Let me start by saying that I am a customer and fan of the services offered by Uber (took a ride Monday!), Airbnb (recently booked a family member into a nearby property) and other so-called “sharing” companies. In fact, just this week I gave a presentation about customer experience in which I cited Uber as an example of what brands can achieve with customer-centric product and service experiences. So, I say this as a fan and not as someone who is either anti-tech or anti-innovation: The time has come for companies in the space to stop hiding behind the “sharing economy” label and to improve collaboration with all concerned parties. Failing to do so puts these companies at risk as the industry, customer relationships, and regulations mature.

A year ago, I mounted a passionate defense of the term “sharing economy.” At the time, I argued that the word “sharing” was appropriate given these business models facilitate the mutual consumption of assets in contrast to traditional individual ownership and consumption. While this is still true, I cannot shake the feeling that companies have gotten a lot of PR and are camouflaging risky corporate practices thanks to the humanist adjectives they use, including “sharing,” “collaborative,” “trusted community marketplaces,” “the crowd” and “connected.” Who can be opposed to those ideas? It’d be like hating motherhood and apple pie!

The problem is that few of these “collaborative” companies are, well, collaborative. For a while, this was easy to overlook, because many consumers agree that some of the regulations these companies flouted were unpopular and, arguably, unnecessary. For example, Uber bypasses municipal safety regulations in many cities, and most of us don’t care because we feel safer in an Uber than a taxi. (On my last taxi trip, the driver exceeded the speed limit by 25 mph and barreled through a late yellow light near to a phone-distracted pedestrian, and I reached for my phone to give a bad review only to realize I could not.)

Because we agree some codes are outdated and appreciate the much stronger customer experience offered by the startups, it has been easy to disregard how these companies unilaterally pick which rules they like and which they do not. Laws that shield the companies from unfair practices orprotect their intellectual property–yes, please! Laws requiring they follow standard background checks or adhere to local rental ordinances–hey man, can’t you see we’re trying to innovate here!?

But it is getting harder to ignore the dangers of self-determined laws and regulations. After all, while we give a wink and a nod to Uber snubbing livery laws, do we want the manufacturing plant in our town deciding which environmental standards they’ll ignore or food companies to go maverick on safety codes?

As citizens, we all are part of the greatest collaborative platform of all–no, not Uber or Airbnb but democracy. If people don’t like certain laws, they can petition their lawmakers to change them; if citizens are not satisfied with their elected officials’ response, they can mount a recall or campaign for their defeat. Unless we want companies to set their own laws based on what is best for stockholders (or a handful of VC investors hungry for rapid and sizeable returns), then we must question the green light we give to sharing economy firms to pick the laws they deem worthy.

It seems that green light may be turning yellow. Los Angeles charged a handful of landlords with illegally evicting tenants to convert their units to short-term rentals. The New York State legislature has passed a law that would ban Airbnb users from listing some short-term rentals. Chicago just implemented new (relatively mild) rules for Airbnb. San Francisco’s Board of Supervisors unanimously passed a law requiring Airbnb hosts to register with the city. And Austin residents rejected a plan to allow Uber and Lyft to self-regulate.

In response to the new regulations, the sharing companies and their supporters have too often returned to the same old scripts. They accuse officials of being in the pockets of traditional companies. They label new laws as anti-consumer (even as consumers are asking for them). And they accuse officials of being opposed to innovation. In short, these companies ignore that their industry is maturing and many stakeholders are now asking for actions to ensure safety, equitable tax collection, a level playing field for all players, affordable housing availability, and fair rules that protect residents living adjacent to high-traffic, unlicensed hotels.

photo credit: Unicorn Silly Bandz Unicorn Macros July 09, 20102 via photopin (license)

We have all seen statements such as "Uber is worth four times more than Hertz, and it doesn't own a single car." While there is a kernel of truth to this statement--Uber's latest round valued the company at $40B while Hertz's current market capitalization is $10B--the difference between startup valuations (so-called "unicorns" with valuations of $1 billion or more) and publicly held companies' market capitalization is so profound that the two are hardly comparable. Understanding the distinction is vital if we want to cut through hype, understand risk and assess the market changes underway.

It Is Important To Put The Hype Into Proper Perspective

To be clear, I am a big fan of digital, mobile, Internet of Things (IoT), big data and collaborative economy opportunities, and I believe they will continue to grow and challenge traditional forms of business. That does not mean, however, that I believe every startup will win or that VC valuation decisions are a valid yardstick for comparing financial worth between VC-funded firms and public corporations.

While the hype around new these nascent businesses can benefit established firms by forcing them to take notice, it can also hurt by setting unrealistic expectations. Back in the dot-com era, established companies were spooked by all the e-commerce hype and leapt without considering the hard work and long road ahead.

In the late 90s, the buzz about Silicon Valley valuations and the focus on gaining new users rather than revenue models created an environment for silly decisions. Acting fast was more important than devising the right strategy; having a website was the goal rather than retooling the organization for a digital world; and patience was in short supply. When companies' new ecommerce programs did not instantly deliver profits, many companies diminished investment in digital efforts, only to reinvest years later to match growing consumer demands and competitive threats. Some firms even opted out of the ecommerce race altogether--Borders sealed its fate when the company got frustrated with dot-com losses and turned over its soon-to-be-vital online business to Amazon.

Valuation hype encourages short-term rather than strategic thinking. How can it not as headlines continue to trumpet Uber's rise from $60 million in 2011 to $300 million later in 2011 to $3.5 billion in 2013 to $17 billion early in 2014 to $41 billion before the end of 2014? That means from February 2011 to December 2014, Uber increased its valuation by almost $30 million per day. There's gold in them thar hills, and just like every other gold rush, there will be more losers than winners.

This is why a more sober view of IoT, big data, mobile and sharing economy opportunities would be beneficial. Established companies need to be less impressed with billion-dollar valuations and more concerned with consumers' changing habits around media consumption, mobile adoption, wearables and collaborative consumption. While Uber's, Slack's, Snapchat's and Sprinklr's $1 billion+ valuations make it seem the brass ring can be snagged on the next turn of the merry-go-round, the fact is that real, defensible, consistent success will require years of hard work for these companies--and yours.

Startup Valuations And Corporate Market Caps Are Fundamentally Different

Both startup valuations and publicly held companies' market capitalizations begin with a dollar sign. Beyond that, the two have little in common.

Market cap is set by millions of investors buying and selling shares in an open market based on information the company publishes adhering to stringent SEC rules that ensure a fair marketplace. You can find a company's market cap on any finance site (Apple's is $740 billion), or you may easily compute it yourself using public data (Apple's share price of $127.10 multiplied by its 5.82 billion shares outstanding).

Startup valuations are set by a much different process--secret backroom deals between a very small number of parties. The company and its VC partners do not make their negotiations, financial information or terms of the deal public. In fact, even the valuations themselves are not really part of public record but instead are announced (or not) by the parties involved.

The differences between the two are evident:

• Value determination: Market caps are set by a vigorous marketplace that is as close to an economically "perfect market" as exists on the planet. On an average day, investors buy and sell 48.5 million shares of Apple stock, and this is the mechanism that determines the corporation's value (or market cap). Startup valuations are set behind closed doors based on the evaluations of a small number of deep-pocket venture capitalists, and unlike liquid shares of stock, once the funding round is complete, startup investors have limited and complicated ways in which to divest themselves of their investment.
   
• Available information: You and I may come to a different decision as to the future opportunities for a publicly held corporation, but by law, we both must have access to the same information disseminated by the company. Thanks to SEC filings and annual reports, we can see the same detailed information about company performance, from revenue to profit/loss and even management's assessment of potential risks. For example, in Facebook's recent 10-K filing, it acknowledges, "We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook." Compare that to what we know of Airbnb's and Uber's performance, growth, risks and management assessment (which is, essentially, nothing).
   
