Burgess COMMENTARY

Peter Burgess

The Sharing Economy: A High Stakes Game of Snakes and Ladders

The peak of the Social Economy Pyramid is turning into an elusive hunting ground for unicorns as the secret magical powers of Sharing Economy companies is being discovered. This is leading to a gold rush amongst investors and entrepreneurs seeking to stake a claim at the peak of the Social Economy Pyramid. But not is all blue sky and rainbows as storm clouds are starting to gather. And the “Snake” companies that have scaled to the peak on the back of a long tail of supply of unskilled human capital are finding themselves at the eye of the storm...

Since we published our in-depth research report last September titled “The Abundance Economy: Where the Long Tail Meets the Blue Ocean”, we calculate investors have poured an additional $7.9 billion into 44 Abundance Economy companies. Granted, the majority of the capital went to fund the astronomical growth of Uber ($4.4 billion), Airbnb ($1.5 billion), and Lyft ($680 million). But the remaining 41 companies in our Abundance Economy universe (which now stands at over 70 companies) still raised a total of $1.4 billion since last summer, with the median raise at $25 million.

Figure 1: Nearly $8 Billion in Capital Raised Since Last Summer Source: Crunchbase, Brady Capital Research

We are becoming increasingly convinced we are undergoing a profound structural shift in society and the economy to one driven by scarcity to one driven by abundance. What started last decade as the democratization of non-rival content through companies such as Blogger, Yelp, and YouTube, has now advanced to the democratization of rival goods, assets, and services through Abundance Economy companies such as Airbnb and Uber. But unlike their predecessors, who created value that was difficult to monetize, the Abundance Economy companies excel in capturing value through their on-demand and transaction-centric business models. To understand what this means for economics, which is defined as “the science of choice under scarcity”, we created a new term based on the Latin word “copia” meaning “abundance, plenty” (i.e. cornucopia is “horn of plenty”).

Introducing “Copianomics”: the science of choice under abundance. Under the new laws of “Copianomics”, the following economic forces act as growth catalysts:

• Blue Ocean of Demand [1] – comparable sales growth is not constrained by existing demand constraints as the companies are accessing new “blue ocean” market demand.

• Long Tail of Supply [2] – unit growth is not constrained by traditional time or capital constraints as the companies are accessing a “long tail” of latent/under-utilized assets, goods and services.

As evidence of the value acceleration potential of companies operating under the new laws of “Copianomics”, we highlight that both Uber's and Airbnb's valuations have doubled since last summer as their supply bases continued to grow exponentially. Since Uber was founded only six years ago, the company has expanded to 309 cities in 57 countries. As evidence of how fast it is growing, we note that since last summer, Uber has entered into 12 new countries and started operating in 104 new cities, a growth of over 50%. This has led to its valuation skyrocketing by 128%, from $18 billion last summer to $41 billion. Since last summer, Airbnb has added 400,000 accommodation listings (to a base of over 1,200,000) versus only 25,000 rooms for Hilton Worldwide, a multiple of sixteen times. Not surprisingly, Airbnb’s valuation has grown by 155% (from $10 billion to $25.5 billion) compared to only a 10% appreciation in Hilton’s stock price over the same period.

Figure 2: Growth in Supply Since Last Summer: Airbnb vs Hilton Worldwide Source: Bloomberg, Brady Capital Research

But not is all blue sky and rainbows in the land of unicorns as storm clouds are starting to gather at the peak of the Social Economy Pyramid. We are starting to see an increased level of scrutiny from government, regulators, and the workers themselves who are starting to question the potential exploitative power of companies that are building their supply base on the back of human capital. With billions of dollars at risk, the so-called Sharing Economy is turning into what we see as a high stakes game of Snakes and Ladders…

As shown in Figure 3, the Ladder companies are sharing platforms found in the Asset Sharing, Goods Marketplace, and Specialized Services verticals while the Snake companies are on-demand platforms found in the Delivery Services and Commodity Services verticals.

Figure 3: The Snakes and Ladders Verticals Source: Brady Capital Research

As shown in Figure 4, both the Snakes and Ladders have been able to create blue oceans of demand (by leveraging technology to create blue oceans for their assets, goods, or services) and long tails of supply.

Figure 4: Blue Oceans and Long Tails of Snakes and Ladders Source: Brady Capital Research

However, on the demand side, the difference is the social mission driven Ladders have focused on creating 'Blue Oceans of Fidelity' while the on-demand driven Snakes have focused on creating 'Blue Oceans of Convenience'. And while the Ladders create the opportunity for individuals or businesses to “fish” (i.e. transact) below the depths of the corporate ocean for unique, authentic, and personal experiences, the Snakes deliver fish (i.e. goods/services) directly to the buyers’ doorstep with the tap of a button. However, due to the low barriers of entry and lack of differentiation (no social mission and low fidelity), some of these blue oceans of the Snakes are starting to turn into red oceans as rivalry from existing competitors intensifies and new entrants seek to claim a stake of the treasure.

On the supply side, both the Snakes and Ladders have been able to achieve abundance of supply through providing individuals and businesses with the structural capital to monetize their under-utilized or latent assets, goods, and human capital. The Snakes, in particular, have been able to rapidly scale their supply base by creating opportunities for people to easily monetize their under-utilized human capital by performing gigs such as driving, delivery, caregiving, and housecleaning. These platforms are empowering from the sense that they provide people with the freedom to work where and when they want using their own assets (i.e. car, bike, tools). However, unlike the Specialized Services workers, who are differentiated by their expertise and skills, the Delivery Services and Commodity Services workers are more of a commodity and there is a risk that this could lead to a slippery slope down to the lowest common denominator if there are no protections for the workers put in place as there is no minimum wage, job security, insurance, or benefits.

We question the sustainability of the business model of these companies, especially in light of the recent bankruptcy of on-demand home cleaning company, Homejoy. In addition to red oceans of increasing competition, some of the Snakes are starting to face lawsuits based on the potential misclassification of their workers. Consequently, we are starting to see some companies be proactive and shift their supply base from contractors to employees. For example, on July 1st, Shyp announced it would be switching the status of its couriers from 1099 contractors to part-time or full-time W2 employees. Although this will negatively impact the company’s cost structure by increasing its labor costs by 30% and shift them from variable to fixed, as the company’s CEO, Kevin Gibbon, wrote in the Shyp blog post “This move is an investment in a longer-term relationship with our couriers, which we believe will ultimately create the best experience for our customers.” We note that Instacart followed suite and on July 15th announced that it would be offering its contract “personal shoppers” the option to apply for employee status, although at the present time it is not offering that option for its delivery drivers.

As the gold rush fever spreads, the stakes in the new Sharing Economy game of Snakes and Ladders will only continue to rise. So players might want to start thinking carefully about the spots where they are staking their claims.

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