Is ‘Bubble or Bust’ the Only Future For the Tech Industry?
Creative and innovative tech startups often seem promising. With hopes that these businesses will under-promise and over-deliver — just like many tech companies did back in the dot-com glory days — some investors jump on the opportunity to get a piece of the action.
But things are different now, and while many of these startups are great ideas, a great idea doesn’t guarantee long-term success. Technological advances have fostered an environment where competitors can easily enter and insert themselves right into the middle of the game board. Even if you have the king in check, the game isn’t even close to over.
A Few Tech Cos. We’ve Been Watching
Uber vs. Lyft
In case you haven’t heard, Uber and Lyft are both services that provide users with transportation. If you need a ride from point A to point B, you can simply go onto the app and buy it. Like a taxi, the cost of the trip is determined by the distance travelled and time taken. Quick, convenient, and creative, the business had an estimated 79,000 new signups per week as of late last year.
Uber generated roughly $20 million in revenues each week around that time period, according to Business Insider estimates. These days, CNN reports the company is worth around $18.2 billion — more than Campbell’s, Mattel, or Hertz. Uber even entered into a partnership with MasterCard. On the surface, things seem to be looking up for the rapidly growing ride provider.
There are a few problems with Uber, though. Costs for drivers, insurance, and marketing are relatively high for an online business. The business continuously has the challenging task of meeting customer demand — it has to have enough drivers to provide all of these rides. Legal challenges face the ride company, as State legislatures may view it as a taxi company instead of a tech company — two types of businesses that operate under different rules. Of course, another problem Uber faces is competition from similar services — particularly Lyft.
According to one estimate by Tech Crunch, there was a time in 2013 when Lyft’s revenues were growing at a rate of 6 percent per week. Lyft provides virtually the same service as Uber. Sure, the two companies have some distinguishing features, but all in all, one could serve as a substitute for the other. In the Uber vs. Lyft business battle, news reports portray Uber as a dirty player — you know, that guy that will continue to foul you in a ball game because he’s afraid to lose?
According to CNN, the multi-billion dollar company’s employees have been playing taxi ding dong ditch with Lyft employees, calling for rides they don’t really need to create a rift in daily operations. “Uber employees have ordered and canceled more than 5,000 rides from rival Lyft since last October, according to new data provided by Lyft,” reports CNN, who says the company has since apologized.
Just about everyone has heard of Dropbox — that place where you can store files online. Made popular by companies like Hightail, Box, and Dropbox, online file storage is a relatively new concept that has spread like wildfire.
Box was founded in the mid-2000s and soon after its release, it had close to 40,000 users — each paying between $15 and $35 per month. Today, Box customers can pay anywhere between $0 and $35 per month for different amounts of storage space.
Dropbox has a huge customer base, with 300 million users. Some of these users pay nothing and others, around $10 per month for 1 TB of storage space. Hightail managed to attract around a half-million business customers and collect at least $25 per month from each. Individual users can buy 10 GB of storage on Hightail for $15.99.
Though some of these cloud businesses have managed to do pretty well for themselves, the competitive market is not working in its favor. Soon after the idea came to fruition, the big dogs like Google, Amazon, and of course Apple wanted in. These are companies that a startup really can’t compete with.
“In March, Google celebrated the unification of several cloud computing services with price cuts of 68 percent for most customers, to 2.6 cents a gigabyte a month, about one-quarter the price of Dropbox’s premium consumer service,” according to reports by The New York Times.
Amazon also cut prices, and a user can buy large amounts of storage for 2.75 cents per GB. To compete with the giants, the smaller players will have to get even more creative. “Both Box and Hightail now say they assume that they will offer customers unlimited storage free and push their costs into the prices they charge for other services,” per The New York Times.
In addition to competition, security issues are also a cause for concern. With Apple’s recent iCloud breach where celebrity accounts were hacked, people may begin to question the security of these online storage programs. They begin to ask themselves: “Is anything safe and secure online?” and “If it happened to them, could it happen to me?”
The Tech Bubble
David Einhorn describes the current tech bubble like this in a publication by The Wall Street Journal: “[It is] an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm.” Very well said.
Bubble or no bubble (well, let’s go with bubble), most investors have evolved beyond the tech speculation. Today, we are much more inclined to watch, wait, and let the numbers do the talking.
But the numbers paint an interesting picture. Remember Snapchat’s rapid decline? Let’s not forget about daily deals websites like Groupon. Watching these declines, coupled with the competitive battles on the tech scene, we have to wonder if the bubble is on the verge of bursting.
Security issues associated with many high-fliers may also poke the bubble, and even changes to net neutrality could be a contributing factor. At the end of the day, we may not know what’s going to happen until it actually begins happening. In the meantime, Einhorn, who according to The Journal is “more comfortable shorting a basket of these high-flying stocks,” provides some sound reasoning. “A basket approach makes sense because it allows each position to be very small, thereby reducing the risk of any particular high-flier becoming too costly … When the prices reconnect to traditional valuation methods, the de-rating can be substantial,” he said to The Journal. Again, very well said.