24 October 2016
Big Data have passed the “tipping point.” Some innovations change the market; others are so disruptive that they create entirely new markets. Think back about the rise of the internet, for instance: when the world wide web took off, leveraging computers became interesting for a completely new group of users.
At the moment we are experiencing times where Big Data applications open up new frontiers. This is manifest in the almost surreal valuations of new companies like AirBnB, Uber or Alibaba. What they have in common is that they hold no inventory, have very little personnel, yet command tens of Billions in market capitalization, 10 to 20 times their revenues. How did this happen?
I vividly remember around 2000 when internet start-ups only needed to create a buzz to see their valuation soar. Traditional investors abhorred the out-of-sync stock prices, and must have felt a sense of reckoning when that bubble burst. Lots of venture capital evaporated, and for a brief while, the markets seemed to go back to normalcy.
But things didn’t really go back to ‘normal’ again, because soon companies like Twitter and Facebook grew astronomical valuations without even making any money at all. Radically new business models have forced investors to rethink how to value companies, and accountancy practices have never caught up. As an explanation for some of these success stories, Libert, Wind & Beck (Harvard Business Review, 2014) refer companies like Alibaba, Uber or AirBnB as “Network Orchestrators.”
What many of these largely ‘virtual’ companies have in common is that they operate like very clever institutional ‘middle men’ that rely heavily on Big Data and smart algorithms to bring supply and demand together. They have made their respective markets so much more efficient that entirely new markets evolved.
As an example: the value proposition of Uber is that they offer limousine service well below the price of a traditional taxi. Customers know where their car is at all times, can plan ahead how much the fare will be, can text their destination the ETA, etc., all “bonus features” that are spun off the data they leverage. They can raise the tariffs (apply a “surcharge”) to entice more drivers to get in their cars, and have customers pay a premium when supply is short. Triple wins.
AirBnB taps into unused real estate, providing owners some additional income and renters remarkable value for their holiday or even business trips. By a system of mutual rating, the risks for both tenants and landlords are mitigated. With a platform in place that effectively serves a trading market for accommodations, geographic expansion costs relatively little, yet reaps handsome extra rewards.
When leveraging Big Data pays off in Spades for such companies, traditional powerhouses have little choice but to follow suit. They either keep up with these innovators, or will be left behind in oblivion by the stock market. Small wonder that so many companies are attempting to augment their offering by seeing added value from data. The rise of mobile platforms and ubiquity of smartphones has made it possible to distinguish yourself from the competition, if you can grow your analytics capabilities at a faster pace than the competition. Exciting times.