The on-demand economy

Posted: June 24, 2008 in CRM

The world is beginning to run up against significant resource constraints — the amount of arable land, available energy, peak oil, climate change and much more.  What all these things have in common is the dawning realization that everyone can’t have everything they want, or at least they can’t own it.  They may be able to rent it though and that’s a major shift. 

In prior eras such as the middle ages, there was a small upper class and a lot of very poor people.  The upper classes owned all the property and all of the productive assets.  Petty nobility held the land in the name of the monarch and peasants rented it for a percentage of the harvest.  The same was true of infrastructure assets so for example, if you grew wheat and wanted to grind it into flour you paid your local lord (in flour of course) for the privilege. 

Studying this phenomenon gave rise first to economics and later to communism as some analysts from the poorer side became aware of just how lopsided the distribution of resources was.  David Ricardo developed a concept called “rent seeking” (a mildly pejorative term today) in which owners of assets did little more than collect rents on their lands to support their life styles.  Meanwhile, Marx and Engels popularized the term “means of production” to reference economic assets like land, labor and money.

In the twentieth century inventive economists like Kenneth Boulding asserted that all the means of production, the famous land, labor and cash, could be reduced to one thing in the modern economy which they called “know-how”.  Know-how is the sum total of all capabilities “stored” in people’s brains, on blueprints or in plans and models and any other intellectual device that maintains the “smarts” for how to make or do something.

In the modern world and the U.S. for example, furniture and textiles are made in the Carolinas because that’s where the know-how is; the same can be said for space travel Houston and Cape Canaveral.  You can say similar things about areas like Silicon Valley (and small parts of it like Route 92 in San Mateo where so much of the on-demand industry resides) Boston and New York (law, publishing and communications, finance) multiple urban areas that specialize in medicine, Los Angeles (entertainment, music, film), Chicago (commodities, futures and options).  The list is extensive and this sample leaves out a lot, but you see the point.

You could argue that these activities are not geographically bounded, good movies are made in New York for example, but the point is that there are a small number of hubs where innovation in a particular endeavor are concentrated.

Many would say that we still have a lopsided distribution of wealth but the distribution of productive assets is more even, because the most productive asset in the world is the human mind, hence the importance of know-how.  The distribution of productive assets is driving and being driven by things like on-demand because on-demand significantly lowers the cost of employing your most productive asset. Need to get somewhere but can’t afford a car?  No problem, there’s Zipcar.  Need technology to employ your productive asset and leverage your ideas?  No problem, computers are cheap and for everything else, there’s on-demand.

On-demand’s big challenge

There is one challenge out there that I can see which could overturn the whole apple cart though.  The on-demand society is fundamentally a pay as you go affair with little financial buffer capacity.  In a world where people own things, no one living on a wage can afford to buy everything which is one reason humans invented finance.  In the prior age, finance did what on-demand does with the critical difference that on-demand can be turned off much faster than the repo man can be engaged. 

Miss a mortgage payment and it’s serious but you will not be sleeping on the street tomorrow.  The same is true for a car payment.  But lose a job, max out your credit card and you won’t be able to rent a Zipcar.  So, curiously, while on-demand can significantly lower the cost of entering an economy, the lack of buffer capacity makes it easier to fall out too.  That may be the great challenge of the on-demand movement.

Fortunately there is at least one place to look for an analogy.  The on-demand industry’s roots go back, not to technology but to the era of commodity utilities.  Water, gas, electricity, telephone, cable, sanitary services and more are delivered to the user on-demand, often by a municipality but sometimes by private companies. 

We have come to regard many of these commodities as essentials of modern life and many utilities are regulated by municipal and state governing organizations principally, but not exclusively, to ensure that no person without the means to pay automatically or quickly loses access to these commodities.  We have also implemented laws that, among other things, enable a creditor to place liens on property to ensure payment.

On-demand technology services have not reached the level of essential commodities yet, though some might dispute that idea when it comes to cable service.  Nevertheless, some of the same issues of access may become important in the future.  What rights might a bankrupt company or its successors have to access its CRM data held in an on-demand system if use charges have not been paid?  I am sure legal minds have already contemplated this and other issues but it is now time for all of us to think about these issues too.

So, what did you think?

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