• Performance history: Another obvious difference is that publicly held companies generally have well-established business models that demonstrate a track record. By comparison, the business models of startups are new, untested and evolving rapidly. We know Uber for its ride-sharing service, but the company is also testing new ideas like UberRush, a package delivery service, and UberFresh, a Seamless competitor for food delivery. Whether these two services catch on and produce profits is uncertain, but it is apparent Uber is still figuring out its business model.
   
• Known versus unknown risks: Along with more performance history comes a strong sense of the known risks faced by publicly held companies. While established companies face new laws and lawsuits every day, leaders and shareholders understand the type of legal risks the company faces. In comparison, the risks inherent with startups like Uber and Airbnb are poorly understood and rapidly developing. From labor laws to legal liability to taxation to compliance with state and local regulation, the future profitability and growth of these startups is less certain due to the unknown risks.
    
• Special deals: The final reason public corporations' market caps are profoundly different than startup valuations is that VC firms don't invest millions (or hundreds of millions) without negotiating special conditions to protect their interests. According to Bloomberg, startups offer incentives for big-number late-round investments, such as guarantees that the VCs will get their money back first if the company sells or will earn additional free shares if a subsequent round's valuation is less favorable. By contrast, an individual shareholder in a corporation cannot ask for special consideration outside of rare special circumstances, such as when one accumulates a significant portion of shares (Carl Icahn forced Ebay to consider splitting Paypal from the rest of the company) or bands together with other activist shareholders (such as when the Humane Society attempts to force a change in Kraft policies by engaging shareholders via SEC filing.) 

Bombs Versus Screen Passes--The Risk/Reward Continuum

The mechanisms, information, marketplace and bargaining power of parties is profoundly different for the funding rounds that determine startup valuations than for the stock market that determines corporations' market caps, but it all comes down to one thing: Risk.

Headlines about startup valuations promote just one concept--value--while ignoring the other equally important attribute that drives all investing and pricing decisions--risk. To simply compare the (supposed) value of two wildly different organizations (or any dissimilar assets) without also considering questions of risk makes the two dollar amounts seem equivalent, but they are far from it.

To draw an analogy from the world of football, the average screen pass earns a little over 5 yards per attempt while a "bomb" pass attempt delivers an average 12-yard gain. Given this data point, why do teams ever run or throw for short yardage when each deep pass averages a first down? The answer, of course, is risk--a long pass is a low percentage play, so even though the average completion delivers over 50 yards for the offense, fewer than one in four passes of 40 yards or more are completed. By comparison, the completion rate for screen passes is 79%.

Football coaches do not assess the relative value of one play over another based solely on average yardage. This is why teams tend to stick to higher percentage and safer short plays most of the time, turning to the more risky, lower-percentage plays when they trail late in the game.

In the same way, venture capital firms are in the business of making lower-percentage, high-risk investments with the hope that, across a wide portfolio of similar long-shot investments, a few will pay off handsomely, even though most will fail. In fact, just like deep passes in football, three out of four startups fail. Meanwhile, like a screen pass, an investment in a NYSE listed stock may not yield spectacular gains, but it is not likely to fail outright, either.

The Unicorn Population Explosion And What's Ahead

In times when money is cheap, a great deal of cash gets invested into innovative startups, elevating valuations and making headlines. Once money gets tighter, as it inevitably does, many of those startups suffer.

We saw this back in the dot-com era, when firms like Webvan were briefly valued at over $1 billion--what we today label a "unicorn"--before going under within a year. They were hardly alone--Pets.com made a splashy IPO in 1999 and liquidated just 268 days later, and eighteen months after eToys was valued at more than $8 billion, KB Toys bought its intellectual assets for just $3.4 million. Even the companies we know today as successes took an enormous hit when the dot-com bubble burst--Amazon lost more than 80% of its market cap from 1999 to 2001 and required six more years to return to its pre-crash value.

Today, cheap money is again flowing into startups. Business Insides notes that, "The use of the term 'unicorn' began with a blog from investor Aileen Lee of Cowboy Ventures in late 2013, when there were just 39 of the creatures and an average of four 'born' each year. The number created in 2014 rose to 38, according to CB Ventures."

Some say today's VC investments are different from those during the dot-com hysteria; that today's valuations are more justified and less risky. There may be some evidence they are correct. Collaborative startups such as Uber and Airbnb have business models (and probably even net income) in a way that many of the startups in 1999 did not. Still, other unicorns have a long way to go--Snapchat's last funding round valued the company at $15 billion (a 50% increase from nine months earlier) despite the fact the company was rumored to have virtually no revenue (much less profit) prior to launching its untested advertising program this year.

While established firms worry about competition from the startups, the startups themselves also have some unique competitive threats. Many folks who watch the collaborative economy space love to crow how the collaborative economy firms have established huge valuations despite owning virtually no assets. They are correct--Airbnb owns no rooms yet soon will rent more rooms than the world's largest hotel chains, and Uber owns no cars and is about to overtake taxis, limos and airport shuttles in the expense accounts of American business travelers--but this may be as much a problem as a benefit. Owning few assets allows for incredible leverage of cash, but it also means that barriers to entry and customer switching costs are incredibly low, as well.

Airbnb and Uber excel at providing a terrific customer experience, so neither is in imminent danger from competitors, but we should not forget that Myspace was once praised in the same way as today's collaborative startups. Insiders used to point out Myspace created and paid for no media, unlike the NY Times or NBC. Just like today's collaborative startups, Myspace enjoyed extreme leverage on its assets because consumers created content for each other at no cost to Myspace, and just like today's startups, Myspace owned nothing and had low barriers to entry, so it could not stem the loss of users once Facebook attracted critical mass.

It is hard to imagine the same thing happening to Airbnb or Uber, but then it was impossible to foresee that Myspace would crash when, in 2006, it surpassed Google as the most visited website in the United States. In fact, compared to the challenges of creating a profile and moving your entire social graph from Myspace to Facebook, the ease of installing a new app on your phone to order a car or reserve a room seems like child's play.

Social Media stocks vs. NASDAQ, YTD

So what is ahead for these startups? Silicon Valley analysts are voicing concern, and we have already seen some newer firms stumble. As recently as 2013, Fab was valued at nearly $1 billion, but in March, the remains of Fab were acquired for just $15 million. Meanwhile, I have been tracking the performance of a dozen US social media stocks that are post-IPO, and in 2014 they under-performed the market. Thus far in 2015, that trend has continued--NASDAQ is up 5.7% as of April 11 while a portfolio of social stocks (including Facebook, Twitter, Marketo, Jive, LinkedIn, Zynga, HomeAway and Groupon) is up just 0.5%.

Becoming A Unicorn Is Not A Reward--It's A Challenge

We would all be better off if we viewed billion-dollar valuations not as accomplishments but as challenges. Having a VC with an appetite for high risk assess your company at $1 billion is one thing, but it is quite another to reach a future state where that valuation is justified in a transparent and open market based on mature and recurring profitability.

Today, growth, opportunity, optimism and high risk propensity are driving startups' valuations, but in a few years--after the VCs claim their return and the firms go public--these companies' values will be determined more by stable business models as measured by revenue and net income. For Uber to justify its $40B valuation, it must someday deliver a stable or growing bottom line of between $1 billion and $2 billion.

If we all kept startup valuations in the right perspective, it would help us to appreciate the hard work ahead, both for firms like Uber and Airbnb, but also for our own companies. Ecommerce hype elevated startup values in the dot-com era and caused many companies to act out of panic, yet it has taken 15 long years for ecommerce to account for just 7% of total US retail sales.

