CHAPTER 7

Asset-Less Business Models

“The four largest companies today by market value do not need any net tangible assets. They are not like AT&T, GM, or Exxon Mobil, requiring lots of capital to produce earnings. We have become an asset-light economy.”1—Buffet told 40,000 shareholders in 2018. The four companies he referred to are Amazon, Apple, Alphabet, and Facebook and they represent about seven percent of the total market value.

However, the asset-less business model was popularized not by these four companies. It is Uber and Airbnb that made asset-less the symbol of the new economy. The two companies dominate the business news because their business models and practices challenge all traditional business assumptions and the entire regulatory foundation. How did an asset turn into a liability when it comes to business growth? Traditionally banks have financed companies’ growth by securing loans with assets. But many asset-less companies have raised millions of dollars without having anything to offer as a security. Gigs versus employment? Licensed cabs versus freelancers? International sales and profits taxation on companies that have substantial sales without local operations? These and many more questions have turned the asset-less business model into a public debate about the future organization and regulation of business.

Unlike the big four, Uber and Airbnb dismantled the very foundation of the traditional business models—asset ownership and employment, in a way that made it obvious to everyone—the businessman, the employee, the regulator, and society at large. They showed that business as usual could be transformed in an unexpected way and that while society was ready to take on the transformation immediately, the legal and regulatory environments were not quite there to support the transformation. The questions and debates fueled the news and served both companies quite well as it is free advertising. Reading so much about Uber and Airbnb makes anyone willing to try them.

Some people call this model the “sharing economy” as people who rent their private apartments on Airbnb “share” their personal property and lifestyle with others. They let strangers into their homes. But as some analysts have pointed out, “sharing” shows the social effect while ignoring the economic effect.2

JP Morgan Chase categorizes the economic effects of Uber and Airbnb in the following way. Uber is a labor platform that mobilizes people to perform a task or a service and Airbnb is a capital platform where people trade assets utilization.3 Yet, in both cases the participants bring the assets and do the services. The Uber driver brings his car into the platform and performs the service. The Airbnb apartment owner maintains the property. Prior to Uber and Airbnb, the companies providing short-term rentals had to own and maintain the assets that they rented.

In the asset-less models the excess capacity that individuals own is being put into a previously unintended use in order to produce income. The person who bought a car for personal use did not purchase it with the intent to drive for Uber. Uber just created an opportunity that previously did not exist, which changed the mindset of many car owners. Buying an apartment to live in is rarely done with the intent to use it also as a short-term rental. People typically buy either a personal or an investment property, but Airbnb blurred this line. The economic driver for the changing mindset is the extra income. Everyone needs a little extra money, and if it is easy to earn, why not do it?

This economic windfall is changing the social and individual preferences for property ownership and usage. More and more people are starting to think of dual usage of every asset that they buy. As statesideinvestor.com projects: “It’s 2050, and we don’t think of our spaces as office buildings, retail buildings, residential or hospitality buildings anymore. It’s all about maximum utilization, and you can rent space for work, living, or vacationing. It’s all lumped in.”4

Such preference for maximum utilization impacts what people purchase and how the purchased assets are financed. The extra cost of a larger apartment or a better car that can be put into a dual usage plan can be financed through the extra income from their part-time commercial utilization in the gig economy. Hence, the impact of the asset-less business models is not limited just to the way businesses operate and to how employment is structured. The effects have spread to how personal property-related decisions are being made. These personal decisions will impact how banks lend money, how properties are managed and maintained, how apartments and houses are designed and furnished, and many more. When the lines between personal and business use are blurred, many asset-related decisions change and the changes create unforeseen new business opportunities and new emerging business ecosystems.

The digital giants who have mastered the asset-less business model know how to create easy-to-earn extra income opportunities that draw in people and drive their phenomenal growth.

Indicators for Scale and Scope Potential

Success in the start-up world lures more investment both into competitors and into innovative alternations of the core business model. Investors believe that if there is one unicorn, there will be another, and even a small unicorn is a good investment. Alternative use cases are even more appealing as replication is faster than invention. Hence, we see over and over new start-ups that vary the goods, services, and other parameters of a successful new business model. Some succeed but many fail, as new business models are like cooking recipes. Changing one ingredient can spoil the meal.

