Imagine you owned a video or DVD rental business in the late 1990’s. Things look great, you had just transitioned your stock from video to DVD, the product had changed but not the way consumers interacted with you.
You were comfortable, but what were the risks to your business? I bet you focused on the competition, you looked at your product range, your price and your whole customer experience including selling the chocolates and lollies on the front counter. You produced loyalty cards to keep your customers coming back.
However, the real threat to your business was not your competitors, it was your business model and the way you delivered your product was going to become obsolete in a decade.
If you did see it coming you probably dismissed it. Watching movies on demand in your own home was a great idea but could not be delivered in the late 1990’s. The size of the data pipe was not big enough to deliver the data and the speed it was sent down the data pipe was not quick enough. Bandwidth was too far away in the future and dial up modem speeds could never cope with video on demand requirements.
The linear progression we have in our minds just meant that it was all too far away at the current rate of change. Moore’s Law shows us that exponential growth is real, and in a few years the infrastructure was built so video streaming product could be delivered by the mid to late 2000’s.
As Marc Andreessen says there are no bad ideas, it just takes time for other systems and the environment to catch up with the idea.
Netflix survived and Blockbuster did not, and in 2010 Blockbuster filed for bankruptcy protection.
Easy to see in hindsight, hard to see at the time.
We do not have the benefit of hindsight as investors but we do have the ability to use inversion techniques, where the trick is not look for the winner in the sector, this is too hard to predict, but rather selling or avoiding the industry in decline.
A great example Warren Buffett gives is the car industry. In the early 20th century there were 2,000 auto car manufactures in the US and if you had bought them all and held them you would have lost money. The best investment was to go short horses. In the US in 1900 there were 20 million horses. Today there are just 4 million. The trade was to short horses not to buy into the new industry.
So we need to focus on finding the Blockbuster as this is the obvious candidate, not finding the Netflix.
So that leads us to driverless cars
We here the talk that driverless cars are coming and that within 10 years they will be a mainstay on the road.
There are a number of issues to work through, not limited to safety, design, integration with existing infrastructure etc.
The common catch cry is, “I will never buy a driverless car, I just love driving too much”. Maybe, but honestly who really enjoys the commute to work when you are backed up in traffic and lucky to get out of first gear. Or hunting around like George from Seinfeld, looking for that perfect car parking space.
As an aside I think the biggest thing we need to overcome is the perception that a computer could never drive as well as a human. We as humans have to feel superior to something and surely the computer cannot take driving away as well!
It’s like work, the majority of people think they are irreplaceable but the reality is the majority of us are not. Maybe Steve Jobs but let’s be honest the rest of us not so much.
Anyway driverless cars may be years away, or, maybe they do not come at all. But if they do become the norm what can we as investors do to avoid the current Blockbusters of this world?
Frank Chen from the VC firm Andreessen Horowitz has a great 30 minute presentation on 16 Questions he is most commonly asked about Self Driving cars. This is a great place to start and get up to speed with how much thought this technology has been given and how much work is still to be done.
Question 13 (time around 20:38) struck me as really interesting and the most relevant to the winners and losers that this new technology will create and destroy.
Will we continue to buy cars or will we use transportation as a service?
The answer to this question will have a dramatic effect on the way the whole car industry and associated industry will operate.
Frank Chen draws a great comparison to plane travel. When we choose to fly we do not make the decision of which plane to fly on (after all why would we? We assume operators have passed the relative safety checks) but rather we choose who to fly based on the loyalty to the airline company.
Take this to the driverless car space and if we chose transportation as a service, your loyalty is to the fleet provider not the car company.
Service will be successful if it can fulfil our needs when we need transport now. The phone rings at 3am and our child needs to be picked up from a party. How quickly can the transportation service respond?
Maybe our children do not ring their parents at all (yes! So I do not have to scramble out of bed at 3am) They log straight onto their Service provider and the car is there 5 minutes quicker than had I got out of bed and climbed into the car.
