Unlocking Hidden Value Through ‘Ubernomics’

How companies like Uber and Airbnb are showing the way to a new, collaborative economy.
Barbara GrayApril 25, 2016

Imagine that on Hilton’s next analyst conference call management announces plans to spend $170 billion over the next five years to add 12,000 hotels. This would be considered an impossible feat, given that it took Hilton nearly a century to reach its current base of 4,300 hotels and it only has a $20 billion market capitalization.

Opinion_Bug7Yet an upstart company, launched while we witnessed the collapse of Lehman Brothers and Bear Stearns, says it will somehow add 12 million accommodation listings (the equivalent of 12,000 hotels) over the next five years and grow its revenue from nearly $1 billion last year to $10 billion by 2020 – and that without incurring any capital development costs.

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Similarly, in 2009 another upstart was launched. It now operates in 395 cities and is the target of deafening protests worldwide. This company is even more radical than the first example: It has emerged from left field as a disruptive threat to both the industry’s core activities. And it poses a more attractive alternative to suppliers and buyers. Finally, the startup has eroded the value of the industry’s core assets, which had been maintained by artificial scarcity.

As you’ve likely guessed, the two companies are Airbnb and Uber Technologies. Since the recession, the confluence of structural shifts in technology, the economy, and society has given rise to a radical new form of collaborative commerce, based on the democratization of physical and human capital. The impact of this collaborative commerce is evidenced by the accelerated rate of value creation of Airbnb and Uber, which are now valued at $25.5 billion and $62.5 billion, respectively.

Such collaborative commerce represents a powerful new business model that enables companies to defy traditional economic principles of scarcity. As such, I believe it deserves a term of its own, and although others have used the term to refer to other aspects of the phenomenon of the company and what it represents, I think “Ubernomics” fits the evolving business model I’m describing here as well.

The model is based on two core ideas: “long tail” and “blue ocean strategy.” On the supply side, companies that are run according to Ubernomics can scale their inventory growth with few timing or capital constraints. They can do that accessing a “long tail” of under-used physical and human capital, according to Chris Anderson, editor-in-chief of Wired magazine, who spawned the idea.

In explaining the theory, Anderson writes on his website that “traditional retail economics dictate that stores only stock the likely [sellable products], because shelf space is expensive. But online retailers (from Amazon to iTunes) can stock virtually everything, and the number of available niche products outnumber the [shelved products] by several orders of magnitude. Those millions of niches are the Long Tail, which had been largely neglected until recently.”

On the demand side, companies expand their markets beyond traditional categories by building a “blue ocean strategy” to access new tiers of what were formerly non-customers. This approach has been adopted by Cirque du Soleil and described by strategy scholars W. Chan Kim and Renee Mauborgne. “Rather than competing within the confines of the existing industry or trying to steal customers from rivals, Cirque developed uncontested market space that made the competition irrelevant,” according to the Harvard Business Review. “Cirque created … a blue ocean, a previously unknown market space. In blue oceans, demand is created rather than fought over.”

Now that the success of Uber, Airbnb, and other startups have demonstrated its potential of Ubernomics to create value, this business model is no longer the domain of just start-ups. In the fall, such technology leaders as Amazon, LinkedIn, and Expedia announced strategic moves into Ubernomics. At the end of September, Amazon launched Amazon Flex, a new on-demand delivery service that will enable it to cost-effectively build a long tail of delivery drivers for its 1-hour Amazon Prime Now service. Less than two weeks later, Amazon launched Handmade, a rival to Etsy, featuring over 800,000 factory-free and handmade products from 5,000 sellers.

On October 19, LinkedIn quietly launched LinkedIn ProFinder, a professional services platform. LinkedIn started piloting it in San Francisco with three categories (accounting, graphic design, writing, and editing) and has since expanded its reach to business consultants in major U.S. cities. On November 4, Expedia, entered the sharing economy with its $3.9 billion acquisition of HomeAway.

Industrial Age stalwarts like GM, Ford, and Hyatt have also started to embrace Ubernomics. In early January, GM announced a $500 million strategic investment in Lyft (Uber’s competitor) and acquired the car-sharing platform Sidecar a few weeks later. On January 11 at the North American International Auto Show, Ford declared it no longer saw its future as just an auto company, but as an “auto and mobility company” and announced the April launch of FordPass, its new digital and physical marketplace platform.

Likewise Hyatt recently launched its new Unbound Collection, an Airbnb for independent boutique hotels. In each of these cases, “old economy” companies have identified established strengths to which they are now applying “new economy” opportunities analysis.

Hyatt Hotels is a great example of how a company can apply the principles of Ubernomics to create a sustainable competitive advantage. From a cost-of-capital perspective, Hyatt employs an asset-light and low-cost producer strategy that enables the hotel chain to source inventory from independent boutique hotels at close to zero marginal cost.

From a customer perspective, it increases customer loyalty and increases switching costs by meeting the needs and desires of guests are seeking a wider variety of choice and more of an authentic and emotional travel experience. From an intangible asset perspective, it enables Hyatt to create a marketplace that leverages its strong brand equity, customer capital, proprietary data, and the strength of its marketing/loyalty program. And from a growth perspective, it creates a structural asset that appreciates in value as it adds more independent boutique hotels to its collection, attracting new guests and leading to an ultimate network effect.

The “Ubernomics Hidden Value Canvas” below shows examples of different options for unlocking hidden value by partnering with, strategically investing in, or acquiring sharing and on-demand economy start-ups. Further, it shows how larger companies can collaborate with one or more of their corporate stakeholders to build your own marketplace.

The Ubernomics Hidden Value Canvas


Source: Brady Capital Research Inc.

Now imagine a giant canvas comprised of 156 individual canvases, representing sub-industries – with not just 66 white spaces, as above, but over 12,000 white spaces. Over the next decade, we will see significant disruption of industries as companies start to fill in this blank canvas by entering new white spaces and unlocking hidden value through Ubernomics – the next generation of business strategy.

Barbara Gray is an analyst and strategy consultant with Brady Capital Research.