The flaws in the app economy

Venture capital has been pouring into the app economy. New billion-plus companies are being minted all the time and smart entrepreneurs are making fortunes for the investors savvy enough to back them early. But beware: the sector looks like it's beginning to wobble. Last week, shares in online estate agency Purplebricks plunged more than 40%, and it reshuffled its management after missing its revenue forecasts. In the same week, Uber Eats, the food-delivery arm of the massive taxi company, started a price war with rivals such as Deliveroo and Just Eat, opening up its platform to lots more restaurants and cutting the fees it charges for using the service. Just Eat's shares fell 5% on the news. Over in the US, shares in Dropbox came under pressure as it reported figures that disappointed the market as more rivals pile into the online file-storage industry.

These developments may be a signal of an impending shake-out. Firms operating in the app economy face three big challenges.

Wafer-thin margins

First, margins are often wafer thin, and get competed away quickly. In estate agency, for example, the old high-street chains got away for decades with charging extraordinarily high fees for often mediocre service.Online rivals can easily undercut that.But they can also easily undercut each other.After all, there isn't much difference between one online-only platform and another one. It is virtually impossible to raise your prices and often you have to keep cutting them to remain competitive with rival start-ups busily burning their way through a ton of venture-capital money.

Traditional companies offer stiff competition

Second, all of them face competition from traditional companies and from internet giants such as Amazon and Google. Streaming music is a fantastic product, for example, and most of us couldn't live without Spotify anymore. But plenty of other companies have piled into the market it largely created. Amazon is spending a fortune on its own streaming service, and so is Apple, and those are both firms with almost unlimited money to spend. The food-delivery companies face the same problem, and so will the taxi and online-storage-service start-ups. At the same time, old-economy rivals eventually catch up. Many of the fintech start-ups, for example, can take a slice of the market quite quickly, but before long the big banks and insurance companies come up with products of their own, and that can be very hard to match.

Winner takes all

Finally, the internet economy is often a "winner takes all" market. One company dominates the industry and everyone else is tiny. That has proved true in areas such as online retailing, dominated by Amazon; or auctions, dominated by eBay; or search, dominated by Google; or social media, dominated by Facebook. It may well be true of most apps. Economies of scale, coupled with the importance of networks, mean one company takes almost the entire industry, and we will end up with one online estate agency, one fintech giant, one food-delivery company, one streaming service, and so on. That's great if you happen to be the big winner, but it's terrible for everyone else. In the old economy, three or four major players often emerge and share the market for decades. Online, it is usually only one.

A lot of money has already been made in the app economy, and plenty more will no doubt be made during the 2020s. Investors are quite rightly buying in to that potential. But a lot will be lost as well. There will be a much larger shake-out in the years ahead, and many more companies that may look successful now will end up failing.