(Read Part 1 here.)
Most of the day, your car is empty. Your kitchen is empty. Your camera isn't taking photos. Your computer's CPU is idling. Your utility's power plants and power lines are well below capacity. THESE ARE MASSIVE INEFFICIENCIES THAT SHOULD APPALL YOUR INNER ECONOMIST. Coordinating more efficient use of these high-fixed-cost-and-low-utilization resources is a market opportunity worth trillions of dollars.
Of course, this great inefficiency is all by design. When you buy a car, part of what you pay for is the option value. Not only are you paying for the transportation, you are paying for the guarantee that transportation will be available when you need it. Option value is why it makes sense to buy something that spends most of its life doing nothing.
However, digital technology is enabling new ways of coordinating resources that have never been feasible in the past. Through schemes like variable pricing, online scheduling, and peer-to-peer business transactions, it is now easier than ever before to share things without sacrificing the reliability or option value traditionally associated with ownership. That is the main idea behind the companies in this category.
Below are business ideas (most of which are already companies) that I predict will grow over the next few decades. They all succeed by using digital technology to coordinate the sharing of high-fixed-cost capital goods.
- Car rental services, car sharing services, carpooling services, taxi services
- Smart grid, smart meters, smart appliances that dynamically manage electrical load
- Parking meters that charge variable prices depending on demand
- Peer-to-peer tool rentals, shared workshops
- Room rentals, room sharing services
- Restaurants that use variable, dynamic pricing
- Shared offices or shared desks within offices
- Apartment buildings with community kitchens/TVs/etc.
One question a venture capitalist faces is whether to invest in early stage or late stage start ups. Another question is whether to make small investments or large investments. In this category, all things being equal, I'd prefer large investments in late stage companies. Most of these companies, which help share pooled resources, benefit from economies of scale. The bigger they are, the better they'll do.
[To see why these companies have economies of scale, consider the following example. You are the CEO of ZipCar. You rent cars to a population 100 customers who each want a car some random 10% of the time. To meet average demand, your fleet will only need 10 cars (100 people * 10% of the time). But your customers don't just want access cars; they want reliable access to cars. For 99% reliability, if you do the math, your fleet will need 17 cars total: 10 for the baseline demand and 7 to buffer random spikes in demand.
The math changes as your customer base gets bigger. Now suppose you serve 1,000 customers. To achieve the same 99% reliability, you'll only need 121 cars: 100 baseline and 21 as the buffer. Here's the key point: the for 100 customers, the buffer was 70% of the baseline fleet, but for 1,000 customers, the buffer was 21% of the baseline fleet. This is the law of large numbers - as your population gets larger, the random fluctuations in demand partially self-cancel. This means that the companies with the most customers will spend a smaller percentage of their budget on excess capacity. The bigger your business, the more profitable it will become.]
Most of the business ideas above aren't new. What is new is that computers and the internet are making it easy to rent capital goods, especially from peers. Of course, there are big barriers to many of these ideas, especially some forms of dynamic pricing; nonetheless, I am optimistic that efficiency will eventually win out. The potential is just too great.
Coming soon: Companies that replace labor with capital (the post, not the companies. They came years ago).
Read Part 3 here.