Dear Reader,
This week in Product | Strategy | Innovation is an update on market opportunities large enough for new companies to challenge the FAANGs of Facebook, Amazon, Apple, Netflix and Google (Alphabet). These are a unique group of companies consolidating large total addressable markets with disruptive innovation. They are global and a large part of their businesses are consumer facing. They are digital, mobile and leverage artificial intelligence/machine learning throughout their operations. But the FAANGs also grabbed the low hanging fruit with disruptive innovation in unregulated or limited regulation markets.
This update also allows us to look back on some key profiles we have already covered on disruptive companies and to look forward into what is next. This also provides a lens into the innovation space required to challenge the FAANGs. Success likely requires a total addressable market of at least $2 trillion to provide an adequate opportunity with a reasonable market share.
This market size criteria alone eliminates most companies since they are going after much narrower markets. That doesn’t mean companies pursuing smaller markets cannot achieve years of very attractive revenue growth and provide valuable products and services that we need. It just means they are out of scope to compete for this elite class of companies that earn a letter within the context of FAANG with market caps currently greater than or approaching $1 trillion. Netflix is the exception with a market cap currently under $250 billion, but with attractive recurring revenue through streaming subscriptions.
These valuations are impacted by interest rates. With inflation these valuations would likely be cut substantially, but so will the valuations of many growth companies. But the market opportunities still remain for future growth. Pricing power and sustained profitability just become more important during inflation.
Three large, regulated, global vertical markets offer companies the opportunity to challenge the FAANGs. However, the FAANGs can also use these verticals to expand their own markets.
Broadly defined, financial services are the largest global market opportunity with an estimated total addressable market of $28 trillion by 2025. This market is very fragmented with Berkshire Hathaway (Insurance) and JP Morgan Chase (Banking) leading based on market caps at around $600 billion and $400 billion, respectively. This market is also heavily regulated through the SEC, FDIC and other regulatory bodies in other jurisdictions to protect financial assets.
It is estimated the global automotive industry total addressable market will reach just under $9 trillion by 2030. Considering the electrification of vehicles, this also expands the automotive industry with sustainable energy to power the vehicles. Renewable energy is a small percentage of that market today, but the global energy market spanning oil, gas, coal, nuclear, renewables & electric utilities could reach around $8 trillion by 2030. So the automotive and energy markets combined are estimated at $17 trillion by 2030. The automotive industry is regulated through the NHTSA and other regulatory bodies. Energy is regulated through public utilities, the EPA and other regulatory bodies in other jurisdictions.
The global healthcare market is likely the next largest market spanning pharmaceuticals, medical devices and healthcare services at $12 trillion by 2022. This market is also very fragmented with UnitedHealth Group, Johnson & Johnson and Roche Holdings leading based on market caps, but all are currently under $500 billion. However, Walmart, Amazon, Google and Apple are all looking to expand their presence within healthcare. CVS Health is also aiming to expand this space. Healthcare is regulated by the FDA and other regulatory bodies in other jurisdictions.
The global education market is projected to reach $10 trillion by 2030. The global entertainment and media market could reach $2.5 trillion by 2024. Real estate, construction & food/agriculture are large verticals, too. These are all viable global markets, but they do not compare to the size of the first 3 mentioned to enable Fintech, EVtech & Healthtech.
1. The market for financial services is so large with many different functions, it will be hard for any company to consolidate substantial portions of this global market. Multiple fintech companies can both disrupt the incumbents and co-exist together.
Key functions within financial technology (fintech) serve commerce, banking, lending, investing and insurance. Mobile, machine learning & smart contract technologies will likely provide the major disruptions within fintech to challenge the major financial services incumbents. Stripe and Shopify add streamlined commerce functionality to most business models with credit card and subscription services. Plaid connects many fintech apps to legacy banking accounts and services through its APIs. Circle uses stable coins and cryptocurrency for global commerce. But these companies are offering financial services primarily to businesses.
Security, mobile access and superior consumer experiences will likely be key components to scale to a $1 trillion market cap with 100’s of millions of users and a wide array of back-end services. Banking or investing alone are not disruptive enough to consolidate this market even when fees are not charged for core features. Pricing a product like insurance competitively or yield farming within decentralized finance could disrupt and provide adequate scale.