Just as Kodak, Borders, Circuit City and others lost out by not acting quickly enough, your firm needs to establish its strategy in mobile, IoT, big data and collaborative economy business models sooner rather than later. But be careful not to buy into the hype so much that you think acting fast will deliver rapid bottom-line results. The future is here, but it will not drive your business results for many years.

photo credit: via photopin (license)

There has been a lot of buzz and disapproval around the word "sharing" in the term "Sharing Economy." While there is plenty to criticize (and praise) about the concept of the sharing economy, I get tired of people disparaging the idea simply because of its label. Call it the Sharing Economy; call it the Collaborative Economy; or call it the Aardvark Economy--it will make no difference in the growing trend of collaborative consumption and commerce that is changing the way consumers acquire and use goods and services.

Today, people are picking on the term "sharing economy" because, in the words of a post on Harvard Business Review, "The Sharing Economy Isn’t About Sharing at All." The article is actually quite good, focusing on the motivations of those who participate in the sharing economy, although the author's conclusion strikes me as achingly obvious: People participate not out of a sense of altruism or community improvement but instead do so for economic benefit.

Well of course the primary driver behind the rapid growth of sharing economy models is economic--that's why the word "economy" is in the label!--but does that really mean people are not sharing? HBR says it does, because it defines sharing as "a form of social exchange that takes place among people known to each other, without any profit." Apparently, they do not have dictionaries at Harvard, because when I turn to Merriam-Webster, I see much broader definitions:

share
    verb 

• to have or use (something) with others of two or more people 

• to divide (something) into parts and each take or use a part 

• to let someone else have or use a part of (something that belongs to you)

Of those three definitions, only the last one implies the act of giving something for free (and even then, it is not explicit with respect to the lack of monetary exchange). The other two definitions focus on the division or mutual use of things.

We have all shared things for economic benefit. We share meals and then divide the check. We collectively purchase and share weekend homes and hunting land. We pool money to share ownership of lottery tickets. We pay association fees to jointly own and share community services like pools and streets and pay taxes to share access to public parks and schools. We own shares of stocks (a term derived from the literal sharing of ownership). And at our jobs, we use and transfer funds for access to shared services such as Human Resources.

The word "sharing" does not (solely) mean giving or lending of things with no economic expectation; the definition of the word also includes the way things are divided, used and consumed. This is the sort of sharing implied by the "Sharing Economy" label.

Those who do not own a car can access one thanks to Zipcar, a company that shares the cost of its distributed fleet of vehicles across its customer base. On Lending Club, people do not fully fund individual loan requests but share the risk and ownership with others. And today, small businesses can avoid the risk of long-term rental agreements by using services like PivotDesk to share office space and services with other SMBs.

The reason I am so irked by the HBR article and others that make a big deal about the term "sharing" (such as this one and this) is that they can encourage those not paying attention to deride the important trend towards collective consumption. It is too easy to see such a critique and think, "Nothing new here--it's just the same old greed and economics." On one hand, they are correct--the individual drive to maximize economic power is as old as humanity; on the other hand, to ignore how new digital, mobile and social technology and behaviors are rapidly altering consumer attitudes and expectations is to miss how vital this trend will become to us personally and to our companies.

Another reason I find these articles annoying is that they can shift the focus away from truly meaningful and concerning aspects of the sharing economy. Rather than debate whether the "sharing economy" label meets the kindergarten definition for the word "sharing," let's instead shine a bright light and have a robust discussion about the potential risks and societal impact of these nascent business models.

Is the sharing economy "hurtling us backwards," as economist Robert Reich suggests? Does the growth of the sharing economy demand new forms of employee benefits and protections? Are collaborative companies behaving unethically? And what does this trend say about the role of government--do we trust sharing economy platforms to empower consumers to keep themselves safe, or do we want new government regulation to enforce safety norms?

As funding for collaborative startups pushes past $11 billion and almost a third of Americans say they are open to purchasing products and services through consumer-to-consumer channels, the time has come to stop debating semantics and start considering the profound changes ahead for business, government, workers and consumers.

Postscript: While I have no issue designating the trend as the "sharing economy," I have shifted towards using the label "Collaborative Economy," the term preferred by Crowd Companies' Jeremiah Owyang. That is not because people aren't sharing (they are!) but because the trends that are threatening traditional sales, ownership and consumption include new ways to empower people to collaborate on the development, production and distribution of new goods and services. In other words, Zipcar and Airbnb may permit us to collectively use (or share) today's products, but Kickstarter and Shapeways are furnishing new ways for consumers to develop, distribute and promote new products. The word "collaborative" better describes the breadth and diversity of these innovative business models.

It is no secret that today's revolutionary collaborative economy companies present many challenges to established business models and laws, not the least of which are those pertaining to risk. Luckily, new forms of protection--including laws and innovative insurance options--are being developed to cover ridesharing participants.

USAA, Uber and the state of Colorado have all taken actions that not only protect consumers but also facilitate the continued growth of sharing economy firms. Their actions demonstrate how Transportation Network Companies (TNCs, such as Uber and Lyft), states (including lawmakers and regulators) and insurance companies can innovate and collaborate to resolve the issues of risk and protection that hinder growth, acceptance and adoption of ridesharing. Accidents are unavoidable, and all three of these parties play important roles in safeguarding drivers, riders and others when they occur.
 

Uber Covers (Some) of UberX Drivers' Risks

UberX presents a special risk challenge for both Uber and drivers. While UberBLACK, UberSUV and uberTAXI rides are provided by commercially licensed drivers covered by commercial insurance policies, UberX is a true peer-to-peer business model, with private drivers offering rides in their private cars. Personal auto insurance is not priced for the additional risks that come from commercial transportation, and as a result, auto policies exclude these sorts of commercial activities.

Uber protects UberX drivers with a variety of coverage while transporting customers. From the moment a driver accepts a trip to its conclusion, drivers are covered with $1 million of liability coverage, $1 million of uninsured/underinsured motorist coverage and $50,000 of contingent comprehensive and collision insurance (with a $1,000 deductible).

During the "gap time" or "unmatched phase," when drivers are logged into the app but do not have a fare, there is a different set of coverage offered. This includes protection for bodily injury up to $50,000 per individual (and $100,000 per accident) and up to $25,000 for property damage. This policy is contingent to a driver’s personal insurance policy, meaning it will only pay if the personal auto insurance completely declines or pays zero.

While questions remain and some argue coverage must improve, Uber has taken steps to clarify the insurance and protection situation with its drivers.
 

Colorado Becomes First State to Authorize Ridesharing

Auto insurance and livery services are regulated at the state and local levels, so TNCs have been working (or battling) for acceptance on many fronts. Last June, Colorado became the first state to pass a law that clarifies issues of protection and risk, permitting TNCs like Uber and Lyft to legally operate.

Under the legislation, ridesharing companies will have to obtain permits from the Colorado Public Utilities Commission and carry at least $1 million in liability insurance. In addition, either the companies or their drivers will also have to carry primary insurance coverage during the gap period between when the app is turned on and a rider enters the vehicle.

This gap (or unmatched) period continues to cause questions, even in Colorado (much less states without their own similar legislation). For example, Uber has stated in a blog post that "the vast majority of personal insurance policies cover this period either by the plain terms of the insurance policy, or due to the insurance requirements set by state." The insurance industry feels otherwise. Dave Jones, California Insurance Commissioner, notes that "TNC's are under the mistaken impression that personal automobile insurers cover now, planned to cover, or will cover the risk of TNC-related for-hire transportation," The Insurance Information Institute states that "a standard personal auto insurance policy stops providing coverage from the moment a driver logs onto a TNC ride-sharing app." And Esurance agrees, noting that "if a TNC driver is available through the app, they’re driving as a livery service and therefore won’t be covered" by personal insurance coverage.

