bringing new efficiencies to underserved consumers.

To begin with, the existing companies have become fat and lazy. That’s what the term “entrenched incumbents” means — they are here already, and they usually have some moat around their business to prevent true competition.

In New York, the former lack of real competition allowed taxis to extract excessive charges, regardless of the poor service.

Uber broke that monopoly. In doing so, it brought true competition to the market for car services. That is why Uber is worth a fortune.

What other industries are ripe for disruption? All of the following have some form of restriction which limits supply and reduces competition, thereby keeping prices high even when providing poor service.

Credit transactions: How is it that every time a consumer uses a credit card, the retailer pays a 3 percent (or more) transaction fee to credit-card companies? Most of the new transaction processors — whether it’s Apple Pay, Square or PayPal — still process the back end through the major credit-card firms. This area is long overdue for a new competitor that will be cheaper to the retailer (and, therefore, to the consumer) and more convenient to the shopper.

Mortgages: The way we finance homes in this country is slow, filled with middlemen, who run a nonstandardized evaluation process. This makes financing a home cumbersome and difficult. Whoever figures out how to replace this inefficient process stands to make a fortune in residential real estate. The same is true for commercial loans.

Medicine: There is a shortage of doctors, and the American Medical Association is aiming to keep it that way. According to the World Bank, the United States has 2.4 physicians per 1,000 people, putting us way down the list of developed nations. We are behind such emerging nations as Croatia, Moldova, Macedonia, Jordan, Slovenia and Uzbekistan. Germany and Israel have 3.7 physicians per 1,000 people, while Greece (6.2) and Cuba (6.7) leave us in the dust. The Kaiser Foundation has a similar ranking, in physicians per 10,000 people, and the United States ranks 53rd. That is abysmal. If we finished 53rd in the Olympic medal race, there would be an outcry. Yet the very real doctor shortage hardly is discussed. If it takes you a long time to get a doctor’s appointment and costs a lot of money, well, now you know why.

Asset management: Increases in technology are starting to have an impact on this industry. Robo-advisers (Wealthfront, Liftoff, Betterment, Private Capital, et cetera) have a tiny percentage of total assets, but it’s growing. And Vanguard just jumped into the field, bringing it heft and credibility.

The old disruption was passive indexers vs. active managers. Here, the entrenched incumbents are especially deep-pocketed and won’t go down without a fight.

Real estate: Brokers have enjoyed a 6 percent sales commission for as long as there have been houses to sell. That began to change, and you can credit mobile apps. The technology embedded in apps such as Zillow, RedFin, Trulia and even Google Maps and is changing the way we buy homes. It is long overdue.

All of the above sectors are the obvious markets. No one saw taxis as an industry ripe for disruption, and I bet that lots of other markets we hardly even think about are similarly ready for competition. I have no idea which market the next generation of disruptive technology will focus on. Whether it’s the college admission process or virtual reality or 3D printing or advanced robotics and drones or autonomous vehicles or next-gen genomics is almost beside the point. The one thing you can be assured of is that no industry is safe from disruption.

That is how progress is made.


Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. On Twitter, @Ritholtz.

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  1. texasdiver commented on Feb 7

    You forgot the biggest and ripest target of all……car dealerships. They know they are a ripe target for disruption which is why they have been fighting Tesla so desperately. What I would give for the ability to purchase my next car online to my exact specs and have it delivered to my house with no hassle.

    • Robert M commented on Feb 9

      Very good one. It does make you wonder how this didn’t happen when GM and C were put into governmnet controlled bankruptcy. They did reduce the number of dealers w/o much push back..

      AS to doctors I suspect if they lift the immigration controls for specialized workers this is one that isn’t gong to be lifted. I also do not want it as it strips everywhere else of health care helping to destabilize theose countries.

    • BillG commented on Feb 9

      I don’t know about that. Some of those countries are poor but rather good at training doctors. They could ramp up production and make medical education a major export. Some of their citizens might choose to leave and come to the States (not necessarily bad for their home country) but they could also educate people from around the world who want to practice in lucrative markets like the US.

  2. rd commented on Feb 7

    Mortgages – The banks tried that with MBS and MERS. However, they only looked at it as a way to create a product to sell and to cut their costs in buying and selling mortgages. They paid no attention to the real estate laws or the other parties, such as homeowners. As a result, we ended up with imploding MBS’s and a title nightmare throughout the country. Only a complete blind eye by regulators and prosecutors has prevented people form going to jail on this. The next time, it has to be viewed as more than a cost-cutting measure by an oligopoly.