Small to medium size businesses can process credit cards, setup e-commerce, manage payroll and access capital without a credit application using Square. And Square adds to its Seller ecosystem by offering many banking and investing functions direct to consumers through its Cash App on mobile devices. Square Seller and Cash App ecosystems shown in the illustration above can also be brought together more in the future for unique value creation to build community around local commerce.
We previously profiled Square as Jack Dorsey’s vision for commerce. PayPal also provides fintech services to both businesses and consumers. Lemonade makes insurance available to consumers in minutes and uses machine learning to price policies and process claims. Coinbase offers consumers digital wallets and an exchange for cryptocurrencies.
2. The electrification of vehicles and transition to sustainable energy to power EVs are major commercial opportunities over the next decade and more.
The global automotive fleet is over 1 billion vehicles dominated by the internal combustion engine (ICE) powered by hydrocarbon fuels like gasoline and diesel. Electric vehicles (EVs) offer a disruptive threat to ICE vehicles due to electric motor performance matching an expensive sports car at a fraction of the cost, lower maintenance costs and lower carbon emissions. Volkswagen, Ford, BMW and most major legacy auto manufacturers have announced or released EVs in recent years.
Tesla has taken the EV experience to the next level with direct purchase in minutes on a mobile app or the Tesla website, a network of Superchargers for long distance travel and a micro-grid use case for residential solar energy generation and battery storage to power the home and Tesla vehicle(s). Tesla also offers grid-scale battery storage and software services to utility companies and corporations to further accelerate the transition away from hydrocarbons.
We have discussed Tesla extensively in prior updates and a recent profile on Elon Musk’s vision for sustainable energy. Tesla is on track to cross the $1 trillion market cap, but also serves as a proxy for what it takes to challenge the FAANGs. The illustration above identifies 9 unique points of innovation that Tesla is driving to accelerate the transition to sustainable energy. Key to that is the demand flywheel where every EV purchase can lead to micro-grid residential power generation with solar panels and battery storage to power both the home and EVs with limited use of hydrocarbons. Advanced manufacturing continues to lower the price of lithium ion batteries and provide even more affordable vehicle options to accelerate EV adoption. And advancements in artificial intelligence provide the opportunity to create fleets of shared autonomous robotaxis with EVs to offer affordable transportation-as-a-service as an alternative to ICE vehicle ownership. That illustrates disruption at scale.
Arcimoto was covered in a prior profile on innovation by subtraction for EVs. The Arcimoto Fun Utility Vehicle (FUV) offers a low end complement to the more traditional 4-wheel vehicle chassis for cars and trucks. The FUV is a tandem 2-seater EV on 3 wheels for local errands by consumers, but also offers uses business use cases for delivery, emergency response, leisure rentals and other applications. Tesla spanning Semi trucks and the major vehicle segments plus Arcimoto provide a global EV portfolio to eliminate the need for the majority of ICE vehicle purchases in the future around the world.
3. Healthcare is a large, fragmented market with many stakeholders and needs business model innovation as much as disruptive technology innovation to manage chronic conditions like diabetes, asthma, heart disease and cancer.
There are many challenges with healthcare. In our series on Disruptive Innovation, we discussed healthcare in [E3.3] and covered options to access services as a consumer, through employers and through healthcare providers across multiple value networks as illustrated in Fig E3.3-1. In that model, the level of service influences pricing and the ease of access.
Another useful model considers the innovation pillars that can be used to deliver care through these various access points. The key feature here is to define a scalable platform to consolidate a large pool of consumers on which to offer higher levels of services almost like apps on an iPhone. But what is the scalable platform? The mindfulness app Calm had 100 million downloads as of 2020 and 4 million subscribers. The number of subscribers has doubled annually between 2018, 2019 and 2020. Mindfulness is important to health, but is likely more of a feature than an adequate platform for a more comprehensive solution.