Because of the confusion, some ridesharing drivers try to hide their association with TNCs from their insurance companies. This is risky behavior that places their insurance at risk, and in fact, there have been sporadic reports of insurance companies canceling coverage for ridesharing drivers. The threat of losing insurance is so real that cab drivers in one city, in an effort to buy leverage against the growth of ridesharing, claim to be compiling a database of thousands of TNC vehicle license plate numbers to make available to insurers.
 

USAA Offers Innovative Ridesharing Coverage

Even with the coverage offered by the TNCs and the new law in Colorado, there is a need for insurance companies to step in to help educate and protect their customers. USAA, which has a reputation for innovation, is piloting a program to do just that.

USAA is launching a pilot in Colorado that will protect TNC drivers from the moment their ridesharing mobile apps are turned on until they are matched with a passenger. The pilot program, which will begin in February, extends a member’s existing auto policy coverages and deductibles, and costs about $6 to $8 more per month.

Colorado provides the perfect proving ground for this inventive insurance product. Not only is it the first state to authorize ridesharing, but Colorado also has a high concentration of USAA members (not to mention a Financial Center and Regional Office in Colorado Springs.) “Ridesharing is a growing industry, and it’s important that our members have the right coverage,” said Alan Krapf, president, USAA Property and Casualty Insurance Group.

USAA is not alone in offering novel products for ridesharing participants. Erie Insurance has  a new insurance offering that covers ridesharing drivers "before, during and after the hired ride" in Illinois and Indiana. And last May, MetLife announced a partnership with Lyft to develop new insurance solutions to protect rideshare passengers and drivers, although details on those products are still outstanding. Watch for many other insurance companies to follow the leads of USAA, Erie and MetLife with new products aimed at TNC drivers.

The collaborative economy still has a lot of maturing to do, and TNCs like Uber are a long way from working out their legal and regulatory issues across the country and globe. Still, the fact that Colorado, USAA and Uber have come so far so quickly is quite impressive, considering Uber was available in only a handful of cities four years ago. This sort of prompt and innovative action is required elsewhere so that riders, drivers, insurance companies, states and TNCs can understand their roles, responsibilities, risks and costs in the nascent ridesharing marketplace.

“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.”
                                      ― Peter F. Drucker

One of the mistakes that successful companies make when faced with profound change in the business environment is to believe that their loyal customers will stay loyal, both to the brand and traditional business processes. Of course, building customer devotion is a necessity for brands nowadays, but leaders must recognize that today's strong brand loyalty offers no protection against significant changes in consumer expectations and behaviors.

This is an especially vital message now as we witness the birth and growth of the collaborative economy. No brand, regardless of existing consumer preference and loyalty, can avoid innovating to meet consumers' evolving expectations around sharing, renting, collective consumption and P2P (peer-to-peer) commerce.

I love the Drucker quote that leads off this blog post, although I would change one word, replacing "marketing" with "Customer Experience" (CX). At the time he said it, Drucker was referring to the old "Four Ps" model of marketing--product, price, place and promotion; nowadays, too many marketers are concerned with Promotion, leaving the other Ps to different parts of the organization. Nonetheless, what he says is that today's success is not enough; marketing and CX can create strong customer relationships today, but innovation is what creates strong customer relationships tomorrow.

Of course, studies demonstrate Drucker was correct. For example, in "The Living Company," Arie De Geus shares a study completed by Royal Dutch/Shell Group. Researchers examined similarities in companies that have existed since the nineteenth century. The study found that companies that enjoy long-term success share four attributes. Two do not pertain to innovation, but are important nonetheless--successful companies are fiscally conservative and have strong cultures with a firm sense of identity. The remaining two factors speak to the way innovation is baked into the core of their business:

• Successful companies are sensitive to their environment: "As wars, depressions, technologies, and political changes surged and ebbed around them, they always seemed to excel at keeping their feelers out, tuned to what-ever was going on around them." These companies "managed to react in timely fashion to the conditions of society around them."
   
• Successful companies are decentralized: De Geus later rethought the word and redefined it as "tolerant." He notes, "These companies were particularly tolerant of activities on the margin: outliers, experiments, and eccentricities within the boundaries of the cohesive firm, which kept stretching their understanding of possibilities."

Source: Econsultancy

History teaches us that today's brand strength furnishes no protection against the need to innovate. This has never been more true than today; while innovation has always been important, as the pace of change increases, the demand for business innovation grows. That companies today struggle with the quickening pace of innovation is apparent, as the average age of organizations in the S&P 500 has dropped from 60 years to less than twenty in the course of the past five decades.

We can examine what has occurred over the Internet era to see many obvious examples of companies that quickly failed despite very strong brand preference and customer loyalty. This loyalty meant little once the companies could not provide a product that met the changing needs and expectations of customers:

• Source: Journalism.org

  Newspapers: By the late 1990s, newspapers had seen an uninterrupted 40-year increase in both ad and circulation revenue. At the time, many in the news business saw the Internet as little risk given the high levels of subscriptions and trust people had in print media and low usage and trust consumers had for information on the Web. Newspaper were riding high with strong consumer perception and profitable business models. Then Craigslist and eBay launched P2P marketplaces, Monster created a digital job board and dozens of news sites like CNN.com and SFGate gained traction.
  
  The result was the rapid destruction of newspapers’ business models. Classified advertising dropped almost 80% in thirteen years and continues to fall today--down another 10.5% between 2012 and 2013. Circulation declines have not been as severe, but the trend has been consistently downward. In 2012, total daily newspaper circulation and total Sunday newspaper circulation were each equivalent to about one-third of U.S. households, down from around 55% in 2000.
  
  Newspapers could have innovated with consumer behaviors, but instead they are playing catch-up. The recent release of the New York Times' digital strategy demonstrates just how much change newspapers still must undertake because they relied on existing customer loyalty and business models rather than on innovation. The question is if newspapers can adjust in time--in recent weeks Gannett, Tribune Company and E. W. Scripps, all empires built on the newspaper business, spun off their newspapers into separate businesses in order to reduce the earnings drag on their bottom line. The New York Times said the newspapers were "kicked to the curb" and questioned if they can survive (or if anyone will notice or care if they disappear).
    

• Source: Zap2It.com

  Television Networks: Around 1980, the three big television networks had seen three decades of substantial growth in ratings, with viewers per season rising from 6 million in the early 1950s to more than 15 million around 1980. The launch of satellite and cable networks seemed a minor inconvenience, but it began a significant decline that only accelerated as the adoption of the Internet provided entertainment and video alternatives.
  
  The national networks have suffered a 50% decline in viewers by season over the last three decades. Today, there are even greater signs of change ahead; while traditional TV watching among older demographics has been steady in recent years, younger people are increasingly tuning out. In the past three years, Q1 TV viewing by 18-24-year-olds dropped by 4-and-a-half hours per week, or around 40 minutes per day.
  
  Television networks did not adjust to the Internet age. People were recording and sharing their favorite TV shows via filesharing sites years before the networks would acknowledge the online demand for their content. The networks were slow to innovate, leaving openings for a slew of startups (many with dubious legal models) including Napster, The Pirate Bay and even YouTube (which in the early going was subject to great wrath from the networks for not preventing sharing of their IP.)
  
  Today, less than ten years after YouTube's launch, its growing ad revenue is beginning to approach that of some cable and national TV networks. Meanwhile, a recent New York Times article notes that “no one really talks about the broadcast side anymore;" investors care more about the cable channels that the parent companies also own more than the big national networks. The enormous power and viewership of the national TV networks in 1980 could not prevent the 30-year decline of their business model as others innovated more rapidly.
   

