Monday, March 20, 2017

Frank Newman: Disruptive opportunities

Technology based companies are having a significant impact on the way people do business. Companies like Uber and Airbnb are among a new generation of IT based "disrupters" – operations that are so innovative that they seriously threaten the viability of an established industry.

The best example is Uber, which for those that don't know, is a taxi service. It differs from the traditional taxi companies in a number of ways. Most significantly, it is not strictly speaking a taxi company - it is more like a broker that brings together those that want a taxi with those that want to provide a taxi service - like Trademe. They create an online marketplace for buyers and sellers.

In effect what Uber has done is tap into the huge pool of car owners who want to make some secondary income or want to earn a primary income but with total flexibility as to when they work. Basically they register with Uber as a driver and receive 75% of the fare. Uber keeps the balance. By mobilising this casual workforce of independent contractors Uber is not restricted by all of the hassles and regulations - and cost of hiring drivers. That gives them a significant advantage when it comes to pricing.

Uber is also unique in the way it uses technology to enhance the consumer "experience". It's remarkably simple. Once you have downloaded the APP, all you need to do is enter the "Where to" address. It will then map the available Uber cabs and how long to pick up. Just select the driver you want and you can see the cab’s progress as it comes to collect you. At the end of the ride you don't even have the hassle of making payment. Your credit card details are preloaded and automatically charged. So simple.

The other game-changing aspect is that at the end of the ride a passenger is asked to rate their experience. This is like providing feedback on Trademe. This instant feedback is such a strong motivator for the driver that they are falling over themselves to be nice to their passengers!  We recently had some Uber rides in Australia and the drivers were like tour guides. Making a positive impression was clearly important to them because their feedback rating and passenger comments are visible for all to see. Bad rating, no passengers - it's a simple equation.  The result is clean cars and pleasant and helpful drivers - at least that was our experience. Add to that a better price, and it's not hard to see why they have disrupted the taxi industry.

On that trip we put Uber pricing to the test. We had a party of six people to travel about 14km. One group of three ordered an Uber cab. The other group a convention taxi. Both were ordered at exactly the same time. The Uber cab arrived within three minutes and the trip cost $21. The other car arrived 10 minutes later and cost $37.  To see if this was a one-off, we replicated the test for the return trip. Again the Uber arrived first, and was about 35% cheaper. This was in Australia and not New Zealand so I can't say if it’s the same here.

It's not hard top see why the taxi industry is not happy about Uber.

A very similar thing is happening in the property sector with Airbnb. The business model is very similar - people with rooms to spare "host" travellers via Airbnb. Hosting typically involves renting a room or house on a night by night basis. It's the engagement at a local level that sets Airbnb apart from your typical motel accommodation.

According to media reports some landlords are now considering Airbnb as an alternative to long-term tenancies. The equation they are considering is the trade-off of receiving a higher nightly rate and lower occupancy, against a weekly rate on a long-term tenancy with near 100% occupancy. 

Tenants also are getting in on Airbnb - but it didn’t work out too well for some in Wellington. The Tenancy tribunal found that the tenants had breached the Residential tenancies Act and their tenancy agreement by sub-leasing their rental property via Airbnb. The tenants had wanted to terminate their fixed term tenancy early but the property manager declined their request. Instead, they rented out the property via Airbnb and made $1,568 from “hosting” guests on seven occasions.

The Tribunal awarded $1,000 to the property owners plus exemplary damages of $300. Ironically the income the tenants received was slightly more than the fines, but there are clear messages from the case. Tenants need to obtain the consent of their landlord before they go sub-letting the premises. The message for landlords is renting via Airbnb is an option.

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