245 years ago, Adam Smith wrote “An enquiry into the Nature and Causes of the Wealth of Nations”, in which he put down his economic theories. First and probably one of the most important was “Division of Labour”.
"It is the great multiplication of the production of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity, or, what comes to the same thing, for the price of a great quantity of theirs. He supplies them abundantly with what they have occasion for, and they accommodate him as amply with what he has occasion for, and a general plenty diffuses itself through all the different ranks of society".
Smith identified correctly that when men and women specialise their skills, and importantly they “trade” with one another, the result is a rise in productivity and standard of living for everyone. In 1817, David Ricardo published “On the principles of Political Economy and Taxation”, where he expanded upon Smith’s work of in developing the theory of “Comparative Advantage”. What Ricardo was saying is that it is important and in the everyone’s best interest to embrace specialisation, as in the end, everyone ends up in a better place.
There are two requirements for these mechanisms to work: first and foremost - we need free and open trade, something that some politicians even 245 years later not all agree; second and probably less discussed, it is the requirement for parties to be aware of one another’s goods and services. There is a lot of information asymmetry, but also physical distances and the resulting distribution costs which can both cut against the economic advantages that would otherwise arise for all.
In his 2005 book, “The World is Flat”, Thomas Friedman recognises that the Internet has the ability to create a “level playing field” for all participants, one where the geographic distances become less relevant. The core reason that Internet marketplaces are so powerful is because they connect economic traders that would otherwise not be connected, they unlock economic wealth that otherwise would not exist. In other words, they literally create growth.
The first marketplace was ebay, which was followed by its Chinese counterpart - TaoBao (owned by Alibaba) which in 2020 traded over $550 billion in goods. There were many other successful goods marketplaces that have launched post ebay and Taobao: StubHub (a secondary ticket exchange), Etsy (a leading marketplace for the exchange of vintage and handmade items).
With the launch of Airbnb in 2008, and Uber in 2009, these two companies established a new category of marketplaces known as the “sharing economy”. They based their business model on the fact that for many people, their main assets: their residence and their car are materially underutilised. Extra rooms and second homes are vacant most of the year, and the car is not utilised more than 5% of the day. These sharing economy marketplaces allow owners to “unlock” earning opportunities from these underutilised assets.
Some of the companies which run these marketplaces are listed companies. They are however posing problems to people and their agents in valuing their “intrinsic value” and finding if these companies present a “margin of safety” to invest today. The main problem is to figure out their Total Available Market (TAM) when the company gets to its peak, maybe in 2028 or 2030, and here there are many disagreements between market participants on how these companies should be valued.
In other words, there are people who think the arrival of a product or service like Uber will have little impact on the overall market size of the car-for-hire transportation market. There are multiple reasons why this is a flawed assumption. When you materially improve an offering, and create new features, functions, experiences, price points, and even enable new use cases, you can materially expand the market in the process. The past can be a poor guide for the future if the future offering is materially different than the past. Sizing the market for a disruptor based on an incumbent’s market is like sizing the car industry of how many horses there were in 1910. Or consider the following example from 34 years ago that included the exact same type of prediction error:
“In 1980, McKinsey & Company was commissioned by AT&T (whose Bell Labs had invented cellular telephony) to forecast cell phone penetration in the U.S. by 2000. The consultant’s prediction, 900,000 subscribers, was less than 1% of the actual figure, 109 million. Based on this legendary mistake, AT&T decided there was not much future to these toys. A decade later, to re-join the cellular market, AT&T had to acquire McCaw Cellular for $12.6 Billion. By 2011, the number of subscribers worldwide had surpassed 5 billion and cellular communication had become an unprecedented technological revolution.”
There are also new marketplaces appearing:
Exchange of labour – companies like Upwork and Fiverr International
Other emerging marketplaces – Instawork, HipCamp.
In conclusion, the specific benefits of Global marketplaces:
Increases wealth distributions (all examples);
Unlocks wasted potential for assets (Uber, Airbnb, HipCamp);
Makes specific products reachable and findable (eBay, Etsy)
Allows for increased specialisation (Etsy, Upwork)
Enhances supplemental labour opportunities (Uber, Instawork)
At N2 Asset Management Limited we believe that sharing economies marketplaces will change our way we buy goods and services in the next 10 year significantly. As a result, following decisions taken this year, we invest our money and our clients’ money allocating to companies described above on which we did a lot of due diligence and made cautious assumptions in the valuation process, companies like Etsy, Uber, and Airbnb. Not to say, that we also have allocations to other companies which run marketplaces like Amazon, Facebook, and investments in providers of technology used for online payments.
IMPORTANT NOTE: The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
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