CHAPTER 1

The Brave New Digital World

What do the most popular and most valuable companies today have in common?

These are the companies that are household names, that permeate the news, that have become part of our daily routines and habits, and even part of our language, as some companies’ names have become verbs.

These companies:

1. 1. They have millions and even billions of users globally;
2. 2. They own their respective markets, that is, they completely dominate these markets;
3. 3. They are all young companies, founded in the last 20 years;
4. 4. They have enormous market valuations and capitalizations;
5. 5. They continue to grow at double digit rates as they expand and ­disrupt adjacent markets;
6. 6. Everyone wants to work for one of these companies;
7. 7. Finally, and most importantly, these companies do not own physical assets or if they do, this is not what drives their phenomenal success.

Some people call these companies digital giants1 because they are built and run on data. They are completely different from the rest of the companies in the economy precisely because they do not have and do not build their business models and their competitive advantages on physical assets. In fact, they view assets as a liability because physical assets take time and energy to be managed. Physical assets consume expensive management resources which can manage only a limited number of assets. Physical assets are viewed as a distraction from the core business. They are like an old car that is not only costly to fix but also needs fixing quite frequently.

This is not an entirely new way of thinking. When Warren Buffet was starting a family in 1955, he refused to buy a house contrary to “common sense.” He was an investor and his reasoning was quite simple and logical:

In Omaha, I rented a house at 5202 Underwood for $175 a month. I told my wife, “I’d be glad to buy a house, but that’s like a carpenter selling his toolkit.” I didn’t want to use up my capital.2

While for many people a house is viewed as an investment, for Buffet it was a liability.

Like Buffet, the digital giants avoid conventional wisdom and do not focus on physical assets—you do not have to buy physical assets to create equity! Instead, the digital giants focus on business models that bypass all together the accumulation of assets, which traditional companies consider to be the biggest barrier to entry for new competitors in their controlled markets. The digital giants are focused on DATA and its magical ability to create value out of itself.

Each one of the digital giants has invented its own data-driven business model. Each one has figured out how to collect or use other people’s data and package or repackage these data as useful information that can be sold. But the model to monetize these data is not always so easy to invent.

This is why it is hard for traditional companies to transition to the digital economy. This may just be a coincidence and habit as we are used to creating business models that are tied to physical goods.

The need for search became instantly obvious once the first web pages were launched. You sit in front of a computer screen, you are reading a page, questions arise, you know there are thousands of pages on the web and many of them may contain relevant information to your questions. How do you get to these pages? It is not difficult to guess that you need a search function. And yet the need to search cannot be monetized directly.

The consumer sees search as a utility, as something that just has to be there to make this entire Web-thing useful. Without it, the World Wide Web is just a walled garden restricted to what you learn from hearsay and what your memory can retain.

And there is a second issue. How do you charge the consumer for searching the web? Charge them for every search or a flat monthly fee? Consumers hate variable costs, that is, those that vary based on usage or how many searches you perform. Consumers like to have more predictable expenditures that they can budget. This is why even gas and electrical utilities switched to plans that stabilize the monthly payments. Consumers did not like the difference between winter and summer monthly utility bills as it disrupted their budgets and hence the utilities had to invent new regular monthly plans. On the other hand, charging a monthly fee for search leaves too much money on the table, as peaks of usage on word searches are hard and expensive to predict. Hence, no consumer wants to pay for search and no pricing model is easy when demand is disaggregated based on the use of words.

These are the big differences from the physical world in which a need can be monetized directly. The need to sleep has created and continues to create different companies that produce beds, pillows, night lamps, blankets and duvets, sleeping accessories, and electronic gadgets. These products directly satisfy needs and consumers pay directly for the products.

Data-driven companies almost never monetize needs directly because of the disintermediation of the demand or the ownership of the resources. Google sells the words from dictionary to advertisers. Facebook sells information about relevant posts to advertisers. Pinterest sells relevant information about our interests and hobbies to advertisers. I do not mean that Facebook and Pinterest sell the actual content which would violate the user’s privacy. They sell demographic and psychographic information associated with posts and users that allows advertisers to target particular audiences more accurately. Airbnb, Lyft, and Uber sell a service directly to consumers through an indirect use of resources, because they do not own the cars that provide the service or the properties that they rent. In the data-driven economy the need, the payer, and the ownership of the resources are frequently disintermediated.

Data-driven business models typically leverage information to align multiple different needs to achieve a monetizable business model. Lyft and Uber satisfy two consumer needs—(1) the basic need to find a ride and (2) the basic need of some people to earn extra income. And so do Google, Facebook, and Pinterest, who align basic human needs to find information and share experiences or hobbies with friends, with the need of advertisers to reach targeted audiences.

Throughout this book we will explore how the invention of data-driven business models propels the fortunes of companies in today’s digital economy. There is a tremendous variation of data-driven business models that creates invaluable opportunities both for established companies and start-ups. There are asset-less business models, man-less business models, product-less business models, service-less, digital products business models, and many more. Some models are profoundly changing traditional notions of capitalism. Data and analytics are helping companies move from mass production into extreme personalization and analytical craftmanship at scale, with tremendous benefits both for the consumer and the economy. There are also new infrastructure companies that specifically emerged to support the data-driven economy that are growing faster than traditional infrastructure companies.

Finally, this book is intended to provide a framework and examples on how to think about data-driven business models so that you can create your own. Unlike the physical world, the digital world provides endless variations and opportunities to derive new business models or adjacent business models without cannibalizing those prior models. Data-driven business models disrupt and cannibalize only the traditional physical world business models. At the same time, they offer tremendous opportunities to build synergies with existing data-driven business models, which have multiplicative effect on the creation of value through the use of data.

We hope this book will inspire you and give you some ideas on how to build a new data-driven model or transition a traditional model to the new reality of the digital economy.

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