Incumbents Hedging with their Disruptors
Hedging in Air Travel
Cheap oil has been a blessing to airline profits, typically offsetting hedge losses because fuel comprises about a third of airlines’ operating expenses. Southwest earned $608 million in the first quarter of 2015, and United Airlines posted a $1.19 billion profit. Hedging can insure against soaring fuel costs.
When oil prices crept up in Spring 2015, locking in fuel prices again seemed smart until July 2015 trading reversed the rise.
Hedging of an essential commodity is a wise practice in any industry. However, lately, we are seeing incumbents invest in potential disrupting companies as a form of a hedge.
Visa — Square
Back in 2011, Visa, the 58 year old multinational financial services corporation which has a 38.3% market share of the credit card marketplace and 60.7% of the debit card marketplace in the United States, invested in Square.
Square, the mobile payments company which allows a merchant to process credit/debit cards through the phone’s headphone jack, at the time was processing $2M a day.
Visa must have seen that Square was doing something really unique, would eventually hurt them if they didn’t adapt. Enabling any merchant, no matter the size or business type to accept a card payment, rather than only cash, was the way of the future.
By partnering with Square, Visa ensured a land grab opportunity, where Square would not be able to form a unique partnership of this sort with other credit card companies. For Visa, the investment gives the company access into the innovations taking place within the company and the mobile payments industry. In February 2011, Visa published a glowing post, praising the startup’s product as a “big deal.” Back then, it was thought that Visa could be looking to partner with the startup or even acquire it.
Ford — Getaround
With Uber raising ~$10B and Lyft raising ~$2B, a lot of entities are shorting car ownership. But this would not be happening anytime soon.
About 17.5 million cars and trucks were sold last year, overtaking the 17.3 million sales in 2000 and far outpacing the 10.4 million sales in 2009, when taxpayers paid billions to bail out the bedrock of America’s automotive might.
This was aided by low gas prices and a strengthening economy marked a banner year on American roads.
However cheap gas and a strong economy is not permanent. Ford Motor made an investment in Getaround. Ford is the second-largest U.S.-based automaker (preceded by General Motors) and the fifth-largest in the world based on 2013 vehicle sales. Part of the deal states that Ford Credit customers will earn extra money each month by sharing their financed vehicles with pre-screened drivers in Getaround’s community. In turn, Getaround renters benefit from having convenient, affordable access to Ford cars, trucks, and SUVs.
Getaround, the car sharing app, promises “a world with fewer cars, without traffic jams, and less pollution.” With the two companies incentives completely at odds — Ford wants to sell more cars, Getaround wants to have a fixed amount — a partnership where both parties win, works out.
Getaround gets instant credibility by partnering with a 112 year old established company, and Ford ensures and incentives that it gets a large piece of that “fixed” pie.
Investments by incumbents into possibly disrupting companies usually fall into two camps: 1) hedging a possibly doomed fate for the incumbent or 2) buying the solution after performing their make-or-buy analysis.
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