• Source: WSJ.com

  Retail:  By the late 90s, national retailers were riding high after decades of strong growth. Their enormous purchasing power had allowed them to shoulder smaller competitors out of the way. In 1948, single-location retailers accounted for 70.4% of US retail, but by 1997 this percentage had fallen to 39%; meanwhile, sales from chains with more than 100 locations grew from just 12.3% in 1948 to 36.9% in 1997. Worry about those tiny, money-losing online eretailers? Ha! Why would loyal customers begin to trust their credit card numbers and retail purchases online?!
  
  Less then twenty years later, Borders, Circuit City and Linens 'n Things are gone. Other retailers--ones that not long ago possessed high levels of consumer trust and loyalty--are on life support, and few believe they can pull out of their death spirals. Radio Shack may not survive through the coming holiday season. And Sears Holdings, including both Sears and Kmart, have experienced constant declines in same-store sales over the past three years. (Since the beginning of 2011, the stock of Sears Holding has dropped almost 50%.)
  
  I recently wrote about the lessons companies should learn from Borders' failure, but here is perhaps the most surprising fact about the chain's demise: Just six months before the company filed for Chapter 11 bankruptcy, Forrester declared Borders the top company in the nation in its Customer Experience Index (CxP). The research firm surveyed consumers for opinions on their experiences with over 150 brands, and customers put Borders at the top. At the very same time that Borders had the strongest customer perception in the country, it failed.
   

A free ebook in progress, being created one blog post at a time:
	Four Mistakes Made By Borders And How To Apply The Lessons To The Collaborative Economy The Innovation Imperative: Customer Loyalty Won't Save Your Company From the Collaborative Economy New (and Very Old) Consumer Attitudes Support Rapid Growth in the Collaborative Economy Old, New, Newer and New Newer: The Past, Present and Future of the Collaborative Economy
Join the "Share and Share Alike" discussion on Facebook

Many people assume that the sharing or collaborative economy is something new and innovative, and as a result, it is subject to caution and skepticism, but is this really the case? I often wonder if people considered today's burgeoning collaborative economy models in a historical context, might their caution and skepticism be lessened? Airbnb, LendingClub and Zipcar are new, but the collaborative economy is not; in fact, when considered in a historic context, it is not collective consumption that is new but the idea of private ownership and individual consumption that are quite recent developments.

Ownership was a relatively alien concept for most of human history. For millennia, we lived in tribal societies that pooled resources, skills and output. During the time of the Roman Empire and feudal society, the common man had little right to anything more than tools, with land ownership reserved for nobility who doled out property rights and protection in return for fees and loyalty.

Ideas of personal liberty and private ownership really only flourished following the Reformation, and even then, modern attitudes of ownership and individual consumption were not truly possible until the Industrial Revolution. It was then that the mass production of consumer goods and rise of a middle class to purchase, own, collect and consume those goods led to today's attitudes about private ownership and consumption.

Advertisement from September 1957 "The American Home" magazine

Our current perspective on individual ownership and consumption is really only a few generations old. Still, even as private ownership flourished, collective consumption never truly evaporated. Government services represent a form of collaborative economy, where mass transit and libraries offer people alternatives to the individual ownership of cars and books. Private enterprise also found rare ways to furnish alternatives to ownership, such as laundromats that allow people to rent washers and dryers one load at a time versus owning (and finding room for) expensive appliances.

For much of the last century in the US, collective consumption has been caught up in attitudes about class and standards of living. While poorer urbanites lived in apartments and waited at bus stops, richer suburban dwellers from single-family homes zipped past the straphangers in private cars (or, more likely, over them on the new freeways that connected the suburbs to city centers). While those with more means could avoid sharing walls or rides with others, they could avail themselves of P2P (peer-to-peer) services to avoid doing tasks that were messy or unpleasant, from cutting hair to painting nails to maintaining lawns to cleaning their homes. The ability to privately own more stuff while paying others to do your chores was as much a symbol of status as it was an economic necessity.

"Keeping up with Joneses" became a thing, as families demonstrated their economic power by consuming as much and as obviously as possible. "The Joneses got a new Chevy," said the Smiths with envy, before rushing out to buy the newest model, egged on by mass media advertising that associated ownership and consumption with status and achievement.

Source: Wikimedia

This sort of conspicuous consumption brought benefits such as employment, rising income, economic growth and improved products and services, but it also came at a cost, both personal and to society. We moved further from work, accumulated more debt and spent more time commuting and more hours working. Meanwhile, garbage dumps and automobile scrapyards grew due to the continuous cycle of private purchase, ownership, consumption, disposal and repurchase.

Sharing economy circa 1893; families sharing their homes for visits. H/T +Jeremiah Owyang Source: Airbnb

In the last several decades, a new word has entered our vocabulary: Sustainability. In 1987, the Brundtland Commission of the United Nations issued a report in which variations of the word "sustainable" appeared 400 times. It defined sustainable development as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

What started as a buzzword for environmentalists and advocates has now become business as usual in corporate America. Almost two-thirds of businesses say, "My organization makes public our environmental and social goals, and publicly reports progress against those goals." (Alas, only one in five report that the leadership team’s compensation is driven in part by sustainability performance.)

Reviewing the history of ownership, consumption and sustainability is important for two reasons. First, it puts in perspective that our attitudes about individual ownership and consumption are relatively new and that we humans have a rich history of collectively sharing and consuming goods and services. Second, history demonstrates that significant and broad change in consumption habits results from two parallel trends: Technical revolutions (efficient industrial production, available mass media, etc.) and attitudinal changes (adoption of different modes of living and commerce).

The new wave of collaborative economy sites are succeeding not simply because they use technology in innovative ways. No web site or app can encourage people to embrace new behaviors unless they are ready to change--the foundation for change must be present at the same time the capability for change is presented. (That's what SixDegrees.com found in 1997 when it tried and failed to bring open sharing of one's social networks to a population that would not embrace this sort of behavior for another decade.)

Today, the foundation for a change in attitudes and behavior toward ownership and consumption is in place. Many point to the 2008 economic downturn as a turning point in terms of people's attitudes, but there are many trends that were occurring prior to the Great Recession and are still continuing well into our slow recovery:

• In 2000, researchers found that the time parents spend with their kids was at a 35-year high.
   
• In 2013, the use of public transit was greater than in any year since 1956; from 1995 to 2013, transit ridership rose 37 percent, well ahead of a 20 percent growth in population and a 23 percent increase in vehicle miles traveled. In addition, in 2012, 9.2% of U.S. households were without a vehicle, compared to 8.7% in 2007.
    
• In 2005, the US saw the reversal of a decades-long trend in longer commute times; experts attribute this to several factors, including millennials' reduced interest in cars, more compact and mixed-use development, higher gas prices and more employees telecommuting.
    
• In 2011, for the first time in nearly a hundred years, the rate of urban population growth outpaced suburban growth.
    
•  IHS Automotive found that the average age of vehicles on US roads was 11.4 years in 2014--three years older than the average in 1995. Moreover, an improving economy is not expected to reduce the age of cars on the road; IHS expects the average to rise to 11.5 years by 2017 and 11.7 years by 2019. Our changing attitudes about cars combined with better quality automobiles is having an impact on the industry; a recent study predicted that today's Americans will buy almost four fewer cars in their lifetime compared to the past. 

Keeping up with the Joneses is simply not as appealing as it once was to Americans, while sustainability is a growing imperative in every corner of our personal and professional lives. These changes in attitudes are beginning to fuel changes in purchase behavior, setting the stage for continued growth in new (and very old) collaborative economy models.

I will continue to explore the data and trends supporting the Collaborative Economy in future blog posts.

