Creating equity value in a smartphone-saturated world

By Mark Odendahl and Brad Erickson
Published September 21, 2021 | 16 min listen

In the first episode of the Industries in Motion podcast, RBC Capital Markets internet analyst Brad Erickson explains how internet marketplaces are going far beyond traditional categories and why companies need to alter their models to grow their business in innovative ways.

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Historically, equity capital creation for internet firms was driven by expanding user bases. As smartphones proliferated, they effortlessly acquired more and more customers. But today, the world is reaching smartphone maturity and companies need new ideas about how they can grow their business.

Marketplaces all over the internet

For internet analyst Brad Erickson, a growing trend in the industry is the expanding reach of marketplaces. In the early days of the internet, marketplaces like Amazon or eBay dealt in horizontal ecommerce, where products were small and easily shipped, and supply was fragmented. But as internet use broadened, every vertical started attracting marketplace builders, from travel to home services and transportation to food delivery. 

“Looking forward from 2021, you're starting to get even more nichey in terms of the markets. At the recent RBC Capital Markets Private Tech Conference, we had companies doing really cool things in and around farming and the food supply chain, reinventing how people buy car insurance and transact there. So lots of interesting new vertical opportunities that, I think, digital marketplaces are able to capture value in going forward,” Erickson says.

Collaboration and consolidation

This creates opportunities, not for mega tech firms to sweep through every vertical, but for small and mid-caps who know the market to build small, specialized marketplaces. It also offers avenues for consolidation. For example, Uber is a key example of a company starting in one marketplace – ride-sharing – and jumping to a complementary one – food delivery. Now is the time for other firms to spot this kind of synergy in their business and look for new verticals for expansion.

“There are certain verticals that I think just have naturally synergistic sort of usage characteristics that could lend towards this kind of convergence we've talked about. And I guess the big example that I've been sort of focused on lately is in and around real estate, home services, and then also to some degree, travel. My thought is there's a lot of interesting companies in and around those three spaces in the internet marketplace landscape. What if one or two or a few of them got together and sort of compressed buyer characteristics to be able to leverage a better customer acquisition costs and sell across multiple end-markets?” Erickson asks.

Of course, in the tech space, particularly with the new head of the Federal Trade Comission, regulation on consolidation could be tightening. While it’s unlikely to hit small and mid cap players, M&A for mega cap tech companies is probably off the table for now. Indeed, it’s more likely that the FTC would break these firms up than let them consolidate. But there’s another key trend that offers potential growth for internet firms – funnel migration.

"When you think about these large companies that have a certain amount of equity value attributable to their core business, that's why they're looking to move up and down the funnel – to create incremental equity value"

Brad Erickson, Internet Analyst, RBC Capital Markets

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The power of funnel migration

These large tech firms are experiencing market cap insecurity right now, they’ve reached a size where they’re already addressing their total addressable market (TAM) and it’s not obvious where further growth can come from. For these companies, moving up and down the funnel, from direct sales to advertising or vice versa, can change their business.

“If you are at the bottom of the funnel, you're selling books, and CDs, and toilet paper and all kinds of stuff to customers, you're getting a ton of customer signal because of where you reside. Well guess what? If you have customer signal, you can go up the funnel and sell incredibly valuable targeted performance advertising to those brands that are trying to sell at the bottom of your funnel,” explains Erickson.

“Conversely, if you're at the top of the funnel, let's say you're in advertising and you’ve got a ton of traffic, you have the best data, you have a huge funnel. Well guess what? At a certain point, you want to move down the funnel, you want to participate in more of that ecommerce again, because there's greater value that's down there that you haven't yet tapped.

“When you think about these large companies that have a certain amount of equity value attributable to their core business, that's why they're looking to move up and down the funnel – to create incremental equity value,” he adds.

The competitive edge

It’s also to beat out the competition. Today, any company with a disruptive model or a really strong value proposition has basically unlimited access to capital because of the current cost of capital and the success of the venture capital community and private equity, particularly over the last decade.

Erickson points out; “These companies can come out and hit on your customer, and that's why we get back to that whole idea of, you have to dominate customer engagement, you have to dominate the relationship you have with your customer and own that relationship super strongly. Because otherwise, the next startup that comes into your space, is going to have capital necessary to go out and try and grab that customer away from you.”



Brad EricksonIndustries in Motion podcastInternetMark OdendahlRBC podcast

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