Small Business Labs

Is the Declining Cost of Distance The Next Megatrend?

Bain's Spatial Economics: The Declining Cost of Distance suggests that an array of new technologies "have pushed the cost of distance to the tipping point" - and will lead to major changes in business and society in the near future.

Key quote on what Bain describes as a "historic shift":

Over the next two decades, the cost of distance will decline sharply, according to Bain research, altering the way we live and work—faster than most people expect and more broadly than many imagine.

This next big economic shift will create an astonishing array of opportunities for businesses and investors—and unexpected risks.

Key quote on the technologies Bain believes are driving this shift:

The catalyst for this historic shift is an array of new platform technologies that have pushed the cost of distance to the tipping point. Multibillion-dollar investments in robotics, 3-D printing, delivery drones, logistics technology, autonomous vehicles and low-Earth-orbit (LEO) satellites are giving rise to new products and services that sharply erode the cost of moving people, goods and information. As these technologies combine and converge, change will accelerate.

Key quote on the 4 things businesses should be doing given the declining cost of distance:

Evaluate the risk of developing stranded assets; review supply, distribution and logistics chains with an eye to stripping out distance costs; incorporate new technologies into existing workflows to test and learn; and anticipate the migration of human capital and talent.

Bain suggests that these trends will result in what they call "the post-urban landscape".

This will consist of cities with large walkable urban cores that are able to attract the wealthy, as well as highly talented creatives and other professionals that can afford these areas. Think SF, New York, London, etc. 

In the post-urban model Bain suggests that due to costs increasing numbers of the middle class will move to "New Villages". These are "residential zones lying at the furthest edge of the traditional metropolitan commuter belt, more than 50 miles or a 90-minute commute from city centers." 

These new villages will offer lower costs, more space and many of the amenities of urban cores because of the declining cost of distance. In some cases these New Villages will also be in attractive locations - Jackson Hole, for example. 

The losers in this view are cities (big and small) that don't offer attractive urban cores and large numbers of high paying jobs. Other losers include closer in suburbs and towns that offer fewer amenities than the cities, yet don't have the low cost of the New Villages. 

What Bain seems to be suggesting is we're on the cusp of version 2 of the paradox of place. 

The paradox is even though the Internet and connective technologies have made working remotely easier than ever, people and companies are increasingly clustering together in fewer, more valuable locations. 

This is happening because in our knowledge-intensive world, industries and people cluster in order to share information, generate ideas and cut deals. These activities are all still better done face to face.

Talent also clusters, both to share information and also to have access to networks and new opportunities. Often this clustering is happening in urban cores (think SF, New York, etc.), which in addition to business opportunities offer a variety of other amenities.

Bain is suggesting that a new set of technologies will make place even less important in some ways - and even more important in other ways - than location is today. 

We certainly agree that the declining cost of distance is a megatrend. In fact, it's always been a megatrend.

After all, declines in the cost of distance have been major drivers of change throughout human history. Without declines in the cost of distance we wouldn't have had colonization, globalization, World Wars, the Beatles, etc. - and that's just looking back a few hundred years.

Going back even further, think about the impact of the wheel, sail boats, the domestication of horses and other early technologies that reduced the cost of distance.

So this is a trend worth paying attention to.

Mary Meeker's Annual Internet Trends Report

Venture Capital firm Kleiner-Perkins released the 2016 edition of Mary Meeker's annual Internet Trends report last week (Meeker is a partner at KPCB). 

As with prior years, it's a long (213 pages), data rich set of charts looking at what's happening in the Internet economy. 

Meeker's annual report is hugely popular, well worth reading and full of interesting data. But to be honest, I found it the least compelling of this multi-year, annual series. I think there are two reasons for this:

1. As the report points out, the global economy slowing and the growth of the Internet is slowing. This is leading to fewer new opportunities. Or, as the report says, the "easy growth is behind us".

2. Things don't change very fast year to year, even in the tech world. Because of that, there's simply not as much stuff that's new.

The report nicely organizes the information on the topics covered (the report outline is below). But all of these areas have been extensively covered elsewhere. 

