The platform economy, sharing economy or gig economy. These are all different terms that refer to the platform-based tech disruptors of traditional business models that grew out of the ashes of the 2008 international financial crisis a decade ago. Ride hailing apps like Uber and Lyft, peer-2-peer temporary accommodation platform Airbnb and gig economy sites that match freelancers with business owners like Fiverr and Upwork are all prominent examples of the business model.
Uber and Lyft, planned for early spring 2019, quite possibly joined by Airbnb in the summer, will be the vanguard of this cohort of business to IPO. Opening their finances to the often brutal scrutiny of public markets and institutional investors will offer some real insight into the mettle of the new economic model these businesses embody. Until now they have grown fast and generated a lot of excitement but have so far been backed by Venture Capital funds and wealthy individual backers. Going public will either confirm the arrival of these upstarts as major corporations with the finance to really take on the traditional models and companies that have dominated their industries for decades or expose them as inventive but limited upstarts.
That platform economy businesses have gained considerable traction is undeniable. Using an app to hail a gig economy taxi driver or delivery driver has become commonplace across much of the developed world. Airbnb has become a go to when assessing short to medium term travel accommodation options. And no longer just for budget travellers. It’s now just as easy to find a luxury apartment through the platform as it is to rent someone’s spare room for a few nights or their student flat while they are home for Christmas holidays. Apart-hotel standards have replaced finding a pair of unwashed socks down the side of the bed.
However, while it is easy to assume to the popularity of the biggest platform economy businesses means they are raking in money, no one really knows if these business models have serious potential as big business. Traditional taxi and hotel companies might have much heavier overheads to contend with but they also have far wider profit margins. Airbnb is one of the few big platform economy companies to actually make money, declaring ebitda of $100 million over 2018. However, while the company’s actual accounts are not disclosed, it is estimated that is on turnover of around $3.5 billion. The Hilton Group made $1.6 billion over the same period on the same revenue. But the hotel group’s profit margin is 46% compared to Airbnb’s estimated 3%.
With both having filed to IPO in March or April this year, Uber and Lyft’s accounts will also have to face the scrutiny of institutional investors and retail stock market participants investing online. Both are still loss making. All three represent investor conundrum of fast growth and huge potential but modest current revenues and either minimal profits or significant losses. All three companies also face regulatory pressures with concerns over customer safety and traditional industry lobby groups posing a considerable risk to the rate of future growth.
There are also major issues around protecting participants in the gig economy that do no benefit from the usual holidays, sick pay, minimum wage stipulations or pension contributions. What might seem like a quick employment fix, or means to boost income moonlighting, could quickly turn into a vicious circle of exploitative employment many find it difficult to find a way out of. That’s a long term hurdle public markets won’t be quick to dismiss when assessing the viability of these companies.
Of course, all three have ambitions that go much further than the gig economy model they currently operate. Uber and Lyft see ride-hailing market penetration as a platform to becoming major players in the future driverless vehicle economy that most analysts believe will become one of the most valuable industries in the world.
Airbnb’s next step is likely to be owning and/or selling and managing entire apart-hotel style buildings. But to get there they have to convince investors their current business model can be profitable enough and also that they can make a smooth transition to incorporating elements of more traditional, higher margin businesses models while still retaining the competitive advantage their disruptive platform-based business model has given them.Risk Warning:
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