Under the transport service model cars then almost become a commodity and the majority of cars will be owned by the fleet providers. We may have a preference when we select a car we like from the service provider but this may be driven more by the features of the car and less the brand itself.
So in the transportation as a service model, the largest buyer of cars becomes the fleet operators who maintain the software and run the service. You would imagine with this buying power they will deal direct with the car manufacturers. However, if Fleets still purchase through a dealer network, as I believe they currently do (think SG, Eclipx) then this is a lower margin business for the dealer network than selling to traditional retail.
Under this model maybe the traditional car-yard becomes obsolete or less relevant There are two listed car dealership companies on the ASX, AHG and AP Eagers. These business models will come under great pressure if transportation as a service is the dominant way we transact.
It’s also important to note Tesla distributes its cars without using a traditional dealer network. If other car manufacturers chose to use this model then the headwinds in this industry may already exist even if we still retain our loyalty to brand over transportation as a service.
What about other second level industries associated with the Car Industry?
The idea that you have cars driving around waiting to pick-up and move someone seems a little crazy to me. Maybe the model looks more like the Electricity Network with the use of power substations or the Public transport network with the use of tram or bus depots.
Within each geography or zone we have a depot of driverless cars that can be deployed upon request. Maybe a Fleet provider will guarantee service within 5 minutes or you ride for free. These depot also acts as the recharge station.
This is all guess work but under most scenarios with driver-less cars, car parks as we know them become less important if not redundant. If the majority of time cars are on the move dropping and picking up and then returning to the depot then we do not need our cities full of car parks.
(Thinking at a second level, less car parking means less car parking fines and parking revenue. How much revenue do local councils derive from parking fines and meters? This loss revenue to councils will have to be replaced somehow).
So car parking companies may in the firing line. I believe Ariadne (ARA) has a car park operation. This may be offset with the ability to redevelop this land into alternative uses.
In addition Sydney Airports (SYD) derives a large part of its revenue from parking and car rental services. Looking at segment data for FY2016, $201m of revenue was generated from Property and car rental, and $156m in parking and ground transport. If there was a threat to this revenue then you could see SYD moving to a toll way to access the drop off/pick up area.
As an extension, hire car companies business models may also be under threat.
How will these service providers manage their fleets?
When we have an accident we go to a panel beater. Our car needs serviced we take it to the local mechanic. Under the transportation as a service model these issues are in the domain of the owner of the car, i.e. the Fleets.
So you would imagine that the Fleet owner has a centralised service centre where cars are routinely checked and repairer as needed. Again much like how the airline industry works. Maintenance and repair is done in a centralised hangar.
So a listed company like AMA Group, which is a grouping of panel beaters and workshops, to survive has to change models and strive to be the repairer of choice for the fleet company. As with the car network dealers this may potentially be a lower margin business than simply retail customers.
Retailers of automotive parts may also be under threat. If service and repair is centralised within the Fleet providers then retail demand drops away for auto parts and repair.
Companies like Bursons Group (BAP) who provide parts to the auto industry may progressively become more like a vintage vinyl Record shops servicing people who need that spare part for their vintage manual driven car.
This is another question posed in Frank Chen’s presentation. Will insurance be more or less? Maybe you could argue insurance will go down as there are less accidents occurring. Alternatively maybe the cost to repair will be higher as the hardware/software is more expensive.
If it turns out there are less accidents in a driverless world then people who choose to self-drive will be penalised by higher insurance premiums much the same way smokers are penalised with Life Insurance (I believe the smoker levy on life insurance is around 50%).
We do not know what the future holds, but if the future looks different from today then business will need to adapt and change to this new future.
I think the probability is that we will have driverless cars, but what do I know. The future may present a whole new mode of transport that replaces a car and all of these thoughts are worthless.
However the greatest danger as investors is not to plan for the future and all its probabilities, otherwise we will be left holding the Blockbusters of this world.