The one chart that really jumped out at me is below. It shows just how dominant Google and Facebook are in terms of online advertising. I knew this to be the case, but this chart really makes the point. 

Not only do these two firms control over 60% of the online ad market, they are gaining share.

Recode has a nice summary of the key report points. 

So does the Washington Post.

Media Bias and Pew's On-Demand Economy Survey

Most of the media is not positive about the on-demand economy. A good example is the coverage of Pew Internet's Shared, Collaborative and On Demand: The New Digital Economy report.  

The study findings show the on-demand economy has extensively penetrated the U.S. economy in a relatively short time.

As the study chart below shows, 72% of Americans have used some sort of on-demand/sharing economy service, 15% have used a rideshare (meaning Uber, Lyft, etc.) and 11% a home sharing service such as Airbnb.

            
Given that most sharing economy companies have only been around for 5 years or less (Airbnb effectively has been available for 8 years), these are impressive numbers.

Few industries have grown as fast - especially since most of these services have been broadly available across the U.S. for only a couple of years. 

But based on the media coverage, you'd think these services hardly have any customers.

Despite the impressive numbers, the press has been reporting that the Pew survey found few Americans are participating in the on-demand economy. Some examples include: 

Fortune's 89% of Americans Don't Even Know What the 'Gig Economy' Is And only 15% have used Uber of Lyft has the key quote "Nearly 28% of Americans say they have not used any major shared or on-demand platforms." Somehow the fact that 72% reported using on-demand platforms escaped their attention.

Most Americans Don’t Know About Ride-Sharing and the ‘Gig Economy’ from the Wall Street Journal says "only 15% of adults have used ride-hailing services." This, of course, makes it sound like having 35 million Americans (roughly 15% of adults) using a service is a very small number. 

The reality is in just a few years - Uber went live 2011 and Lyft in 2012 - ridesharing has fundamentally changed the taxi business. 

Fortune's Uber and Lyft Have Absolutely Gutted L.A.’s Taxi Industry is one of many articles chronicling how much share ridesharing companies have taken from taxis. So grabbing 15% of all adult Americans isn't so small after all.

Other articles portray the users of on-demand services as only used by the rich and well-educated. 

Quartz's Uber and Airbnb really are for the wealthy and well-educated is a good example. It says "The new digital economy is increasingly looking like it belongs to the rich and well-educated", which simply isn't what the data shows. Yes, higher income people are more likely to use these services than lower income people.

But this is true for all consumer discretionary spending. For example and not surprisingly, Starbucks sells more coffee to middle and high income people than they do to those with low incomes. 

The general media bias against the on-demand economy is understandable.

Uber's intentional bad boy image and confrontational style certainly is one reason the press doesn't like this sector. Labor issues also clearly have had an impact on how the press (and others) view the on-demand economy.

But we think a bigger issue may be that the original, utopian vision that the sharing economy would lead to a kinder, gentler and more equal economy has not come true.

Instead, we got companies like Uber. Even the early sharing economy darlings Aribnb and Etsy have turned out to be profit driven instead of just socially minded. Etsy even had the nerve to legally minimize their tax bill. 

We suspect the disappointment with how this turning out is behind much of the media bias.

We're not suggesting there aren't problems with the on-demand economy. There are and these should be covered by the media. 

But as the Pew data shows, the on-demand economy is successful and consumers of all kinds are embracing it because the services add value.

It would be nice to see more balanced coverage of these facts.

Why the Office is Still Important and Coworking is Growing

One of the most interesting trends we follow is the paradox of place. 

The paradox is place and location have become both more and less important.

Place is less important because high fidelity connective technologies allow people to communicate with anyone, anywhere.

This is why telecommuting is growing (although not as fast as many predicted), work forces have become more distributed and mobile work much more common. 

It's even enabled a small but growing number of people to roam the Earth working as digital nomads. 

But place has also in many ways become more important. This is because people and companies realize physical co-location leads to more interaction and innovation. 

The Harvard Business Review article If Work Is Digital, Why Do We Still Go to the Office? looks at this paradox from the point of view of the office.

