The future of new business is disrupting old business
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.Groceries: Shopping for food can be a bothersome, time-consuming chore. Firms like Peapod and Fresh Direct are seeking to fix that, delivering groceries to your home. How long will it be before the giant real-estate-consuming footprint of the suburban supermarket is a thing of the past?
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 Mortgagecalculator.org 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.