Lesson 2. Drive To Demonetization

One of the most important—and least celebrated—achievements of the internet is that it has cut the marginal cost of marketing and sales to nearly zero. 

By this, we mean that with the web, it became possible to promote a product worldwide for a tiny fraction of what it cost just a few decades earlier. It is precisely this advantage that has allowed businesses such as Amazon, Alibaba, and eBay to scale with extraordinary speed to become some of the world’s biggest companies.  

What’s important to understand is that in the age of the Exponential Organization, the exponential cost drops not only for sales and demand generation but also for the cost side, with a radical drop in the cost of supply. For example, the use of crowdsourcing and community ideation by companies like Xiaomi, GitHub, or Reddit means their product development costs approach zero. 

What we’re now seeing with ExOs—and this is tremendously important—is that the marginal cost of supply goes to zero. 

A case in point: it costs Uber a pittance to add an additional car and driver to its fleet. For Airbnb, the marginal cost of adding a room to its inventory is near zero—not so for Hyatt or Hilton, who have to build an entire hotel. ExOs are able to scale their businesses with near 100% variable costs, even in traditionally capital expenditure–heavy industries.

This advantage seems obvious when it comes to information-based or information-enabled sectors. But remember: every industry is becoming information-based, either by being digitized or by using information to identify under-utilized assets (e.g., collaborative consumption). 

In their book Abundance, Peter Diamandis and Steven Kotler argue that as technology brings us a world of abundance, access will triumph over ownership. They argue that technology is a “resource-liberating force” that makes available resources accessible at increasingly lower costs. By comparison, scarcity of supply or resources tends to keep costs high and stimulates ownership over access.  

In traditional industries that can be fully information-enabled, new competition has produced staggering revenue drops for old companies. The business models for music, newspapers, and book publishing, for example, have all suffered through this transformation, and today these business models look almost nothing like they did ten years ago. The newspapers that have survived have largely shifted their revenue efforts to their web pages; the albums and CDs of the music industry of old have since dematerialized into Spotify playlists; and many of today’s bestsellers enjoy most of their profits from e-book sales.

We believe the next industries to fall will be education, automotive, and energy. Take cars. Trends today indicate that the younger generation doesn’t want to own cars. Many teenagers aren’t even getting driver’s licenses. By 2018, Tesla cars in autopilot driving mode had fewer accidents than human drivers driving the same distance. There’s obviously some catching up to do by the insurance and regulatory side. Clearly an autonomous taxi model of payment per kilometer is coming.

Demonetization does not have to be at the product level.It can also destroy demand. At the 2016 Rio Olympic Games, for example, major construction companies started planning for the needed 60,000 hotel rooms (Where would they place new hotels? Who needed to be bribed? Etc.) And then, instead, Rio decided it had no space for a bunch of new hotels and partnered with Airbnb instead. That’s 60,000 unbuilt hotel rooms.