Key quote on why we still cluster in offices:

What early digital commentators missed is that even if we can work from anywhere, that does not mean we want to. We strive for places that allow us to share knowledge, to generate ideas, and to pool talents and perspectives. Human aggregation, friction, and the interaction of our minds are vital aspects of work, especially in the creative industries.

This is also why coworking spaces are so successful and growing so rapidly. They are places where people aggregate, share knowledge and pool talents.

They're also social places, which is also important and increases the likelihood members will be happier and more successful. 

Humans are by nature social creatures. Because of this, we will continue to cluster. This means place will continue to be important even while technology makes it less important.

The paradox of place is not going away anytime soon and because of this, the coworking industry will continue to grow.

Tesla's Auto Pilot and Underground Self-Driving Cars

I had the opportunity to experience Tesla's self-driving auto pilot mode in their new Model X SUV. It's very cool and the car really does drive itself.

While in auto pilot mode the human driver doesn't need to have their hands on the steering wheel or touch the pedals. 

Sensors circling the Tesla coupled with front-facing radar and a camera mounted by the rearview mirror continuously scan the road. This allows the car's computer to automatically follow traffic, stay in its lane and even change lanes. 

The auto-pilot is impressive, but it's is not close to perfect.

Even on a short drive there were several cases where it emitted a warning beep requesting help from the human driver. The main areas where the system seems to fail are places where lanes are not well marked or shift in a major way.

For example, the system was clearly confused by a tunnel where the pavement and line markers changed that also required a merge. It also asked for help while crossing a bridge.

So the human driver still needs to be alert and ready to take over. But all in all it's very effective and no doubt makes driving more relaxing.

The systems shortcomings point out a major problem for self-driving cars. Driving is very complex and developing a self-driving car that knows how to handle every possible driving situation is an enormous challenge.

Researchers at MIT think one way to solve this is to develop underground roadways for autonomous delivery vehicles.

The Wall Street Journal's Are Self-Driving Delivery Vehicles Headed Underground? covers this effort. Key quote:

For deliveries, subterranean drones have a number of advantages over unmanned aerial vehicles, said Sertac Karaman, an assistant professor of aeronautics and astronautics and one of the developers of the robotic trike. For one, a lot of urban infrastructure–from sewers and subways to conduits for telephone, data and electrical cables–already resides underground. And then there’s the safety issue: “It only takes a kid with a rock to take down a drone ..."

The other huge advantage is an underground system would be controlled environment. This would make it much easier to create the systems needed to make the delivery vehicles autonomous.

Autonomous cars are going to happen in the future and Tesla's autopilot provides a glimpse at what it will look like and highlights how good the technology has become.

But in our opinion mainstream use of fully self-driving vehicles is still many years away.

Part of this is due to cost and infrastructure. It will simply take a lot time to replace our existing fleet of traditional cars, especially given the self-driving versions will initially be much more expensive.

Also hindering the growth of self-driving cars will be regulatory and insurance issues. 

We expect to see Tesla like autopilots become common in new cars over the next few years. We also expect to see fully autonomous vehicles more widely used in controlled settings.

But despite all the press reports claiming self-driving cars are just a few years away, don't expect your Uber to be driverless anytime soon.

Economic Uncertainty Hits Millennials; Only 1/3rd Feel They're Middle Class

The Guardian's US millennials feel more working class than any other generation covers data from the General Social Survey showing that the number of millennials (born 1980 to 2000) who consider themselves middle class has fallen from 45.6% in 2002 to 34.8% in 2014.

This is part of a broader trend of fewer Americans in general seeing themselves as middle class. In 2014 we reported on a Pew study showing only 44% of Americans consider themselves middle class, down from 53% in 2008. So it's not just millennials.

We cover the reasons for this shift in detail in our Economic Uncertainty section.

But the quick summary is stagnant wages, increasing costs for housing, healthcare and education and the hollowing out of middle wage jobs. 