What are the core factors that determine the scale and scope potential of an asset-less business model? This question is particularly relevant in the digital economy where the first mover advantage and the winner-takes-it-all effect limit the potential of new entrants as we have discussed earlier.

There are four key factors that determine the scale and scope of an asset-less data-driven model and every entrepreneur or company contemplating to launch or diversify by deploying an asset-less business model should consider and address the challenges and advantages as they relate to each factor:

• • Type of Asset: What is the type of asset that can be offered in an asset-less business model? As we discussed earlier, the choice of selling books versus selling wine online might have made all the difference why Amazon succeeded.
• • Asset Density: Are there enough assets to be shared within the chosen markets? Do you have enough rooms or apartments to rent in any given city to make it worth for prospects to even look up availability on your website?
• • Earning Potential: Are there enough suppliers willing to share their assets to earn the extra income? Is the extra income sufficient and easy to earn in order for suppliers to jump onboard of an asset-less monetization platform?
• • Ecosystem Pull: Would an ecosystem form around the platform and pull additional participants who may offer complimentary services? In some countries, car owners rent their cars to Uber drivers. In other countries, property managers take over the Airbnb management on behalf of the owners for a small fee.

These factors can be mapped to two dimensions that determine the business potential. “Easy to Monetize” is the supplier dimension, because the less effort it takes to rent out an asset or to put it into an alternative use, the more likely it is that many people will do it. “Easy to Get” is the demand dimension because the easier it is to book a room on Airbnb, the more likely it is many people choose to do it. Within this framework it can be illustrated how the types of asset, density of assets, supplier incentives, and ecosystem impact the scale and scope potential of the asset-less business.

Figure 7.1 shows why some asset-less short-term rental model businesses are more scalable and expandable than others.

Figure 7.1 Monetization opportunity matrix: Asset-less business model

The benchmark for success is Airbnb and Uber. But adopting the Uber success model to other types of assets did not always work. Two companies (AUTOnCAB and HAY BOB) failed to succeed as Ubers for rickshaws. Even though they launched in cities where rickshaws were widely available and used routinely, the businesses failed because they did not make it any easier for the rickshaw operators to monetize their assets. Rickshaws were easy to get to begin with, so the model failed because it was not easy to monetize. A rickshaw hailing app did not provide any more easy income earning opportunities to the rickshaw drivers or riders.

Similarly, companies like BlackJet that tried to sell or rent seats on private jets failed because they did not address the “Easy to Get” dimension. While it is easy for airplane owners to offer their excess capacity, the scheduling of a flight is extremely complicated. A commercial jet has a fixed schedule. An Uber in Manhattan is a few minutes away from the passenger. But a private jet has neither a fixed schedule nor can be hailed at a moment’s notice. The jet’s location can change before the schedule and make it very uneconomical to pick up the passenger from another airport.

Short-term peer-to-peer car rentals pose many small inconveniences that make the model hard to operationalize. Most commercial car rental companies have convenient locations for travelers to pick and drop cars. But private cars stay at peoples’ homes. The chances of having a sufficient supply of cars near an airport and having convenient transportation to the pickup location are very slim. Hence, it is quite difficult and inconvenient for customers to use the service. Given the inconvenience, consumers consider the alternatives—renting a car or riding Uber. These are often easier substitutes that impede the success of the peer-to-peer car rental model and limit its scope.

Finally, bikes and scooters are extremely difficult to share as there are far more inconveniences in sharing small equipment than big equipment like the personal cars. Thus, most bikes and city scooters short-term renting companies own and maintain the assets. There are over 50 start-ups in this category that use the data and analytics to optimize the utilization of their own assets, and none that does peer-to-peer sharing.

Mapping a business proposal to the Monetization Opportunity Matrix is not meant to discourage companies from starting an asset-less business. Just the opposite, it shows clearly the good and the bad in the way of making a successful business. These obstacles and challenges that can make or break a new business model are simply opportunities for innovation. Like Zappos invented a way to assure its customers that it is regret-free to buy shoes online, so some companies will invent ways to make asset-less work for personal cars, planes, boats, and other types of properties. Creativity and innovation work best when the constraints are clearly understood.

