It is more than 20 years since the internet revolution began. And yet not a month goes by without news of new internet-based businesses threatening to disrupt traditional business models. In the first of an occasional series I’d like to point my telescope towards a few rising stars in the firmament of cyberspace. Some of them are shining brightly – and some not.
Supercell
Supercell of Finland, founded in 2010, is the company behind Clash of Clans, the world’s most popular mobile video game. In late June this year Tencent Holdings Ltd (HKG:0700), the Hong Kong-based internet giant, announced that it was effectively taking over the firm by buying an 84 percent stake for US$8.6 billion from Softbank (TYO:9984), the Japanese hi-tech incubator and investment conglomerate. (This may have been related to Softbank’s acquisition of ARM Holdings, the British computer chip manufacturer, later that month.) This valued Supercell at US$10.2 billion. Softbank walked away with a hefty profit, having bought 51 percent of the company for around US$1.5 billion in 2013.
The attraction of the deal for Supercell was that it gives the company access to around 300 million gamers in China – more than in any other country. Supercell has already invested in US competitors, including Riot Games, the maker of League of Legends, a leading computer game which runs on MS Windows. Supercell will continue to operate as an independent company and could be a candidate for floatation in due course. The company’s sales growth has been meteoric but is slowing. In 2014 sales tripled. In 2015 they rose by a third to €2.1 billion.
Finland, with a population of 5.5 million people, has had an astonishing record of incubating gaming unicorns. Rovio Entertainments developed the (apparently) globally popular Angry Birds video game series and franchise. The company had sales of €142 last year. I have noticed that Angry Birds seem to be popping up all over – for example in cinema information announcements (not to mention Labour’s front bench).
Boohoo (LON:BOO)
The market cap of this Manchester-based internet-only fashion retailer has soared this year and is likely to go higher. Last month it passed the iconic £1 billion mark. One year ago this AIM-listed company was trading at a price of around 35 pence. Earlier this week Zak Mir speculated on these pages that its shares could reach 140 pence as early as the end of next month. Clearly they are doing something right.
The company is still 44 percent owned the Kamani family who founded it eight years ago. Over that time they have built up a brand based on the strategy of cutting edge design at affordable prices. Boohoo is now worth more than Debenhams, which has 178 stores and ten times Boohoo’s sales.
It is reported that its currency hedges have protected the company against the 10 percent plus decline in the value of Sterling since the Brexit result on 24 June. On 27 September the company announced its latest half-yearly results, which exceeded expectations. The share price firmed to around 120 pence. Be aware that, at this level, with EPS at 1.1 pence the stock’s P/E ratio is a toppy 99.
Mahmud Kamani’s sons Adam and Umar have set up a separate fashion portal called Pretty Little Thing which appears to be targeted at a younger female market. They are leveraging the new brand with celebrity endorsements (no one that I have ever heard of, I fear). The risk is that this space might get too crowded. Amrita Kriplani, a former product manager from Asos (LON:ASC), has launched Anek, a mobile app that connects consumers to independent women’s fashion brands from around the world. So young female trendies are increasingly well catered for, it seems. The key is to generate volume through brand recognition and repeat buying. I wish Adam, Umar and Amrita every success but they will have their work cut out to emulate the triumph of Boohoo.
Airbnb
The home holiday rental marketplace which puts short-term tenants in contact with homeowners has rolled out a global portal operating in over 200 jurisdictions in a matter of eight years since it was founded in California by Joe Grebbia, Brian Chesky and Nathan Blecharczyk. Earlier this year they opened a 400,000 square feet HQ in Dublin to manage all of its non-US sales which are booked through Ireland. The US part of the business is still privately owned and therefore accounts are difficult to come by. But a US$1.5 billion funding round in June valued the group at US$25.5 billion according to the Wall Street Journal[i].
Airbnb takes a three percent cut on all sales generated through its website as well as a 6-12 percent fee from guests. The company is thought to have generated sales of US$900 million last year but has a sales target of US$10 billion per year by 2020. The rumour is that the company is still generating losses because it continues to invest heavily in expansion.
Despite being a model of what is often called “the sharing economy”, Airbnb has its critics. Some claim that Airbnb enables landlords to circumvent health and safety and fire regulation – not to mention taxes. Their defence is that all landlords should comply with all local regulations and tax regimes.
The floatation of Airbnb could come sooner than we think. I would be concerned that while it has a great business model, there is no unique underlying technology. It’s basically a dating site with real estate, though no doubt the algorithms they have developed would be difficult to replicate.
Fly Now Pay Later
Fly Now Pay Later is a holiday finance firm which enables customers to bag the holiday of their choice even if they don’t have the means to pay for it. This is otherwise known as holiday credit. It secured £20 million of finance in a funding round over the summer. Since holidays can be purchased on credit cards, one assumes that most clients would be the sort of people who have already maxed out on theirs. So it’s basically a payday loans company with sun and sangria. And the service doesn’t come cheap. Customers must pay a one-off “transaction fee” of about 15 percent.
Where the business model is innovative is that it has teamed up with online travel agents such as Travelpack, Carlton Leisure and 360 Travel Group. Once customers book their holiday they are given the choice to click Fly Now Pay Later at the checkout. FNPL’s systems then conduct a credit check. If approved, the customer has the choice to pay for the holiday in from two to ten monthly instalments.
Gocompare.com
This leading price comparison website is set for a £400-£500 million floatation on the London market. Currently it is owned by Esure Group (LON:ESUR) the FTSE-250 car and home insurer. Last year Esure purchased the 50 percent of the business that it did not already own for £95 million.
The website has generated massive brand recognition through the advertising campaign featuring the manic moustachioed opera singer. But it has resilient rivals, not least Moneysupermarket.com and Compare the Market. The latter – remember the meerkats who speak with Russian accents – is owned by BGL, which is currently considering a floatation. The meerkats are likely to be about five times as valuable as the opera singer, in market cap terms, that is.
Gocompare’s listing, to be handled by Deutsche Bank at a total cost of £19m, will give the company a £75m debt facility and unlock a dividend of an estimated £63 million for Esure. Esure’s own shares have responded accordingly.
The most common business model for price comparison websites or “shopbots” is to charge sellers for displaying their information while letting users access the site for free. Fees charged to service providers are computed in different ways. The main risk here is that users cease to trust that the information provided by the shopbot is truly impartial. BBC R4’s Moneybox programme recently featured a discussion on this topic. Canny users may be turned off price comparison websites if they find that they can do better by undertaking their own research. On the other hand, time is money. For that reason, we can expect this sector to continue to grow.
I hope to point my telescope at a few more cyberspace stars shortly.
[i] http://www.wsj.com/articles/airbnb-raises-1-5-billion-in-one-of-largest-private-placements-1435363506