The Internet: cutting out the middleman and creating platforms for regulatory arbitrage

This is today’s daily post. It’s going to be all about technology. To start,  I want to focus in on a theme: the deflationary impact of the Internet. Since I have a lot of ideas here, I may make this into a thematic post later.

1 Big Thing: The Internet cuts makes it easier to cut out the middle man

In July I wrote about how data-only platforms make unbundling easier. Check out that post here. The upshot of unbundling is lower profit margins for incumbent businesses. And ultimately that’s a good thing for the customer.

I mentioned music as a perfect example of how unbundling worked with iTunes and why that’s hurt the music industry’s profits. But there are other important Internet phenomenon that reduce margins: one is the direct sales model, sometimes known as peer-to-peer sales. Another is the subscription rental model that replaces the ownership model. And two news blurbs today highlight each model in turn.

First, there’s Spotify:

Every music streaming service kind of sucks, we already know this. One of the ways Spotify sucks is that it limits how many songs you can download on each device. But the service just raised its download limit from 3,333 tracks per device, up to 10,000 per device, for up to five devices. Great news for anyone who needs to keep their data use down, or use Spotify anywhere with bad cell reception. You can finally listen to the music you pay $10/month for!

People who still actually buy their music are laughing right now, and we can’t blame them. (Even if one day Apple just deletes their purchased media.) With annoyances like disappearing music, download limits, and stuttering playback, Spotify and Apple Music constantly remind their users that you’re not owners, just renters. If you want full control over your music, you’ll need to switch back to buying (or stealing) your music.

I have a different take here since I am a music buyer. People like me are going to be ‘phased out’ and replaced by people like my son. I own music. He rents it. Why? The Cloud.

What Spotify is doing is using the Cloud to distribute what is essentially a single copy of a song to hundreds of thousands of people. They can do this because, despite the Lifehacker’s claims above, data speeds are sufficient to make music sourced that way convenient. And because Spotify’s licensing fee to the music labels is so low, end users lie my son pay much less to rent music than people like me would to buy music in the past.

This is where the music market is headed because Spotify has all of the data. Remember in July when I wrote about working at HotJobs and warning my bosses that our model was vulnerable to a competitor with all of the data? The data ‘curation’ model doesn’t work. The data search model does because people want choice. This is what Spotify gives users, an instantaneous choice of music that is an order of magnitude larger than music they could own. Netflix has already shown us how this works in video.

In this model, the middleman, the entertainment company, gets shellacked.

2 – Peer-to-peer in cars

What about the direct sales model I was talking about? Here’s what I’m thinking: a la Tesla, new-style companies want to cut out the middleman. And the Internet makes it much easier for them to do direct sales. But people who don’t want to own a sales business also want to sell stuff. And sites like eBay allow them to do that. The big difference here is that, unlike with a company like Spotify above, this is a platform that relies entirely on third parties’ content. And so network effects are large and difficult for new entrants to overcome, again, unlike with Spotify.

So I thought the following announcement today was interesting:

Shift Technologies, an online marketplace for used cars, has closed a Series D financing round of more than $140 million in equity and debt.

The round, which consists of about $70 million in debt and $71 million in equity, was led by automotive retailer Lithia Motors. Bryan DeBoer, CEO and president of Lithia, will join Shift’s board of directors.

Previous investors Alliance Ventures, BMW iVentures, DCM, DFJ, G2VP, Goldman Sachs Investment Partners and Highland Capital also participated. This new capital brings Shift’s total financing of equity and debt to $265 million.

Shift, which is based in San Francisco, serves car buyers and sellers. The company, founded in 2013, has built a software platform that lets customers shop for cars, get financing and schedule test drives. Car owners can use the platform to sell their vehicle as well. Shift says any car it buys must pass a “rigorous” 150+ point inspection.

I am never going to buy a car on eBay or other generic peer-to-peer markets. But I would buy a car on a specialized peer-to-peer marketplace like Shift. Why isn’t CarMax doing this? Maybe they are and I’m just missing it.

