In 2011, Marc Andreessen famously quipped, “software is eating the world.” Andreessen could have been talking about startups like Uber and Airbnb, which have disrupted and upended traditional business models in their respective industries. Both companies have generated a lot of opposition from established players as well as from authorities scrambling to put legal framework in place to regulate such disruptive startups.

The Rise and Rise of Software-based Businesses

To start with, the cost of launching a tech business has fallen considerably over the last 10 years. According to the Wall Street Journal (WSJ), the cost of running a basic Internet application 10 years ago was about $150,000 a month. Currently, you can use Amazon’s cloud computing services to run the same application at a cost of about $1,500 a month. Secondly, more than two billion people can access the internet today, whereas ten years ago this number was nowhere near the one billion mark. Spurred by low start-up costs and a large pool of online consumers, entrepreneurs like Mark Zuckerberg, Jan Koum, Larry Page and Sergey Brin have used software to create virtual behemoths. This environment has also allowed Uber and Airbnb to become leaders in their industries.

Enter Uber and Airbnb

Unlike traditional players in those industries, Uber and Airbnb rely on software-driven business models. For example, although Uber is in the taxi business, it does not own a single taxi. Instead, it uses powerful computer algorithms to match drivers and people who need cabs. Airbnb on its part uses the same approach (software) to allow people with spare rooms to rent them out to tourists/businesspeople. Both of these companies facilitate the use of underutilized resources. At stake are billions of dollars of revenue, and incumbents are fighting to prevent technology­-driven startups from eating their pie. Enchanted and enticed by their disruptive business models, Silicon Valley venture capitalists now value Uber at $41 billion and Airbnb at $20 billion.

Challenges

Both companies have rattled established players and authorities. In New York, Airbnb is challenging a subpoena to turn over information about people who list apartments/houses on its website. New York’s State Attorney, Eric Schneiderman believes that these people violate the law by acting as unregulated hotels. In addition, Schneiderman is investigating Uber for engaging in illegal practices such as price­ gouging.

Uber is also fighting accusations in cities like Berlin that its drivers and their cars do not meet minimum safety and insurance requirements. Its Paris offices were raided earlier this month by police as part of an investigation into its smartphone application, which has allegedly been allowing customers to rent cars with non-professional drivers at the wheel.

Future Prospects

These challenges are unlikely to dampen Uber and Airbnb’s march to industry dominance. Recently, both companies announced they would make it easier for corporate honchos to file expenses through Concur (corporate software for filing expenses). This means they are now targeting business customers to generate revenues.

Uber is now operating in 250+ cities in 50 countries. Recently, New York’s Taxi and Limousine Commission reported that the city has 14,088 Uber cars, compared to the 13,587 licensed yellow taxis – a notable achievement for such a young company. It should be mentioned, however, that passenger journeys in yellow cabs number approximately 15 times more (440,000) than in Uber cabs, partially because a Uber car is operated by one person throughout the week, whereas yellow cab companies normally have drivers working in shifts, 24 hours a day.

Fast Company recently speculated that Airbnb would become the world’s largest hotel chain, overtaking Hilton Worldwide and InterContinental Hotels Group, without owning a single hotel. Given the nature of the service offered by Airbnb, however, the mid- to lower-priced end of the market is most likely to be affected by the competition. A recent Boston University study on Austin, Texas – home to the world’s highest Airbnb supply – found that a 10% rise in Airbnb supply ultimately translates into a 13% impact on hotel revenue in the city. The report also concluded that hotels not catering to business travel and ones at the lower-priced end of the market have been the worst affected.

Vijay Dandapani, president of Apple Core Hotels in New York, last year admitted that there was a direct relationship between the decline in revenues of his hotel group and the rise in those of Airbnb. Meanwhile, Richard Habeeb, president and COO of First Hospitality Group, believes Airbnb and others are stealing business from his hotels, although he has not been able to quantify the extent of loss.

The higher-priced hotel groups seem less concerned. As Christopher Norton, executive vice president of Global Product and Operations of the Four Seasons, recently pointed out, customers expect a different level of service that is “more sophisticated, detailed and skillful” compared to that of Airbnb. IHG chief Richard Solomons also mentioned the difference in food control, security and the safety of the buildings, which are largely absent when booking with Airbnb. Nonetheless, just last week Airbnb announced that it would accept bookings in Cuba. There are already more than 1000 places to stay in Cuba listed on Airbnb.

In conclusion, Uber and Airbnb’s software-driven business model has revolutionized the taxi and hotel industries. Tomio Geron, a Forbes contributor, reckons these companies are here to stay because millennials, the largest-growing economic demographic in America, have embraced sharing, borrowing, and renting. A study carried out by UC Berkeley researchers found that people who use Airbnb rentals tend to stay longer and spend more money in the cities they visit. Still the question remains as to whether valuations are getting too high.