Outline:
- Companies no longer need to own assets, platform companies can connect and match the most efficient parties to the transaction;
- Their moat is the network effect.
At Spaceship we’re interested in moats. A moat is a company’s competitive advantage, historically this has been through branding or economies of scale. Consumers trusted big brands as information about other brands was difficult to find and those larger companies were generally the most efficient users of assets. That meant they tended to have the lowest costs.
The information revolution (internet, smartphone and social media) has changed this equation. Social media is helping new brands like Dollar Shave Club break out against Gillette and find a voice with the consumer.
Companies with scale are also under threat through the internet; users can find under-utilised assets where prices are cheaper than traditional companies. Think Airbnb vs the large hotel chains. This information revolution leads us to a new moat and superior business model.
A platform is the new moat
If a moat protects the business, a platform can raise a company above its competition. The information revolution means companies can connect users and their assets which may be more efficient and valuable than companies that complete the transaction itself.
Companies no longer need to own assets or be the most efficient manufacturer, platform companies can connect and match the most efficient parties to the transaction. Platforms generate value by making connections and facilitating transactions not by making things. Their moat is the network effect and number of users they can connect to facilitate or create a transaction.
Youtube, owned by Alphabet/Google, is one of our favourite platforms that we own in all our portfolios. Youtube doesn’t need to create videos or buy movies users create videos for them. YouTube doesn’t pay Hollywood and doesn’t even need celebrities. It has created its own Youtube stars on its platform. These Youtube celebrities are the new trend setters, more influential to millennials than most Hollywood stars.
Apparently 63% of 13-24 years old surveyed would try a brand or product recommended by a Youtube star vs 48% for a movie or TV star.
The sharing economy
Airbnb and Uber are other great examples of the platform/network company.
What a company owns matters less than the assets it connects to. Think about Airbnb and Uber they don’t own the physical assets they connect the owners of the assets. They don’t deliver rides or rooms they deliver connections and transactions. As they grow the network effect kicks in adding more users creates more connections/choice, generating data for more personalised experiences. They can also add additional services think Uber Eats and Airbnb and with travel experiences creating a further network effect.
Airbnb is one of our favourite platforms. Its was founded in 2008 but its not yet listed. It's growth has been staggering because it does not own the underlying asset of a room it just has to facilitate a connection.
In 2017, less than 10 years after founding, Airbnb had over 4 million listings more than the top five global hotel chains. Platforms can grow more quickly than traditional businesses as they require little capital to grow and they get better as the amount information/data increases. The more users transact on the platform the more company knows your preferences personalizing future experiences and becoming more valuable to users.
Importantly platforms don’t monopolise assets but allow others to monetize theirs. Uber and Airbnb have created substantial value allowing users to monetize under utilized assets like their car and spare bedrooms. Platforms tend to expand the market for everyone not just themselves like the Youtube stars above. It’s a better business model that we like for consumers and investors, creating more value for everyone enlarging the economic pie.