Tools like Facebook, Twitter, Yelp and Flickr have taught people the power of sharing more widely and have begun to alter attitudes about privacy. Today, you live more transparently and share more information than you ever would have been able (or willing) to in the past.

Opinions, experiences, likes and dislikes that we used to share verbally to a handful of trusted friends and family today are captured, indexed and aggregated for all to see. The places you visit, the jobs you have held, the people you know, the food you eat, the teams you cheer, the hobbies you enjoy and the entertainment you love have become data points in a great pool of public information, permitting new ways to connect, commune, play, work, discover, complain, praise, influence and learn.

Too often, people think of social media only as the immediate and ephemeral information Twitter or Facebook presents in their news feeds. These real-time social feeds demand attention and can be at once enjoyable, distracting and annoying, but there is another way to think of social media, and that is as a persistent data layer. Social networks do not simply share your data in the moment but retain it so that tools and applications (and marketers) can later access, recall, combine, process and convert that data into useful information.

Foursquare's new Swarm app, alerts you to nearby friends.

Here is an example of how the social data layer works: No one wants to be informed of every place that every friend visits, but when you are deciding where to eat, you may find it valuable to know where your friends are dining at the moment or which restaurants they frequent most often. What is noisy data in your news feed can be transformed into useful, relevant information when aggregated and presented at just the right time and right situation.

Photos are another example of how the information we share becomes part of the social data layer and enhances our lives. Images that we used to mount into forgotten photo albums are today posted online and tagged with dates, locations and people’s names for easy access and retrieval. This meta-data transforms the half a billion photos uploaded each day to Flickr, Instagram and Facebook from mere pictures to vital pieces of information that can be recalled at just the right instant. (Because I tag my Flickr photos and upload them with an Attribution-NonCommercial Creative Commons license, my photos can be found and used by others, such as the Indiana Public Media website.)

Facebook’s vision for the future is that you will check into a beach and discover that your parents visited that same spot two decades earlier—and look, they posted a picture! The social data layer can take something that seems meaningless at one time (old family photos) and make it available at another when that information will be pertinent and valuable (your parents sharing the same moment you are, separated by decades).

Photo: Roadsidepictures

Of course, social media is not just about sharing pictures and status updates; it is also increasingly about the way consumers make purchase decisions. Take for example information you use to make choices about travel. When is the last time you purchased a Mobil Travel Guide? Once the indispensable travel bible for selecting hotels and attractions, the Mobil book series has been replaced by ratings and reviews collected by online travel agencies (such as Orbitz and Expedia) and ratings sites (like TripAdvisor and Yelp). In 2011, Forbes Travel Guide, which licenses the Mobile Guide, published its last set of guidebooks and launched its own Yelp-like site, Startle.com (which has since been retired and replaced with ForbesTravelGuide.com.)

It is one thing for social data to inform and influence your purchase decisions, but increasingly social is furnishing new ways to procure goods and services. The next wave of change is not just peer-to-peer (P2P) information but P2P commerce. A new collaborative economy is growing with a shift away from traditional ownership and toward “peering,” offering new methods of sharing or renting goods and services that permit consumers to gain economic power, increase income, and save money.

Why purchase an expensive item when you can more economically rent or borrow it, instead? Why let the things you own sit unused when they can easily be converted into cash flow? Why drive anywhere with empty seats in your car when someone nearby is willing to pay you for a lift near your destination? Why rent a car overnight when you really only need it for an hour? Why spend your time doing chores you do not enjoy when you can easily find and pay someone to do those tasks? And now that you have more free time, why not offer your own talents and skills to neighbors willing to pay for what you have to offer?

Thanks to new technologies and new consumer attitudes, there today are different answers to these questions than in the past. This is the collaborative economy—new methods for people to collectively consume resources for mutual economic benefit.

We can illustrate the difference between the traditional ownership economy and the sharing economy by examining the old, new and newer way of procuring an automobile.

The Old Way is Selling, Buying and Owning

We are all well acquainted with the old way in the automotive business. One party (and its supply chain partners) manufactures, transports, inventories and sells the cars, while consumers buy, maintain, insure and own them.

The old way: Lots of underutilized cars

The problem with this business model is that it is wasteful and expensive. The average car owner in the United States, Canada and Western Europe uses his or her car just 8% of the time, which means that an expensive and depreciating household asset goes underutilized the vast majority of time.

Buying, financing, maintaining and insuring cars devours a substantial portion of people’s  income—transportation is the second highest category of household expenditure, according to the US Bureau of Labor Statistics. Automobile ownership also ties up large portions of our available assets; Pew Research Center found that equity in motor vehicles is the third largest non-retirement category of net worth for households worth $499,000 or less. In addition, the old ownership model in the auto business is also hard on the environment, as enormous amounts of energy go into producing, distributing and disposing of cars that mostly sit idle.

The old way will not die, at least not quickly. Just as ecommerce has not replaced physical malls, neither will the traditional auto dealership disappear as the sharing economy grows. Of course, while malls still exist, many struggle to survive and stay relevant, and their trials are hardly over; analysts estimate that one in seven malls will fail in the next decade as retail continues to transition online. Auto dealerships will face the same squeeze. The soft economy has meant difficult times for auto dealerships in recent years—over 4,500 disappeared (almost 20% of the industry) between 2005 and 2012—and consumers’ changing social consumption habits spell more trouble for the future.

The New Way is Business-to-Consumer Real-Time Rental

Zipcar represents the new way of conducting business. In this business model, Zipcar owns, maintains and distributes vehicles over a wide geographic area, and consumers rent only the car they need when they need it. Cars are utilized a greater percentage of the time, so waste is lessened and the impact on the environment is reduced. At the same time, Zipcar customers increase their liquidity and decrease expenses.

The New Way: Zipcar owns cars; fewer cars are needed or used

I can use my household as a perfect example. When we sold our car and embraced a car-free lifestyle, my wife and I expected we would need to rent a Zipcar on at least a weekly basis; instead, we found we need one less than once every month or two. This experience is not unusual; research has found that consumers who carshare have 27% fewer vehicle miles traveled and make fewer trips.

For my household, the cost of Zipcar rentals, mass transit and grocery deliveries is far less than the expense of owning a devaluing car, interest payments, insurance, parking, gas and maintenance. We estimate we are saving approximately $800 a month by engaging in the sharing economy, thanks to Zipcar. (My wife and I live in the New York metro area, which is somewhat more expensive than most other locales, so the average savings per month enjoyed by ZipCar members is a bit less--Zipcar reports that members save an average of $600 per month compared to owning a car.)

Of course, Zipcar is not available in every neighborhood, nor is it feasible for Zipcar to scale into every suburban or rural nook and cranny. If Zipcar spreads itself too wide and thin, it may have automobile assets that do not get appropriately utilized. This is why a newer form of sharing economy model shows promise.

The Newer Way is Person-to-Person Rental

There is an even newer way of transacting business—a more peer-to-peer way—as represented by companies like RelayRides, Getaround, Hubber and JustShareIt. Unlike Zipcar, RelayRides does not own and maintain vehicles; it merely connects people who own cars with those who need transportation and wish to rent cars.

In this “newer” P2P commerce method, renters enjoy the same benefits as they would with Zipcar—access to nearby cars for short periods at a modest cost. This much is the same as the “new” form of social business, but this “newer” form also offers benefits to car owners. Automobile owners no longer need to let their expensive asset sit unused in the driveway but can, with little effort, increase the use of that asset and enhance their income.

According to RelayRides, the average car owner renting his or her vehicle is making $250 a month using the RelayRides platform. Some make less and others make more; one recent Yahoo article profiled a woman who has made $12,000 since 2012 renting out her Prius on RelayRides.

