In the digital era, it’s the route to customer, not the balance sheet, that matters
Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content”.
The quote has become the accepted metaphor for disruption in the internet age – so much so that it was cited by more than 80% of the speakers at a conference we attended in London last November.
What started as an interesting observation – that the internet has shaken up the supply chain and allowed for the emergence of balance-sheet-light, distribution-only platforms - has morphed into orthodoxy. In the information age, the theory goes, one set of companies does the hard work of producing goods and services, while another set – internet platforms – distributes them, earning super-normal profits on account of having few assets and negligible costs.
This is an interesting and intuitively appealing theory, but it doesn’t hold when you examine it in detail. It turns out that these internet platforms are not as balance-sheet light as we might think and are, in fact, becoming much more operationally geared and vertically integrated as they seek to cement leadership and deliver better customer experience. But, more importantly, it looks at digitization through the wrong lens. The fact is the internet era is not producing an overall trend to smaller balance sheets – just different routes to customers (with varying delivery models). And when we look at the fintech sector, we see no reason why this won’t be the case, either.
Hierarchical models have given way to ecosystems. Within an ecosystem, some things are controlled while others are not; some assets are owned, others are not. What matters is the route to customer, not the size of the balance sheet.