Most tech firms would probably like to think of themselves as unique, that they are truly without peers.
In the case of mega unicorns like Lyft and Uber, that might actually be true. Both companies have disrupted several industries and have expanded beyond on demand car service into e-commerce, food delivery, bikes, scooters, and autonomous vehicles.
So when a company like Lyft or Uber goes public, how should Wall Street view it? Investors, especially institutions, normally evaluate a company’s performance by comparing it to other firms in the same industry. For example, the S&P and Dow Jones have created several stock indices in which investors can benchmark one company’s performance to the rest of the group in industries like transportation, energy, consumer staples, and healthcare.
However, in addition to Uber, tech firms like Facebook, Google, Apple, and Amazon defy easy classification because they operate or impact so many different industries.
For example, Apple generates most of its revenue from hardware sales of iPhones and computers but CEO Tim Cook recently said that he expects the company to generate “material” revenue from health services this year. Facebook is a social media network that also sells virtual reality headsets from Oculus. Amazon is an e-commerce platform that also makes original movies and TV shows. All of these companies also offer payment services.
The emergence of high-speed Internet and mobile devices makes industry classification outdated because tech firms can easily (and quickly) blur such boundaries, some experts argue.
“Times have changed,” according to 2016 piece published in the Harvard Business Review. “Industry walls are disintegrating at a rapid pace…Today, technology is just a standard part of corporate infrastructure, like operations or marketing. It’s not an industry in itself.”
The article was authored by Yoram Wind, a professor of marketing at University of Pennsylvania’s Wharton School, Megan Beck, chief product and insights officer at machine learning startup OpenMatters, and Barry Libert, chairman at OpenMatters.
“These (tech) companies, which are remarkable for beating out historic leaders like Exxon despite their relative youth, are all digital platform organizations that leverage a growing and virtual network of suppliers and customers,” the article said.
When a company goes public today, it receives a General Industry Classification System (GICS) designation. Launched in 1999 by S&P Dow Jones Indices and MCSI, the GICS categorizes companies into one of 156 sub-industry groupings “according to its principal business activity.” GICS further organizes those sub-industry groupings into 69 industries, 24 industry groups, and 11 sectors.
If that already sounds complicated, consider that the S&P Dow Jones and MCSI has had to revise GICS several times in recent years, including renaming “Telecommunications Sector” to “Communications Services,” creating a new sub-industry called “Internet Services & Infrastructure” under the “IT Services,” and moving e-commerce companies from “Information Technology” to “Consumer Discretionary.”
Instead, the authors of the Harvard Business Review piece propose using just four categories:
“Instead of focusing on vertical industries, it’s time to look at business models instead,” the article said.
“Our research has shown that companies that build and manage digital platforms, particularly those that invite a broad network of participants to share in value creation (such as how we all add content to Facebook’s platform or that anyone can sell goods on Amazon’s), achieve faster growth, lower marginal cost, higher profits, and higher market valuations,” the piece said. “For organizations like these, business model is a better way of identifying competitors and comparing performance.”
Another factor to consider is executive compensation. Companies use GICS classifications to determine how much to pay CEOs and other top executives by comparing their compensation to their counterparts in similar companies/industries.
But such methods are highly subjective; for example, Apple developed two sets of peer groups to benchmark executive compensation, according to its proxy statement.
Primary Peer Group: Alphabet (Google), Amazon, AT&T, Cisco Systems, Comcast, Disney, EMC, Facebook, Hewlett Packard Enterprise, HP Inc., IBM, Intel, Microsoft, Oracle, Qualcomm, Time Warner, Twenty-First Century Fox, Verizon
Secondary Peer Group: 3M, American Express, Boeing, Coca-Cola, General Electric, Johnson & Johnson, Nike, PepsiCo, Procter & Gamble
That’s more than two dozen companies from an eclectic mix of industries. Indeed, it might seem odd that Apple considers as peers companies that make soda, sneakers, and aircraft.
Institutional Shareholder Services (ISS), a powerful proxy advisory service, now monitors and evaluates the peer groupings companies use to justify executive pay.
“ISS will review cases where the standard methodology appears to have produced inappropriate peers and may adjust peer groups in these cases,” the firm said. “The basic principles of the methodology will apply: peers should come from similar industries and be of similar size, and company peers should be prioritized where possible.”
So what kind of peers would be appropriate for some top unicorns? SharesPost has compared Airbnb to online travel firms like Expedia, Priceline, and TripAdivsor.
You could also argue that major hotel chains directly compete with Airbnb. Indeed, the company has partnered with merchants in other travel segments (e.g., rental car companies and airlines) to create joint incentives that resemble third-party loyalty programs longed favored by hotels. Airbnb has also created a “Journeys” program in which hosts not only provide lodging but also tours, transportation, meals, and activities like wine tasting or mountain climbing.
Slack is a communications platform that provides messaging, video, and group chat services. That means it competes with Microsoft’s Skype, Facebook/Instagram, Apple, Google, and Zoom.
Lyft and Uber obviously compete with traditional taxi services and car rental companies. But Uber also delivers food and retail goods, just like Amazon. Furthermore, Lyft and Uber are investing in autonomous vehicles, which means it will compete with everyone from Alphabet to car makers like General Motors, Ford, and Tesla.
When unicorns like Uber and Lyft do go public, it will be interesting to see how these companies compare themselves to their peers, whoever they may be.
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