While Zipcar would lose money if a car it owned were only rented for $100 in a month, the same is not true for RelayRides' car owners; for them, that $100 is a terrific benefit that increases income and puts an otherwise underused asset to work. This is why the newer P2P business model can scale in ways Zipcar cannot. Zipcar needs to place cars in limited areas with sufficient population density, while RelayRide owners are happy to rent their car a day or two a month to people in their less-populated rural or suburban neighborhood.

The Newer New Way--On Demand and Automated

While the "new" way--a company owning and renting out cars--does not easily scale today, the future may be quite different as self-driving cars and carsharing converge to offer a "newer new" way. Ten or 15 years from now, services like Zipcar will not need to spread cars every few blocks in order to place them within walking distance of customers; instead, the car you want will arrive wherever you are and whenever you need it, delivering itself to your front door--the transportation you need on demand.

Want a private drive? Of course! Want to split trip costs but make an extra stop? The service is aware of someone nearby who needs a lift to a destination close to yours. Care to pick up a friend? The service can access your friend list and alert him or her that you are on the way. Late to your dinner reservation? No worries, the restaurant has been automatically informed of your delay and new ETA. Technology, transportation, peering behaviors and the social data layer will combine to offer services that were previously (and are presently) impossible.

The impact of this Newer New way will be profound, bringing substantial and difficult changes to the entire automotive value chain. No part of the auto business will be left untouched, from automaker (fewer and different cars to produce) to dealer (fewer customers to sell to) to consumer (less ownership, more real-time rental, lower cost and risk) to maintenance (larger and more efficient facilities where driverless cars deliver themselves rather than neighborhood service centers scattered every flew blocks for the convenience of car owners.)

Today, it is estimated that each shared car under the "new" approach takes between nine and thirteen cars off the road. The "newer new" way will have an even greater impact, taking more cars off the road and bringing the advantages of carsharing to much wider areas. The benefits to consumers and the environment will be substantial, but the difficulties faced by the auto industry will only mount in the next decade or two. Much like the the rail business of the early 20th Century (that did not adjust for trucks, cars, planes and highways) or the retail business of the last decade (that struggled to adjust to online commerce), the collaborative economy will leave the car industry a much, much different business. And the auto industry is not alone.

How Will the Collaborative Economy Change Your Business?

• Offer your services or find someone to complete a chore on TaskRabbit
• Rent a night on your sofa or secure a place to sleep on Couchsurfing
• Rent a designer dress on Rent the Runway; 
• Be a guest at someone's home for dinner or share your culinary talents with like-minded people on EatWith; 
• Rent a bike for an hour or a day using B Cycle
• Buy or sell used kids' clothes on Swap.com
• Host a strangers’ dog in your home through DogVacay
• Borrow or lend money to others using Lending Club
• Rent Lego playsets on Pley
• Find a space to work or rent out unused office space on PivotDesk

Each of these could further develop into their own "newer new" business model. Might a hotel chain, that today owns one property in a city with 300 identical rooms tomorrow offer 300 different rooms scattered across dozens of small locations, matching you to exactly the room you would most prefer? (You love shaker style furniture, a shower, a large desk, a small bed, healthy snacks and tea service downtown while your traveling peer prefers retro 50s decor with a tub, no TV, a king-sized bed, junk food and a coffee percolator uptown? No problem--everyone gets exactly what they want!) Might your money account automatically loan cash to trusted friends and collect interest without bothering you for approval, since your financial institution knows whom you trust and acts to maximize your return? Might drones deliver your hot and delicious meal at the moment you arrive home from work, created by a famed chef a continent away who beamed his creation to a culinary 3D printer near you?

Comparing the old, new, newer and future ways of commerce not only illustrates how the sharing economy works, it also demonstrates the changes that are coming to business. Just as the adoption of the Internet brought about a significant wave of disintermediation and reintermediation (with Amazon replacing Borders, Apple iTunes replacing Tower Records and Netflix replacing Blockbuster), the sharing economy will bring another such wave. Companies that offer the new products and services in the ways that consumers desire can acquire and retain customers, while the companies that fail to satisfy new consumer demand risk losing customers.

RelayRides will not replace Chrysler or Hertz, but it can have a significant impact on the marketplace without supplanting traditional competitors. As noted in my blog post, even a small shift in consumer behaviors can bring about a significant change in margins and profitability for businesses. As noted by Umair Haque, author of The New Capitalist Manifesto, “If the people formerly known as consumers begin consuming 10% less and peering 10% more, the effect on margins of traditional corporations is going to be disproportionately greater, which means certain industries have to rewire themselves, or prepare to sink into the quicksand of the past.”

There is no corner of the economy that e-business has not meaningfully affected, and now the burgeoning sharing economy is bringing still more change to the business environment. In future blog posts, we will explore the collaborative or sharing economy in more detail and study how traditional firms can explore, adjust and flourish in this new, emerging economy.

Everyone knows the sad tale of Borders Group. It failed to see the world changing and did not adapt to the Internet age, so the successful company quickly failed.

But while the story of Borders Group is well know, I do not believe the lessons of the company's history are understood. It may be a well-known tale, but it is worth revisiting 2001 with fresh eyes, because it can teach us something important about 2014. The company's mistakes occurred in the early part of the Internet era, and as we are now in the early days of the collaborative economy era, it is the perfect time to reconsider Borders' story and learn from it.

Borders' leaders lacked the foresight of their peers at Amazon and even Barnes and Noble, but that isn't terribly unusual. Many of us fail to see important revolutions until it is too late. We humans are good at recognizing evolutions (no one questioned if the iPhone was an obvious improvement on the  Blackberry), but we are less successful at seeing revolutions until they are upon us.

In 1995 (if you are of a certain age), you heard about the “Information Superhighway” and thought, “I’ll never waste my time on the Internet.” In 2000, when some acquaintance raved about his or her first online purchase, your reaction was, “I will never trust a website with my credit card.” And in 2005, as the first “Crackberry” addicts were distractedly walking into lampposts, you promised, “I will never be that tethered to a cell phone!” It is important we recognize our recurrent inability to see revolutions in their infancy, or else we cannot explore today's prevalent (and frequently dubious) attitudes towards the fledgling collaborative revolution.

Failing To Foresee Revolutions Hurts People But Can Be Fatal to Organizations

When individuals fail to see the world changing before their eyes, it can have ramifications--they may disregard the effect on their careers and fail to keep their skills current. In many ways, however, people can adjust quickly once they see the benefits of innovative technologies and approaches. Many mocked the first folks with their Commodore 64s and Atari STs, but a couple years later everyone was clearing a space for a PC in their home.

Courtesy of Crowd Companies

For business, however, the implications of failing to see the future are far more profound. A company that does not anticipate or prepare for impending threats and opportunities cannot simply retool overnight once it discovers the oversight. While we humans can overcome our inability to recognize technology revolutions with a single trip to Best Buy, companies that miss out can spend years trying to catch up. Today, there are successful companies that will become the future Borders, Kodaks and Blockbusters of the collaborative economy era, but they can no more see it than could Borders, Kodak and Blockbuster could at the dawn of the digital era.

Certainly, Borders failed to see the future, but what did they miss that others did not? And why did they fail where others succeeded? The answers to these questions are essential to prepare your company as it enters yet another revolutionary business era. Sharing is no longer just for memes and selfies; increasingly, it is also for the way people acquire and use products and services. Is your company setting itself up to be the Borders or Amazon of the collaborative economy era?

What Borders Did Wrong

They key is to explore the conditions that led to Border's fatal decisions. For example, many assume that the error made by Borders was that it failed to launch ecommerce, but the company had an ecommerce operation and chose to shutter it. In May 1998, Borders launched its first online book store. Few consumers were buying online at that time, and three years later, the bookseller decided its unprofitable ecommerce operation was unnecessary to its core business of selling books in retail stores. In April 2001, the company announced an ecommerce agreement with Amazon, shuttered its own online sales function and dismissed seventy digital employees.

