The Only Two Business Models That Matter?

This is Part 1.

In Part 1, I discuss why rents vs tolls is an increasingly relevant and powerful descriptor of business models (from a revenue generation perspective) and why it matters.

In Part 2, I discuss the conditions that allow for the rise of rents, why technology is becoming the new “landlord”, and why you want to own it anyway as a hedge.

In Part 3, I will discuss the missed opportunity in crypto to break the cycle.

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In recent years, the business and strategy world seems to have become increasingly fond of saying “there’s only two ways to make money: bundling and unbundling”.

This phrase originally came from Jim Barksdale, the CEO of Netscape during Netscape’s IPO roadshow. And has been highly popularized by Netscape co-founder Marc Andreessen over the years.

There’s a lot of evidence that suggests this is true.

Cable succeeded by bundling content into a nice package.

Netflix succeeded by unbundling cable content. Eventually the cable bundle got too big and too expensive. No one wants all that content. So Netflix unbundled it.

But now Netflix may evolve again by creating a new bundle with Netflix at the center.

Cable is dying from unbundling, but it is evolving by putting cable internet at the center of its new bundle. Maybe you don’t want to pay for content anymore, but you still need internet.

Banks succeeded by bundling deposits and lending. People need a safe place to put their money, but that gives banks the data (on payroll and your finances) and presence (branches) to allow them to bundle lending into your banking relationship.

The way it works in every scenario is the same: You take something that works, and you bundle it with other things that make you more money that the customer might not have taken otherwise.

Banks are good at deposits (not least because the government insures it!). But banks are not so good at lending (because they might make you beg). But the bundle gets you in the lending door.

Fintech is now succeeding by unbundling lending.

And fintech is evolving their own new bundle! Some are becoming banks and rebundling deposits. Some are becoming brokerages involving equity and crypto trading. And others are becoming something entirely novel with commerce.

Bundling and unbundling. There are plenty of examples in every industry. So it’s no wonder this view is gaining popularity.

There are technically a lot of business models out there.

Banks.

Insurers.

Retailers.

Industrials and manufacturers.

Commodity producers (oil, metals, agriculture, etc).

Software.

And more.

They all have distinctive features and differences.

But the concept of bundling and unbundling can encompass it all. That’s what makes this description powerful and interesting. This is especially true in the internet age and the rising trend towards super apps and broad, all-encompassing ecosystems that can do it all. The dominant business strategy and business model right now is to unbundle the incumbent and create a new digital-native bundle.

While bundling / unbundling is a powerful and versatile descriptor, what I’ve increasingly been drawn to is a different view that is (I think) just as powerful but receives far less attention: Rents vs tolls.

The world increasingly seems to be divided into businesses that seek to take rents (charge for your time and your existence) and businesses that seek to take tolls (charge you for passing Go).

Rents are fairly straightforward since we all have some direct experience with it. Rents is what you have to pay simply to exist in a place and time. For example, in your house (either direct rents to a landlord or perhaps the mortgage you pay to your lender). You pay this simply as a function of the passage of time. The winners in a world of rents are the people that show up first. Everyone else that comes after, pays rents.

Tolls are less obvious. But I will argue that most traditional businesses that people think about are tolls. A toll business charges you whenever you pass Go. Whenever you get something and make progress on something that requires another party’s input and pays for it, that’s a toll. Your employer pays you a toll to progress your product / work from stage A to stage B. You pay a toll to your hairdresser to progress your hair from long and messy to something more attractive. We all pay tolls to our local supermarkets or restaurants to progress from hungry to not hungry.

The reason I think this description is becoming increasingly more interesting than bundling / unbundling is because bundling / unbundling really only (at this point) describes the old vs the new. And sooner or later only the new companies will matter anyway. All new companies that matter are all unbundling the incumbent and trying to rebundle in a digital-native way. When all new companies that matter are doing this, the description starts to become less useful.

However, not all new companies are pursuing the same outcome with respect to rents vs tolls.

And I think that makes it far more interesting to consider.

History also highly suggests that observing rents vs tolls may be important for recognizing and predicting economic vitality and dynamism.

History is filled with examples that suggest rent-seeking business models tend to stifle innovation and progress.

I don’t know about you, but I’ve never really heard anyone say good things about their landlords. There are good reasons most people view rent-seeking behavior as hostile, and at best, tolerable. Because the fundamental nature of rent-seeking behavior (whether it is necessarily true or not) makes the customer feel as if they are paying for limited progress or work.

This is not the case for tolls. Not all tolls are fair, but all tolls are matched with and paid for when services and products are provided.

What I think will be increasingly interesting to monitor is how the digital world evolves with respect to rents vs tolls.

Rent-seeking behavior is not something that can pop up at any time. Rent-seeking behavior can usually only appear when there are new greenfield opportunities whereby people that arrive early can seek to establish power and extract rents from the people that follow.

We are in the midst of a massive explosion in digital world creation. This creates significant potential for rent-seeking behavior to arise. And if the digital world trends towards rent-seeking behavior (and there are definitely reasons to be worried), it may make physical world landlord rent-seeking behavior look saintly. At least your physical world landlord does not have you enmeshed in all-life encompassing ecosystems that you cannot escape.

In real life you can move if you don’t like your landlord. It’s not easy, but you can. Ironically, in the digital world, where theoretically everything is infinite and not supply-constrained, we are increasingly captive to ecosystems that we cannot escape.