These factors are making people very nervous and even scared about the future. Key quote from the Guardian article from a millennial who's very nervous:

“I’m definitely scared, mostly because I’m paying so much for myself and for my student loans, so I can’t put that money into a nest egg,” she said. “How will I ever be able to put down money for a house? How will I be able to afford a wedding?”

This quote points out one other trend of note - weddings have become way too big a deal and way too expensive.

But I digress. 

But since I'm digressing I'd like to point out that the General Social Survey is an excellent source of attitudinal trend data on Americans.

Run by the NORC project at the University of Chicago, it's been conducted every two years since 1972. We refer to it often and our managing partner even worked on the GSS at one point.

Back to economic uncertainty. We believe it's one of the most important trends impacting business and society.

Teens Less Tied to a Specific Gender

JWT's Intelligence's Gen Z goes beyond gender binaries covers research showing that today's teens (Gen Z) are more open-minded than older generations when it comes to issues of gender and sexuality.

Key quote on the growing view by teens that gender is not binary nor fixed:

Fifty-six percent of 13-to-20-year-olds said that they knew someone who went by gender neutral pronouns such as “they,” “them,” or “ze,” compared to 43 percent of people aged 28 to 34 years old. Over a third of Gen Z respondents also strongly agreed that gender did not define a person as much as it used to.

The study also found that Gen Z is flexible in terms of sexuality. Only 48 percent of Gen Zs identify as exclusively heterosexual and about one third indicated that they were bisexual to some degree.

This is substantially different than millennials, 65% of which reported being exclusively heterosexual. BTW, other studies have shown over 90% of baby boomers report being heterosexual. So there's clearly a generational trend going on.

The shifting view of gender is happening in part because the Internet makes it much easier for people to learn about and explore gender alternatives. Key quote from a Broadly article on the study:

"I think the internet plays the greatest role in the self-discovery process today," they said. "Young people have more access to information and to other people than ever before. Marginalized folks are building communities and platforms online and are talking about their everyday experiences on public forums. I can't tell you how many times someone has written something and I think, Oh my God, that's a real thing? That's not just me? There's a name for this?"

Now that there are terms to describe varying identities, more and more people are realizing they fit into another box or no box at all.

Below is a slide (click to enlarge) from the JWT article listing most of the terms in use to describe non-binary gender alternatives.

The shifting view of gender is an important social trend that will impact the economy in multiple ways. JWT, for example, is studying it because of its impact on shopping.

Only only 44 percent of teens said they always bought clothes designed for their own gender, versus 54 percent of millennials. I won't bother looking up the data for baby boomers, I'm confident that generation is mostly buying gender specific clothes.

But shopping is not the only area that will be impacted. Gender and gender identities are woven into much of our society. Changes in how gender is viewed will have a wide range of effects.

The Stunning Growth of Small Business Globalization

Every so often a report comes across our desk that makes us go "wow!". McKinsey's Digital Globalization: The new era of global flows is such a report.

It claims that "soaring flows of data and information now generate more economic value than the global goods trade."

That's a pretty stunning statement, but not the one that got us to go "wow". 

What got us to go "wow" is their view of the growing role small businesses are playing global trade. Key "wow" producing quote:

... the share of exports by large multinational corporations dropped from 84 percent in 1977 to 50 percent in 2013. Companies with fewer than 500 employees accounted for 97.8 percent of all identified US exporters and 97.2 percent of all identified US importers in 2011. The number of US exporting entities with fewer than 50 employees, in particular, has grown more rapidly than firms with 50 to 500 employees.

The reason for this explosive growth in small business globalization is, of course, the Internet. Key quote:

Small businesses worldwide are becoming “micro-multinationals” by using digital platforms such as eBay, Amazon, Facebook, and Alibaba to connect with customers and suppliers in other countries.

The other side of this is global customers are increasingly buying things from companies not located in their home countries.

The study chart below (click to enlarge) illustrates McKinsey's aggressive forecast for cross border B2C commerce.

It's not just small employer businesses that are expanding internationally. The report stresses that individuals and the self-employed are becoming increasingly globalized.

This is echoed in data from the MBO partners State of Independence studies. These show over 2 million U.S. independent workers are exporters of services or goods. 