Why this matters: If markets like start to work, you and I don’t need a ‘special deal’ from the car dealer for our old car when we’re buying a new one. We can get top dollar for that vehicle and buy the new car for the lowest price in two separate transactions. Moreover, to the degree the car dealer wants you to do business with her, she will have to offer a competitive single-transaction price to make it worth our while. I see this as deflationary i.e. lowering prices for consumers and profit margins for dealers.

Deeper dive:I am still waiting for the housing market to be disinter-mediated. We bought our house via Redfin, which pays its estate agents a flat salary. And that brings transaction prices down. Other dealer businesses should be threatened by developments like these.

3- Competition for Google in Maps

I have a habit of always using the best alternative to big tech that I can find. Whether it’s for email or search or what have you, my goal is to release as little data to one data provider as possible, and to divvy up my data among multiple parties.

The way the world is moving, with everything being done digitally, having your digital footprint all in one place makes you vulnerable in a way you weren’t in the analogue-only world.

So this is interesting:

Mapillary, the Swedish startup that wants to take on Google and others in mapping the world by way of a crowdsourced database of street-level imagery, is taking an interesting step in the development of its platform. The company is now working with Amazon, and specifically its Rekognition API, to detect and read text in Mapillary’s database of 350 million images.

The first application resulting from the new feature will come from a large US city (that Mapillary will not name right now), which plans to use the information that will now be “readable” from parking signs to build a parking app.

“Parking is a super hot space and [parking information] is one of the most asked-for pieces of data that people want to use Mapillary for,” said Jan Erik Solem, CEO and co-founder of the Malmo, Sweden-based startup. He said that while parking will be the first application and one that he expects other cities to use as well, there will be other applications coming out from matching up text in Mapillary’s images, and subsequently being able to pinpoint exact latitude and longitude for specific locations. “We’re starting with parking signs in the US because parking is one of the biggest issues in towns today, but text recognition will apply to many different types of objects and images, such as building facades.”…

Mapillary cites research that says that parking problems collectively cost $73 billion in the US — presumably that includes not just the fines that people pay for overstaying, the gas they gobble looking for a spot, and so on; but perhaps even the lost revenues in areas where they overstay and no one knows.

I would love this to be a Google Maps competitor. Having said that, the technology in Street View is getting better and better. Yesterday, I was using it to find something here in DC and zooming out from the street view, when it switched to a simulated 3-D overhead model. Not only was that view very cool, it was also very useful to help me orient myself.

4 – Think of Uber as a platform for regulatory arbitrage

You know I am dubious about all these new transportation rental apps like Bird and Lime. Uber apparently wants to get int that business though. And that’s because Uber sees yet another regulatory dodge it believes it can exploit.

My view here is that Uber, Lime, Bird, Lyft and all of these other companies are built upon the concept of ‘freedom’. The goal is to create as much user transport convenience and utility as possible as a means of rolling back existing transportation regulation. When the rollback happens, Uber will already have an insurmountable lead in network effects, allowing it to crush competitors and jack up prices.

The problem with this business model is that ‘freedom’ not only threatens existing businesses like taxis, it also can be perceived as chaos and disorder to regulators. And so, I expect an increasing level of regulatory pushback against these companies.

Here’s one example:

The Danish Supreme Court has upheld large fines issued to several Uber drivers for operating without a taxi license, at a time when the ride-hailing giant was still running its non-licensed p2p driver UberPop service in the market.

The decision could mean more than a thousand additional Uber drivers who sold rides in Denmark could also be faced with a big bill.

The four drivers had appealed fines issues by the national court — of between DKK 40,000 (~$6,270) and DKK 486,500 (~$76,200) — but the Supreme Court judged the amounts to be appropriate.

The level of fines is based on the number of Uber rides each driver carried out. In the case of the largest fine the unnamed individual had apparently run up 5,427 Uber rides.

Uber drivers in Denmark have also faced demands for unpaid taxes this year, after Danish tax authorities found tax avoidance among almost all of them.

Why this matters: Uber is ready to go public next year. If I’m right that the economy will still hold early next year, it might be the perfect time for the company to cash in on this latest tech bubble. When the economy turns down, these business models will look less stellar.

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