The world’s largest taxi firm, Uber, owns no cars. The world’s most popular media company, Facebook, creates no content. The world’s most valuable retailer, Alibaba, carries no stock. And the world’s largest accommodation provider, Airbnb, owns no property. Something big is going on.
These are not original observations, for this was spotted a few weeks ago by Tom Goodwin, an executive at the French media group Havas, and has been doing the rounds since. His key point must be right: that companies that control the interface between the consumer and the provider of the goods or services are in an incredibly valuable position. They carry none of the costs of providing the service but take a cut from the millions of consumers that buy from them. The interface is where the profit is.
But business relationships do not stay stable, particularly if there are huge profits involved. So now we would see the battle of the existing interfaces, with each extending beyond their initial footprint to try to win more territory. So Facebook goes into news, Twitter into television and so on. And because they can be so profitable we will see more and more challenger interfaces, each trying to find some way to get their icon on to your mobile phone or iPad.
As a business and industrial story this is fascinating, for the speed at which these companies have grown has been equalled only by the early car companies. It took five years from the incorporation of the Ford Motor Company in 1903 to the launch of the Model T in 1908, and another five to the introduction of the moving production line in 1913. Uber was founded in 2009 but launched its New York service only four years ago and its London one three years ago in July 2012. Airbnb was founded in 2008 in San Francisco and came to London in 2011.
If it is a fascinating business story it is also an encouraging economic one. The only way our economy, or indeed any developed economy, is going to get richer is by becoming more efficient. What these technologies do is to enable existing infrastructure to be used more efficiently. So Uber drivers, usually recruited from mini-cab firms, find they are paid less than they were previously paid per journey, but spend much less time waiting for jobs so their overall earnings are higher. Airbnb uses spare rooms that were previously unlet, so the housing stock is used more intensively. Google Maps enables us to find faster routes and avoid motorway jams, thereby using the road system more efficiently.
I personally find Google News the best way to check on running stories, even if it is frustrating that a search engine that does not develop its own news is more trusted than those of us who do the work. It leads to a huge saving in time. True, this does not always work: I was hunting for the latest insight on Greek debt negotiations the other day and spotted a really promising headline at the top of the list. It turned out to be the piece I had written the day before. But while I did not learn anything new, I was glad to see it there and grateful that it was thus elevated. The interfaces may at some level be parasitic in the sense that they live off other people’s work, as happened here. But we are willing partners in that transaction.
All this is so new that economists are scrambling to measure the impact of the interfaces. For example I cannot find a study estimating the saving in time and fuel brought about by Google Maps and the associated real-time traffic information. Yet that mapping system is 10 years old. We also know that logistics companies have developed extremely sophisticated systems for sending their drivers optimal routings. So what hope is there to assess the efficiency gain from Uber, acknowledging too the social and economic cost in terms of pressure on mini-cab firms and black-cab drivers?
Similarly, there has been a lot of speculation about the economic effects of Airbnb, with some people worried that if people can let their property short-term that might dissuade them from renting long-term, thereby reducing the supply of rented property. Intuitively that cannot be right, because if space is used more intensely, and some people rent out rooms who would not have previously done so, that must reduce pressure on accommodation, not increase it. But it would be nice to see some solid economic work on this.
The further point that has gone largely unexplored is the extent to which the interfaces improve the quality of our lives. Because we can check reviews when booking into a restaurant or a theatre, we have fewer bad meals or plays we walk out on at the interval. That is easy to see. It is harder to put a value on the way in which Facebook supports friendships and families, or perhaps occasionally the reverse. It is harder still – because I suspect it has not really happened yet – to see how social media will improve the quality of public services by putting pressure on them to perform better.
But you see the big point here. We have a set of new technologies, or rather new applications of existing technology, that have over the past five years radically improved the efficiency of some industries. That has brought massive rewards to the founders of the businesses that brought these to the global economy. However we are still in the very early stages of learning what we can do. We are, I suppose, where Henry Ford was around 1910, when he had got the Model T, but had yet to hit on the moving production line. The difference is that the benefits are more widely spread – a huge potential range of services, not just one product – and can be applied to the public sector as well as the private.
Small final thought: is this not much more important than the little matter of who forms our next government?
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