“I bear all the fixed and operational costs, so why are they sharing a big part of my income?” an angry Uber driver grumbles.
It's a question investment bankers and investors are increasingly also having to consider, indirectly, when assessing what a company is worth.
What's sticking in our driver's throat is Uber's high commission rate, which rips out 20% to 25% of his income without accounting for the cost of his auto licence, fuel, repairs, insurance, or even the car itself. The resulting paradox is that although Uber drivers own and run their cars, they may often end up earning less on a journey than Uber.
That harsh truth exposes how the world is changing from an asset-based economy to one driven by information and accessibility.
It all started, inevitably, with the advent of internet technology and has gathered pace as the sharing economy has penetrated more and more industrial sectors globally, from consumer and financial services to real estate and entertainment.
From a financial perspective the most notable change is that asset owners are no longer, necessarily, the biggest beneficiaries, reversing conventional wisdom that owning an asset is the key to building wealth.
Instead of running a business it is now more important to connect asset owners with users. And rather than fight for the biggest assets, it is now more important to build the largest client base and to connect with the most extensive network of asset owners.
How value is perceived
That trend is gradually changing how investors value businesses when it comes to the world of mergers and acquisitions.
Hong Kong-headquartered logistics startup GoGoVan, founded four years ago with seed capital of less than $20,000, transformed into a billion-dollar entity earlier this year after merging with China’s 58 Suyun.
By conventional standards the merger is anything but rational because the Chinese company is exchanging its stake for an entity that literally owns no fixed assets. GoGoVan, which focuses on developing mobile applications for booking cars, rents offices across all nine cities it operates in.
But GoGoVan’s value is seen in its vast network of 18,000 cars, 180,000 drivers, as well as its dominance of Hong Kong’s retail logistics industry. That ensures the company can share a slice of the income of all these drivers whilst avoiding many of the costs.
Most investors of business-sharing platforms are betting on their long-term growth because they can only start making profits after building up a large network of asset owners and users. GoGoVan, for instance, is yet to become profitable because it does not charge car owners for using its services.
As a result, stock market investors are now using fewer quantitative inputs such as asset value or profitability to assess the implied valuation because they may not truly reflect the value of a company.
In 2013, Alibaba chairman Jack Ma declared that we are no longer living in “the era of Li Ka-shing”, the feted Hong Kong tycoon who built his empire from mostly asset-oriented businesses such as property, power supply and utilities. Their companies' contrasting financial statements and market values appear to support that view.
Alibaba, the epitome of a modern e-commercial giant, has a total asset value that is about half that of Li’s flagship listed entity CK Hutchison. Based on its share price, though, Jack Ma's company is worth over nine times more than the decades-old conglomerate Li built.
Li accumulated much of his wealth by acquiring fixed tangible assets – mostly land and factories – at low prices and benefited from asset inflation through the years. But with the US set to begin reversing its quantitative easing programme and Chinese economic growth settling down, some of the fuel driving asset price inflation is running down.
Cheapening assets
The new giants of the internet age face no such impediments because they seek to control the environment in which the asset owners operate.
Business sharing platforms like Uber, Airbnb, Spotify and WeWork will doubtless seek to become monopolies in their respective industries by developing markets in which asset owners and users rely solely on their platforms to connect with each other. If they succeed -- assuming no regulatory or political interference -- then the intrinsic value of an asset could in theory become almost nothing since it could never be used to get customers without the help of the sharing platforms.
That scenario is slowly becoming a reality: whilst cab drivers complain that Uber is disrupting the taxi industry, music downloading apps such as Apple’s iTunes and Amazon Music are being challenged by streaming apps like Spotify, which give users access to an almost-unlimited list of songs in return for a monthly subscription.
All of this happens because the value of assets, whether taxis or music, is depreciating against the value of information that sharing platforms own.
It's a new era that values connectivity and accessibility more than many of the assets themselves. It follows that creating connectivity and accessibility rather than accumulating assets is seen, for the forseeable future at least, as the key to building wealth.
