We read recently about a new startup in the “sharing economy,” a French company called “BlaBlaCar” -- an improvement on its original name that would make sense only to French speakers, “Covoitourage.” The shift is appropriate, since the ride-sharing service is now operating globally. In essence, it applies the Airbnb model to road trips. Rather than focusing on short rides within a metro area, it links would-be riders with longer-distance travelers who have empty seats in their car -- say for a trip from Paris to Marseilles. Rather than competing with taxis, as Uber and Lyft do, it’s competing with buses and trains. It’s a rare European “unicorn” -- a startup worth more than a billion dollars. Its founders joke that after starting in red-tape happy France, everywhere else seems simple to them.
The “Sharing Economy”
BlaBlaCar is part of a tectonic movement in global business -- the so-called “sharing economy.” We mentioned the iconic companies above (Uber and Airbnb are the most prominent), but there are countless others that are much more familiar to urban millenials than to their older peers: companies like Feastly, Neighborgoods, and Tradesy.
We don’t believe the “sharing economy” moniker is the most useful. We’ve noticed a tendency for journalists and analysts to put a socially conscious shine on technological advancements -- suggesting that they represent a virtuous break with a more selfish past. “Sharing” definitely has those overtones. But we note that surveys consistently show that the strongest motivation for consumers to participate in this space is not social networking, but convenience and price -- i.e., pretty much what consumers have always wanted. We’d prefer to call it the “on-demand” economy, or the “peer-to-peer” economy -- or perhaps most simply, the rental economy.
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Whatever we call it, the essence of this new economic model is the monetizing of underutilized assets.
A car is a simple case in point. A private car represents a significant sink of capital, and it is typically massively underutilized. The present writer estimates that his car is in use about five percent of the time. If this were an average, it would mean that we need about twenty times fewer cars than are currently deployed. Conversely, it means that each car is realizing only about a twentieth of its value. The fleet of private cars in the United States embodies an enormous and untapped source of value.
The rental economy is tapping these massive reservoirs of value that have hitherto been locked and largely unavailable because of the lack of appropriate networks for distributing them. This is true for broad areas of the global economy: housing, hospitality, automotive and transportation, retail and consumer goods. Even media and entertainment can be thought of under this model: when a consumer streams media content, they are essentially renting that content rather than owning it.
The trend is huge. In 2014, Airbnb averaged 22 percent more guests per night worldwide than Hilton Worldwide. Uber’s February 2015 valuation exceeded that of American Airlines.
Some analysts have said, “Access is the new ownership.” This refers to a sense among millennials in particular that owning an asset involves burdens that they would rather avoid if they could simply pay to have access to that asset only when they need it.
We think this trend is being driven by several converging macro processes. The first, obviously, is the internet. The internet allows the networked communication necessary to make underutilized assets available to potential users, and to monetize them.
That’s the essential economic motivation; however, there is also a cultural motivation arising, we believe, from the millennials’ experience of economic uncertainty and student debt. Millennials have come of age in an era marked by two large stock market crashes, the deepest economic downturn since the 1930s, and a job market in which old and reliable lifetime jobs have been replaced by more mobility and uncertainty. They are also squeezed between a job market that demands high skills and an educational system that often delivers heavy debt along with its credentials. This generation is more frugal than those that went immediately before -- culturally, in some respects, it has more in common with the “Great Generation” of the Depression and World War II than with its Boomer antecedents (even if it often shares Boomers’ social liberalism). With frugality and a consciousness of uncertainty in the forefront, it is a generation naturally suited to see the benefit of renting rather than owning -- and from the other perspective, of renting assets that one does own to extract their value more thoroughly.
Consistently, the most enthusiastic users of the new rental economy aresuspicious of advertising, and only embrace products and services they have heard recommended by friends. This trend also plays to the rental economy, where crowdsourced reviews and recommendations and social networking are critical.
Together, the technological relevance, economic sense, and cultural momentum behind the new rental economy will continue to drive it inexorably forward, and we will see it spreading anywhere in the economy that there are significant underutilized assets.
In essence, this process will be (as most social/technological shifts are)deflationary in the near-term, and ultimately inflationary. In the near term, the influx of massive supply into various markets will be deflationary. Investors should be cautious not to weight their holdings too heavily in industries likely to experience this supply influx. In the longer term, the creation of new businesses, new business models, new forms of employment, and new income for asset owners, will prove to be stimulative and inflationary for the economy -- as every technological revolution has been over the past 250 years.
From an investment perspective, we note that if and when companies such as Airbnb and Uber come public, they will likely do so at a time when the offerings will be able to find eager buyers at an attractive price for the offerers. That will probably not be an ideal time for investors to buy shares. When this occurs, we would rather wait for a significant market correction to buy the stocks of companies we have already identified as winners in this transformative space.
Investment implications: The “sharing economy” is really more of a rental economy, but it is a huge and inexorable technological and social process, and will have a deflationary impact in many industries as it makes available massive underutilized capacity of many kinds. Investors should be careful in the industries that will be most strongly affected, especially hospitality and transportation. Beware buying new offerings of “sharing economy” powerhouses if they come public during a period of market exuberance. They will likely be overpriced. Keep your list of strong contenders handy, be patient, and wait for a significant correction before you invest.
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