While we were wowed by the extent of the growth of small business globalization presented in this report, we weren't really surprised.

Back in 2008 we forecast that by 2018 almost half of U.S. small businesses would be involved in global trade. The reason we believed this at that time is similar to McKinsey's explanation - the Internet was making trade so much easier.

Shortly after we released that forecast the world fell into the Great Recession, so it didn't look too promising. Now, if anything, it looks like that forecast was low.

For those who don't want to wade through McKinsey's 128 page report or even their 28 page summary, these two articles provide a good overview:

What Happens When Global Trade Goes Virtual - from Bloomberg View

These Charts Show How Globalization Has Gone Digital - Huffington Post

Jobbatical Raises $2 Million to Democratize Expat Assignments

Jobbatical is a startup online talent marketplace that connects people looking for short term experiences combining work and travel with global employers offering short term gigs. Their tagline is:

Travel. Work. See the world. Connecting talented professionals with inspiring career adventures at startups around the globe.

In other words, they provide access to expat assignments. 

In the past expat assignments mostly went to a small number of employees at large corporations. Jobbatical is creating a marketplace that democratizes access to these jobs.

The company just raised $2 million in venture funding from powerhouse early stage VC Union Square Ventures and others. Key quote from USV on how they see the opportunity:

The specific opportunity here is an interesting one: the rapid global shift towards internet-based businesses made tech startups a strategic priority for dozens of countries around the world and venture investors are putting more capital to work in increasingly diverse geographies. So the number of properly capitalized tech companies outside of gravity centers like San Francisco, New York and London is skyrocketing but the bulk of talent remains concentrated in these saturated locations (or looking to move there).

Jobbatical is redistributing that talent more evenly around the world with a proposition that’s as daring as it is reassuring: work elsewhere – anywhere – for a year. It’s a simple message that has earned the company a talent pool of over 30,000 people looking to take jobbaticals and over 1,200 companies in 40+ countries looking to hire them.

Another interesting angle comes from another of Jobbatical's investors. Key quote from a Tech Crunch article on the funding (which playfully includes "catch me if you can" in the article's URL):

“The world of work is changing fast, and Karoli’s vision of millions of people one day soon taking 7-to-10 ‘Jobbaticals’ over 10 years, instead of working a single job over the same period, is one we wholeheartedly share,” he says.

We've covered the digital nomad trend and jobbatical in prior posts and there's clearly a rapidly growing number of people who want to travel and work outside of their home country. 

We often read in the press dire predictions about the future of work. And there are definitely reasons to be concerned.

But the rapidly changing world of work is also creating an array of new opportunities and Jobbatical is an exciting example.

The Continued Shift to Renting

The real estate company and website Trulia recently released the report From Own to Rent: Who Lost the American Dream? 

It covers the ongoing growth in the percentage of Americans who rent instead of owning their home.

The key finding, which is shown in the report chart below, is the share of U.S. households that rent increased from 36.1 percent in 2006 to 41.1 percent in 2014.

The increase in renting was most pronounced among millennials. 

The share of renters between the ages of 18 and 34 increased from 62.5 percent in 2006 to 71.6 percent in 2014. This was in large part due to older millennials. Key quote from the report:

The younger 18-25 year-old group only saw a 5.9 percentage point jump in renting from 2006 to 2014, while the older 26-34 year-old group saw a surprising 10.9 percentage point jump. Traditionally, young adults have become first-time homebuyers as they grow older and have advancing in their careers and incomes. This suggests that the fundamental shifts in the economy (job loss, low-income growth, diminishing affordability of homes) may have caused the increase in renting for those in the 18-34 year-old group. 

But renting is becoming more common in general. As the charts below show, renting has increased across all income and ethnic groups.

The rise in renting is part of the broader shift away from ownership in general.

Don't get me wrong, we're still going to own a lot stuff.

But economic uncertainty and volatility is leading to businesses and consumers to become more agile and flexible. This is leading to a shift away from fixed costs and fixed assets.

The increase in renting is just one example of this trend playing out.

See our Economic Uncertainty section for more on this shift.