Out of the ashes of its predecessor the phoenix is born. People forget that the Hype Cycle exists because rational people with good vision see opportunity. Often the vision is “spot on,” but expectations of velocity of transformation and adoption are inflated, leading to over-investment that subsequently must be rationalized.
There has been no shortage of thoughtful articles exploring a bubble in technology. In general, they share a fear of a return to dot-com failures like Webvan and a coming tide ofunicorpses washing up on the shore. I would argue that the world has already been transformed, and there is no bubble in the purest sense.
Despite going for growth and market share over profit, many of these companies have created real value, and, instead of massive flameouts that leave everyone burned, I think we are going to see a wave of beneficial consolidation and rationalization in industries that appropriately have seen exceptional venture capital funding: food, transportation andentertainment.
This does not mean that companies will disappear or die, but rather that many will merge or be consolidated, which will enable leaders in these industries to achieve sustainable scale and grow to do even bigger and better things.
Let’s take a deeper look at what this could look like.
Which entertainment company is quietly priming itself for original content?
From unbundling and cord cutting to the rise of new content distribution platforms likeNetflix and Amazon, media industry watchers are confused about where people will go forentertainment once the digital dust settles. With that in mind, it’s easy to see that companies in entertainment with strong brands and existing audiences can capitalize on the changing landscape by extending their brand with complementary services to win over consumers.
As inefficiencies are ironed out, the winning companies will be able to innovate new products and features.
For instance, take Fandango, the marketplace that connects theaters selling movie tickets to consumers searching for reviews, tickets and show times. Despite owning the movie ticket market since launching in 2000, Fandango saw a blistering 81 percent growth in ticketing sales in 2015 over the previous year. While Fandango has been coy in its public-facing statements, one could infer from its highly accomplished media-heavy executive team that the company will look to capitalize on this spectacular momentum by creeping further down the value chain, which it has already begun to do by expanding into reviews through its savvy purchase of Flixster and Rotten Tomatoes.
By doing so, Fandango would be following the example of Pandora, which bought Ticketflyto make the natural progression from someone enjoying a musician on the site to someone buying tickets to their concert.
Which is the hungriest food company?
For decades, we’ve seen a steady decline in home-cooked meals, which has led VCs to pourbillion of dollars into food-delivery startups. Barriers to entry, like agreements with local partners, payment models and demographics, make it hard for companies to capture new customers away from a dominant platform. Overall, this has led to one breakout company per region — and a smattering of competitors vying for the other spots.
This dynamic, combined with thin margins that have forced folks like Bill Gurley to reassessthe viability of the business model itself, has led competitors trailing a regional leader to sell off and consolidate their capital in the markets where they have a lead. For instance, Rocket Internet bought several companies — for half a billion dollars — and partnered with one-time rival Delivery Hero to gain further scale. And in February 2016, Just Eat and Rocket Internet further drove consolidation as Just Eat bought several Rocket food startups in Spain, Italy, Brazil and Mexico, allowing Rocket to focus efforts on further scaling its key markets across Asia, the Middle East and Eastern Europe.
Following the precedent set by Square buying Caviar and Fastbite and Yelp buying Eat24, the consolidation will increase stateside with M&A that supports existing products and features. Except, the consolidation will take place one step up the food chain, with model leaders acquiring smaller players as the fundings waters shallow and folks like DoorDashslash valuations.
There are many ways this could play out, but it could look like Amazon acquiring Postmates(which is rumored to be shopping for a buyer) or GrubHub to supplement its own fooddelivery via Prime. Google could reasonably buy Yelp (and also Eat24) since Yelp is basically an extension of search, and doing so would bolster Google’s own reviews (pouring data from Yelp into Google reviews) while also leveraging Google Shopping Express as a delivery backbone.
Which transportation company will drive into the sunset?
Throughout Uber’s meteoric rise, it has used its massive war chest only once for M&A. It bought deCarta, a mapping company. Because Uber has been able to raise extraordinary sums of money, it’s been able to forego the regional M&A consolidation that’s going on in the food-delivery industry (presumably because it believes it can offer cheap enough rides for long enough that it will simply outlast competitors, even though it’s losing a billion dollars each year in China alone).
Out of the ashes of its predecessor the phoenix is born.
Like with Yelp/Eat24, Pandora/Ticketfly and Square/Caviar, Uber buying deCarta is another good example of a company buying a complementary company to expand its range of services. By moving mapping in-house, Uber doesn’t have to rely on Google for logistics infrastructure, and can scale its company in incredible directions, like food delivery (UberEATS), more traditional UPS-type delivery (UberRUSH) and even sell its logistics backend as a service to other companies likeOperator.
However, even if Uber itself doesn’t start buying competitors, faced with Uber’s aggressive expansion of services and cash reserve, we will see more startups consolidate, like Lyft buying Hitch, to increase market penetration and offer more services. I wouldn’t be surprised if Lyft bought Flywheel, if not just to stick it to Uber and take a bigger share of Uber’s home turf, San Francisco.
What does this all mean?
Consumers win. As inefficiencies are ironed out, the winning companies will be able to innovate new products and features.
And even investors win. Many acquisitions are stock deals, and, as such, patient investors can have a second swing at the ball as part of a larger and more surefooted company better positioned for growth and profitability.
Food for thought: What do you foresee for
entertainment,
transportation and
food tech in 2016? Beyond these
industries, where do you foresee consolidation taking place in the coming years?
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