    Realtors – Uber has been skirting (crossing?) legal boundaries by setting up a parallel taxi service to a heavily regulated service. The regulators don’t appear to be making much of a move to shut it down. The real estate market is ripe for a similar move since the final transaction is handled through an attorney instead of a realtor. I suspect that we will see realtors’ fees drop to 3% or less down the road.

    Medicine – the fees are rigged so that specialists make a lot and GPs/internists/pediatricians don’t make much in the US. The insurance industry will need to change that model. However, improving overall health care doesn’t appear to have been much of a priority from health insurance companies to date.

    Asset Management – The old model of asset management is dying. A lot of well-paid jobs are going to go down the tubes. Robo-advisors, all-in-one funds, and fiduciary RIAs will take over much of the market over the next decade or so. The next market crash is going to do in a lot more brokers. The improving 401ks are also going to expose investors to better models.

    Credit – The retailer-credit-card-bank industry have shown themselves to be unconcerned about their customer security. An alternate service willing to provide high security to retailers and their customers could bypass the traditional payment industry without even cutting the charges that much because the value of the service would be higher.

    • rd commented on Feb 7

      One other thought on the asset management:

      A decade from now, 40 yr old millenials will be helping their 75 year old parents with their finances. Don’t be surprised if their parents leave their long-term financial institutions and move to a robo-advisor at that point.

  3. wally commented on Feb 7

    Excellent post – very interesting and very good points made.
    Uber thinks that its model (realtime info and realtime competitive pricing) can be applied to a lot of things other than taxis. Maybe.
    I think it is clear that there are two separate digital revolutions. The first was simply the move to computers and digital records, replacing traditional storage, office, engineering and scientific functions. The second is the internet, which allows processing and information to be immediately and freely exchanged.

  4. lucas commented on Feb 7

    In regards to real estate, I wonder if there is a way to incentivize buyer’s agents to truly represent the buyer in the fiduciary manner the disclosures claim is the duty of the buyer’s agent. Or to get the buyer’s agent to do the homework on the house they should do as an agent such as research the history of the house in the recorder’s office and the permits office. Right now, the buyer must do all the homework themselves. Buyer’s agents hate buyers who do homework.

  5. marketmap commented on Feb 7

    Asset Management … a growing crisis that is represented by two demographics: 1) the pending “underfunded” boomer generation retirement demographic and 2) the millennial generation demographic that is strapped with higher education debt and faces an increasing “unsteady paycheck” and stagnant wage growth economy. Both will need ( in their tax deferred accounts ) higher investment return trajectories than what the Vanguard or Fidelity “indexing” or the Robo advisor efficient market hypothesis based models have demonstrated and provided ( 7 – 8% a year ). And obviously, the old broker / hedge fund / active management models have shown subpar results that have suffered, historically, as a result of pay structure and compensation leakage. Fama and French “factor” research shows portfolio management and returns improvement, yet can underperform for many years at a stretch and can be volatile. Momentum and simple price vs. moving average tactical asset allocation methodologies are also an improvement, yet still lack the necessary asset growth trajectory and can go through periods of “whipsaw”.
    We (attempt to) bring forth a peer reviewed, empirically derived approach that is noticeably different in style or outlook from the mainstream; results not driven not from monetary and compensation incentives or product sales.

  6. Whammer commented on Feb 7

    With groceries, I’m not seeing the need as much. Shopping can be a PITA, but then again it allows for “serendipitous” discoveries.

    Medicine — for sure many opportunities for improvement. Real estate, definitely. I just saw a flyer from a realtor about a Silicon Valley community where the average home sells for $2.5 million, and is on the market for less than 9 days. Pretty hard to justify $150K in commissions on deals like that.

  7. bigsteve commented on Feb 7

    Years ago for a short while a young woman worked in the lab where I work. She had just graduated with a degree in bio-chemistry with a four point O grade point average. She wanted to go into Medical School but could not get admission. She was looking into going overseas for Medical School. I don’t know how it turned out as a Pharmaceutical Company snatched her up in a matter of a few months.

    I watched a documentary on Henry Ford recently. He had a devil of a time breaking the monopoly in his day on car production Much legal opposition to overcome.

    Over forty years ago I submitted several programs I had coded for publication. The magazine simply stole them and publish them under another name. Adam Smith was brilliant and so correct. But also so was Niccolò Machiavelli.

    These examples are not free market capitalism but crony capitalism. And often the crony capitalist buy off the government rather than compete.

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