Pandora, Zipcar, Zynga: The Dangerous Lives of First Responders
Pandora Media (P), Zipcar (ZIP) and Zynga (ZNGA) are extremely popular services now, especially with 20-somethings uninterested in the detritus and expense of owning stuff. These companies, as visionary investor Mary Meeker and others have pointed out, are the forefathers of a growing “asset light” lifestyle, where people prefer accessing music, cars, games and other desires via smartphone to actually buying the physical objects. So why do investors have so much trouble making money in them, a question prompted by a stock chart?
It’s a pertinent question for all investors because this sort of cultural sea change typically creates incredible wealth in the stock market. Remember Microsoft (MSFT) pre-PC adoption, or Nokia (NOK) when shoe-sized cell phones first started killing pagers? During those heydays, each company returned investor money 10-fold in five-year periods. Or Google (GOOG) at the cusp of the Internet boom, when investors’ gains were more than 300% in a couple of years? Some of today’s young companies will, too, quickly build their investors’ fortunes by correctly gauging the profit opportunities in the current trends.
This particular shift -- the move from physical to mobile – is a massive economic change accelerating in pace, according Meeker’s latest “Internet Trends” presentation. Sales of tablets and smartphones will outstrip PC sales in a matter of months, barely five years after Apple (AAPL) launched the industry with the first iPhone. Sales of iPads are growing at three times the rate iPhones did at this stage of their incredibly successful launch. Mobile Internet traffic has gone from almost nothing at the beginning of 2010 to about 10% of all Internet traffic now. And the movement is still in its infancy. Four-fifths of mobile phone users, for example, have yet to upgrade to smartphones.
All of that bodes very well for an investor who can correctly spot the companies with the moxie and the money to emerge as leaders in the new world. But in this shift, as in movements of the past, the winners long term won’t necessarily be the companies that got there first. Remember MySpace before Facebook (FB)? Napster before iTunes? These were gloriously visionary companies crushed by the revolutions they sparked. They failed not because they were ahead of their time – they were beloved in their moments – but because as early adapters, they had no perfect business model to follow. In other words, they made mistakes and worked out the kinks, and as a result, the competitors that came later were better prepared for long-term success.
This is where Pandora, Zipcar and Zynga stand today: on the iffy, low-side of profit-building even as the future of their types of services remains pretty certain. In other words, they’ve created new industries by taking on the costs of the hard assets for consumers – the music licenses, the auto purchases, the game consoles and software -- but they haven’t found ways to sufficiently collect for those services yet. Pandora and Zynga’s profit problems are exacerbated by an incredibly fast shift by customers to access their services via tablets and smartphones. Getting decent profit margins on these platforms has flummoxed hundreds of companies ranging from Facebook to Google. Google, even with all its cash and years to prepare for this mass move to mobile, saw its profit margins tank last quarter because more people accessed its search engine without PCs.
So will our trio of trailblazers here be the ones that figure it out and make their investors rich? Or are these simply the ones that will take the bullets for the start-ups that follow them? We don’t know yet. But at this rate, it may not take a long time to find out.
Dee Gill, a contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine.
Filed under: Company Analysis