Spacious (spacious.com) is a case in point. Just when you think that it is hard to find a new short-term rental opportunity, Spacious figured out how to transform restaurants into co-working spaces. There are plenty of empty restaurants during the day that offer better and more diverse ambience than the established co-working spaces. People like to work in cafes, so why not restaurants if they are accessible. For the restaurant, the extra income is not limited just to rent. Coffee beverages and snacks can be served too. And if you work there, why not schedule the business lunch there too? Mapping the model to the opportunity matrix reveals a high potential. The asset type is good, the density of restaurants is high, the earning potential for restaurant owners is attractive, and an ecosystem can evolve.

Why Is the Asset-Less Model So Advantageous?

The asset-less data-driven business model offers three district advantages that explain the rapid growth of the companies that successfully plan and execute it.

First, it bypasses the accumulation of physical assets. If there are enough people willing to exchange their excess capacity for money, your company will get very big very quickly. Whether you are growing a fleet of cars or rentals across the world, the path to market dominance is very fast. It is contingent only on good marketing and flawless execution. But in the presence of a large number of underutilized assets, even marketing is easy because who does not want to earn extra money.

Second, the model eliminates the maintenance and support of these assets. The offered assets come with support and maintenance built-in, as their owners are directly responsible for it. The condition of the asset reflects on the owner’s reputation, which ultimately determines the owner’s earnings potential within the system. The transfer of the support and maintenance responsibilities to the owner makes the organization not only asset-less but also organizationally light, as it eliminates many functional departments, divisions, and corporate hierarchies that often slow and make less efficient the entire process.

Finally, the pricing of the excess capacity is very different compared with traditional markets. Pricing in the asset-less model is both market-driven, based on the willingness of consumers to pay, and owner-driven, based on the owner’s needs and preferences. The owner’s desire to earn extra income is frequently not based on return on investment calculations or targeted profit margins, as the asset is not purchased for business or as an investment. Thus, for many gigsters the incremental income is just that—extra money, and the price is determined by how badly the owner needs or wants the extra money. In the gig economy, supply is not always constrained by cost factors. An Uber driver can accept a low fare just because the ride is on the way back to his home. A renter may accept a low rent because she is going on vacation and needs the extra cash. A restaurant has already covered its cost, so it can rent the space as co-working at a lower rate.

Why Consumers Like the Sharing Business Models?

Contrary to common business sense, it is not just the price that matters. In many cases it is the variety. Big hotel chains and big limo service companies heavily promote the consistency of their services. All limos are big black cars. All Marriott rooms have the same look and feel. This is the traditional concept of branding. The consumer must recognize the brand right away.

But humans like diversity and novelty. Psychologists have conducted many experiments and determined that slight variations do not excite the brain as much as complete novelty.5 The brain rewards us for the detection of novelty by releasing more dopamine—the “reward” chemical that makes us feel good and excited. But the traditional branding theory relies on variation and not on complete novelty. The rooms may look different, but small ques and patterns make us recognize instantly that this is the Marriott or the Hilton. But Airbnb property renters have neither branding standards nor corporate decorators, artists, and marketers. Each property reflects the unique taste and aesthetics of its owners.

Humans like to peek into the lives of other people and the shared economy gives people a chance to do exactly this. In a world where people have less time to socialize, the shared economy provides an outlet for this innate human need. When you rent a personal apartment, you see how people live. You feel more part of the city that you are visiting when you stay in a local house. You are a “guest.” You learn from the décor, the appliances, the utensils, and the neighbors how people live. Sometimes the experiences can disappoint us; other times they delight us. Yet, this makes it even more authentic as it happens in our own homes too. And it also happens in hotel chains.

The fundamental need for more unique and authentic experiences is what is on the mind of every marketer today. How do we create a segment of one and tailor products and services just for that individual? The asset-less companies seem to have stumbled by accident into what consumers crave. Consistency versus variety is the new marketing battlefield. The two approaches are represented in the two different business models which today coexist. But judging by growth and market valuations of the asset-less companies, it appears that they are taking the lead driven not just by cheaper prices but also by the innate human needs for novelty and authenticity.

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