Franchise of One Model

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Tim O'Reilly:

"In many ways, Uber and Airbnb represent a 21st century update of the franchising model. In franchising, the parent company brands and markets the product, sets standards for producing it, and charges a licensing fee and receives a percentage of revenue from each of its franchisees.

The difference is that technology radically lowers the barriers to being a franchisee. In many ways, you can call the modern trend “the franchise of one.” The smallest unit of franchising in the past was a small business, with all the overhead that implies: real estate, equipment, uniforms, employees (including managers), and so on. Today, the franchise can be a single individual, and that individual can work only part time, so it’s really “the franchise of one or even less!”

Branding and advertising are much less necessary because the app itself becomes a customer habit that delivers business. There are little or no capital requirements, workers can schedule their own time, and turn their own under-utilized personal assets (a car, a house, or other equipment) into business assets. In her book Peers Inc, Robin Chase refers to this as “excess capacity.”

This is exactly the dynamic that Kilpi references when he describes how the radically lower transaction costs of networks give them advantage over traditional firms.

Hotel/Motel (blue) vs Airbnb (red) locations in San Francisco. Source: Though the details of the taxi industry differ from the hotel industry, the same dynamic applies to another great success story of the On-demand economy, Airbnb. Like Uber and Lyft, Airbnb uses technology to make excess capacity available in locations that were otherwise extremely poorly served. Even in great cities, hotels are available only in some neighborhoods, and completely unavailable in others. By contrast, Airbnbs can be found anywhere that there is demand.

A small personal anecdote: I recently got married in Fort Tryon Park in New York City, near the Cloisters. The nearest hotel is 1.5 miles away, and the closest “nice” hotel 3.8 miles, yet my fiance and I were able to walk to our wedding site from a beautiful, comfortable Airbnb facing the park and just 5 minutes away. Many of our guests stayed locally as well.

As with Uber and Lyft, we see that the granular nature of supply (the franchise of one, or even less than one) makes it easy for more natural market mechanisms to come into play. People can offer a resource that they already own, testing the market to see if there is demand and at what price. If they are satisfied with the transaction, they can continue to offer that resource. More supply will come on stream to match demand in highly desirable locations.

There are some interesting lessons, though, about the evolution of the supply network. While Airbnb began as a network of properties offered solely by individuals, already 40% of Airbnb properties are now offered by hosts who own more than one property. There are also anecdotal reports that small companies owning multiple cars are starting to be part of the Uber network." (