It is easy to judge the decision in retrospect, but this deal made logical sense to many. Morningstar analyst David Kathman told E-Commerce Times, "Both companies need this" and Scott Smallman with U.S. Bancorp Piper Jaffray said, "We think it is good stuff." The reason was that Amazon (although it was losing money) was flourishing online, while Borders (although it was profitable) was failing in the digital realm. In 2001, Amazon sold $1.7 billion worth of books, music, and videos online while Borders.com sold just $27 million.

Today, many seem to feel Borders' execs were merely stupid, but the company's leaders made what they thought were smart decisions that many analysts applauded. The error of their ways became evident a few short years later, but by the time Borders realized that digital business was not a sidelight but a vital revolution in the way people shop for, purchase and consume media, the opportunity had passed. Borders dissolved the partnership with Amazon in 2007 and attempted to resurrect its own online business. It was too little too late; just four years later, the company applied for Chapter 11 bankruptcy protection and began liquidating its final stores.

Why Borders Did Wrong

That Borders' leadership made epic mistakes is certainly obvious, but hindsight is 20/20. Why did they make those decisions, and how can your company avoid the same mistakes today? Here is how Borders came to this decision and what it may mean today as your company considers (or ignores) the emerging collaborative economy:

• Borders failed to see how digital wasn't just a change in marketing and communications but a change in business and consumer models: Marketers are quick to adapt to changes in consumer behavior, while product and customer service folks always lag. Marketers launched web sites and started online advertising years before their customer care peers thought of offering web-based service. And while some brands were happy to offer their traditional products for sale online in their "web store," few companies considered how digital distribution would fundamentally alter the products themselves. Borders saw the web as a marketing and sales channel; Amazon saw it a new way to distribute and consume media.
  
  In social media, marketers were able to find money to invest in social media while their peers in customer care acted like it was an insurmountable challenge to find the budget for customer care in the same channel. (Even now, companies like Spirit Airlines are opting for auto-bots in social media because "a social media team costs money." Damn those needy customers, expecting us to pay salaries for people to answer their annoying questions!)  Today's collaborative companies don't see social as just a communications channel or an expense but a significant shift in consumer behavior.
  
  Collaborative Economy Lesson: Social will change business itself, not just marketing. Is your company like Borders, seeing social primarily as a channel for acquisition and reputation? Or is your company Amazon, thinking of social for new ways to collaborate with consumers on product development, encourage peer-to-peer consumption to otherwise empower your customers? If you aren't thinking of new P2P and collaborative business models, rest assured someone else is!
    
• Borders failed to understand that digital benefits would be embraced by the mainstream.  In 2001, it was easy for Borders to see the web as something not well aligned to its audience. A year before, Pew found that 61% of 18- to 29-year-olds were using the Internet compared to just 12% of those over 65.  Since book buying typically skews a bit older, it seemed the Internet was a weak opportunity for Borders. Making it even more difficult to see the digital future was that the dot-com bubble had burst in 2000 and was still deflating in 2001, giving momentary encouragement to those who still claimed the Internet was a fad, not a serious trend.
  
  How times have changed. Digital businesses are now at the top of the Fortune 500 (with Apple, Microsoft, Hewlett-Packard, Google and Amazon among the 50 largest firms in the nation.) Generational gaps still exist but are nowhere near as pronounced as they once were; in 2013, Pew reported that 59% of seniors go online. In the course of 13 years, the percentage of seniors online skyrocketed nearly 400%.
  
  Collaborative Economy Lesson: (Almost) everyone will adopt collaborative business concepts in the years to come.  It is by now a familiar trend that has been repeated with online adoption, ecommerce, mobile adoption and social networking: New behaviors are introduced, tested and adopted by younger consumers, and once the benefits are clear and risks are minimized, older folks follow. Today, is your company looking at Lyft, TaskRabbit and Uber as something better aligned to younger people, or are you thinking like Amazon and foreseeing the demographics for collaborative behaviors broadening rapidly?
     
• Borders underestimated the importance of small changes: There is a sad tendency to think that business models are stable and can be undermined only with profound changes in the market. Perhaps that was once the case, but the pace and hyper-competitiveness of today's business world means that even small changes in the environment matter.
  
  In 2001, online retail was a mere one percent of total retail sales in the US, so it was easy for Borders to dismiss ecommerce as a distraction. But even today--after ecommerce has upended several well-known retailers and is challenging the survival of malls--the percentage of US retail that occurs online is just 6.2%.  That's it--just one of every 16 retail dollars are spent online, and that has been enough to create a painful metamorphosis in retail, not just for Border's but the entire industry. In the last ten years, the stock prices of Barnes and Noble, Sears and JCPenney are down 35% to 75% while the Dow has risen 67%.
  
  Collaborative Economy Lesson: A small shift away from traditional ownership and towards collaborative models can have a significant impact on your company's financial outcomes. Look at the profit margin for your firm. What would a change of three or four points in your revenue mean to your bottom line? For many industries, that is the difference between profitability and failure. Borders saw ecommerce as a small and minor trend that could be farmed out to a third party rather than a significant business revolution that should affect business decisions across the enterprise. Is your firm considering the collaborative economy in one tiny corner of the enterprise, or do your leaders see it as a major trend that will impact the development and delivery of your products and services?
    
• Borders focused on short-term profitability rather than investing for the future: Who can blame a company for jettisoning an unprofitable venture? After all, every publicly held company must furnish quarterly financial improvements or suffer the wrath of investors and analysts.
  
  
  
  Certainly, that was what Borders thought. It was losing money on ecommerce, and at the time, so was everyone else. Even Amazon was hemorrhaging cash--close to $3 billion of losses in the first five years after its 1997 IPO. By ignoring the cash-draining money pit of ecommerce, Borders kept their income statement looking good for another five years, with consistent profitability through 2006. The Street wasn't rewarding Borders with better stock prices, but neither did the company's shares suffer like that of so many dot-com firms.
  
  Everyone was reasonably happy--until 2007 when the wheels came off. Borders could no longer deliver revenue and margin due to its reliance on an increasingly threatened distribution model, and the company and its stock price never recovered. Meanwhile, Amazon thrived--it's stock is up an incredible 3,067% since it signed the deal with Borders. Today, Amazon is repeating its history, making decisions that diminish current performance in the hope of strong financial rewards in the future; the company is warning the market to expect deep losses this year as it attempts to launch the Fire Phone against mobile leaders Apple and Google.
  
  Are today's collaborative startups subject to the same financial challenges as the dot-com startups of fifteen years ago? Some say no--the buzz is that many of the collaborative startups are turning early profits, but we ought to be cautious with such claims. Thus far, many collaborative startups have ignored such niggling details as tax collection and regulation. In the last two years, Airbnb, Lyft, Uber and others have begun to work through the maze of regulations, legal requirements and tax issues, and it may take many years to work out a set of stable and legal business models that can be applied in every state and locale.
  
  Collaborative Economy Lesson: Gaining an understanding of the new forms of collaborative commerce will not be easy or provide an immediate return, but the time is now to begin making smart investments.  Companies cannot build a future simply by focusing on efficiency, productivity and cost containment; they also must invest in the future. The unwillingness to cannibalize one's own business model is a serious problem in today's fast-paced quarter-to-quarter world, because if companies won't challenge their own business, someone else will. Significant changes are coming, and firms unwilling to explore alternative business models will suffer consequences. Now is a time to make strategic investments and experiment with innovative collaborative business models. 

For a host of reasons, Borders’ leaders made decisions that set in motion the problems that would swamp the company just ten years later. These leaders were not dumb, but they were mistaken.