Weight loss and exercise tracking app Noom is reported to have over 50 million users worldwide. Nutrition, exercise and sleep are critical functions for health and well-being. Diabetes and high blood pressure are medical conditions impacted by what we eat and exercise. Additional virtual care with medical professionals would provide services like pharmacotherapy for weight management and additional therapies. Genomics will play a growing role in the future to guide therapy.
So what can we apply from what we have learned regarding Square and Tesla to healthcare? One example would be mobile technology that spans both consumers and professional services. Another would be value creation for the professional network with platform services just like the Seller ecosystem on Square can access capital independent of traditional banks.
And Tesla suggests a comprehensive innovation stack and demand flywheel are required to consolidate such a large total addressable market. A 3 pillar innovation strategy could start with a consumer facing pillar centered on triaging symptoms and a focus on key features like nutrition, exercise and sleep. A second pillar can add virtual care for medical consults and routine TeleHealth services including prescribed therapies. And a third pillar adds more comprehensive services through outpatient clinics and inpatient health centers. Digital, mobile and machine learning technology would link all 3 Pillars. This ecosystem spanning 3 innovation pillars can include partners like CVS Health, Walgreens and Health Systems to link provider networks.
But this 3 pillar strategy connects all services through a mobile app on something like a personally controlled health record. Health benefits are included through an employer or exchange. We also need to invest more into the general population to prevent more chronic disorders in the future. That is similar to Tesla investing in battery technology now to reduce costs later.
Teladoc Health provides a scalable proxy for the 2nd pillar with a platform to enable virtual care with licensed providers and digital medicine for diabetes, high blood pressure and behavioral health through its Livongo and other services. Livongo partnerships with Dexcom and Abbott extend diabetes care with continuous glucose monitoring. Further expansion of Livongo services with consumer directed virtual care can add the scale needed to onboard more individuals who can step up to professional virtual care as needed through Teladoc’s core services. Teladoc revenue doubled to $1.1 billion in 2020 due to the pandemic from $550 million in 2019 with approximately 50 million members.
Conclusion
Facebook, Amazon, Apple, Netflix and Google (Alphabet) have transformed consumer markets with a wide range of digital services ranging from social media to e-commerce, mobile devices, streaming services and internet search. They target huge total addressable markets and use apps and artificial intelligence to constantly improve the customer experience. They also strive to keep costs low and provide many services at no charge to the consumer with ad revenue to generate revenue.
But 3 global total addressable markets in excess of $10 trillion each remain fragmented and ready for disruption. They span financial services, EV technology to accelerate the transition to sustainable energy and healthcare. We have already covered Square for fintech and Tesla for EVtech, but healthtech remains open for a dominant player. Teladoc was discussed as a potential healthtech disrupter, but with only $1 billion in 2020 revenue, it has a long way to go to scale into a dominant player.
Google, Amazon and Apple have all expressed that healthcare is a strategic area of interest. Amazon is expanding its Amazon Care virtual care for businesses after success with its own Amazon employees during the pandemic and added the Halo health & wellness band to what it is already doing with Alexa to interact with consumers. Amazon also offers pharmacy services through its PillPack acquisition. Apple has added class II FDA clearance for ECG monitoring with the Apple Watch to detect atrial fibrillation and added pulse oximetry in the most recent model.
Google and the Mayo Clinic have partnered to drive healthcare innovation and cloud computing. Google is also exploring its own electronic medical record tool. Google is also very consumer focused with Google Fit, FitBit and internet search. Google and Teledoc could partner to scale consumer and healthcare provider solutions that extend capabilities outside the hospital, but still connect all data to providers.
We will explore Teladoc Health further in a future profile. Moderna also offers the opportunity to expand mRNA therapeutics beyond COVID-19. And genomics further expands healthcare innovation with gene editing, targeted therapeutics, molecular diagnostics and other opportunities. But the key questions are what defines the “iPhone” equivalent for healthcare and what are its core “apps” that can include providers to drive early adoption and eventually consolidate the market?
Best,
Stephen
Nothing in this post is intended to serve as financial advice. Do your own research. I’m long GOOG, AMZN, TSLA, SQ, FUV, TDOC and MRNA mentioned in this update.