The detailed analysis of global investment opportunities can shed light on emerging trends closer to home. This is particularly true of disruptive business models like Uber.
As a value investor I focus on individual stocks and frequently travel overseas to investigate global investment opportunities. I recently visited the US to explore stock specific ideas with a select group of companies in technology, gaming, housing and financial services.
The meetings were insightful, with a number of investment ideas being substantiated or falling by the wayside as anticipated. And as sometimes happens, a simple personal experience prompted me to consider a very different investment angle.
During my trip I used a number of Uber services and observed the extent to which they were being adopted by consumers in the US. It made me think about the business model and what it means, not just for Uber, but for other businesses in Australia and around the world.
I have met with Uber representatives from Australia and the US. My conclusion is that the business model will continue to grow exponentially over the next five to ten years.
An Uber appealing business model
In Australia, Uber is predominantly used as a smart phone app to book taxis and hire cars. In the US, the most popular Uber service is UberX. This is a ride sharing service where consumers are able to get a lift from the diver of a normal car. Drivers are vetted by Uber and have to pay a percentage of the fee they earn to be part of the network. In return, drivers benefit from no upfront or fixed costs and the flexibility to log on and off whenever they feel like it.
Customers are rewarded with a service typically 25% cheaper than a normal taxi, although this does vary according to location. The payment system is seamless and customers can track how far away the car is without having to wait on the street.
Resistance from incumbent US operators
There has been understandable resistance to Uber’s business model from the incumbent taxi and limousine industries in the US. However, given the popularity of Uber with voting customers, it is likely the service will ultimately be legalised throughout the US. Even Nevada, home to a powerful taxi and limousine lobby group, has recently legalised Uber.
Implications for Australia
There is still a degree of ambiguity regarding the legalities of the ride-sharing industry in Australia. The incumbent taxi industry’s position is that taxi drivers are at a comparative disadvantage because they have to pay for licence plate fees, insurance and a fixed cost to be part of a network.
While there are elements of legitimacy to these complaints, they will be overcome because consumers will ultimately demand ride-sharing services as per the US experience. This will have a negative impact on the business models of the incumbent taxi networks and payment systems in Australia. Listed company Cabcharge will be in the firing line as consumers move away from traditional taxi services.
In the longer term the bigger issue is the potential exploitation of unskilled labour. As the supply of ride-sharing drivers increases, the payment they receive per hour for supplying their labour will fall. Another concern is that labour laws may not provide adequate protections for drivers because they are self-employed.
This is only the beginning
The Uber business model will disrupt more than the taxi industry. As Australians become more comfortable using these sorts of services, other industries like car hire and couriers will be disrupted. And beyond Uber, companies like Airbnb are already revolutionising industries like accommodation and travel. These business models underpin the “sharing economy” which facilitates better utilisation of fixed cost resources – cars, hotel rooms, spare rooms and holiday apartments to name a few. And increased supply means lower costs for consumers.
On a final note, it is worth remembering that disruptors are also at risk of being disrupted. Ride-sharing may be the next big thing – but only until a driverless car pulls into your driveway.
Perpetual does not hold stock in Uber or Cabcharge.
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