Underutilized Capital Capacity

Wow – it’s been exactly two years and three days since my last post.  Guess the now-not-so-new gig at Google has been keeping me busy!

I had dinner this evening with an old friend from business school and our conversation wandered into the recent trend of monetizing underutilized capacity in capital investments – which is obnoxious financial-speak for renting out (expensive) stuff that isn’t being used.

The most obvious examples of this are Uber (town cars) and AirBnB (vacation homes).  Both town cars and vacation homes are highly underutilized assets – they stand idle or empty a significant amount of time.  By making this downtime available for sale via the Internet, the owners of the town cars or vacation homes can make a surprising amount of money.  In the case of Uber, the town cars were presumably breaking even or close to it, so the extra sales, minus some variable costs like gas, fall straight to the bottom line.  Every town car driver I’ve talked to in San Francisco absolutely loves Uber, because it makes the time between airport trips much, much more profitable.  (Btw, I’m more or less convinced that San Francisco is the perfect market for Uber – relatively high population density, technically savvy populace with disposable income, insanely bad parking situations, highly unreliable taxis, and horrendously broken public transit.  A perfect storm of positive circumstance for Uber.  But will other cities have the same confluence?  To be determined, I suppose….)

In the same vein, companies like Just Share It (and others) allow private vehicles to be rented on a part-time basis.  Again: monetization of underutilized vehicle capacity, albeit sans driver.

Zipcar, City Car Share, et al,  are a bit different.  Instead of monetizing underutilized capacity, these companies allow would-be car owners to avoid underutilization altogether.  In cities like San Francisco or New York, most car owners will find that their vehicles sit in the garage for the vast majority of their existence, getting occasional use on weekend trips to Napa, Tahoe, or the Hamptons.  The owner is paying a lot of money for occasional utilization.  Inefficient!  Instead, Zipcar allows these folks to engage in what amounts to fractional car ownership, thus paying only for the amount of car-time that they actually use.  Ahh, much better.

My favorite entrant into this fray is the hilariously sketchy iPhone app known as Side Car.  Operating in San Francisco, this app essentially turns unemployed or semi-employed citizens who have vehicles into impromptu taxis.  Basically, it’s Uber using random people and their cars.  (A couple of weeks ago, I was picked up by a lady in a beat-up green Subaru who made my buddy Lexi and I sit in the back seat – with her laundry.  True story!)  As far as I can tell, these drivers and their vehicles have no official sanction other than a standard drivers license.   To get around the need to register a taxi or limousine service, the Side Car app calls all fees ‘suggested donations.’  It’s working for now, but if they ever achieve scale, I guarantee you the taxi drivers union will have them shut down.

Which brings me to the larger point:  any change in the marketplace has winners and losers.  In urban transportation, it’s Uber vs Taxis vs Side Car vs Public Transit vs the auto manufacturers.  In lodging, it’s AirBnB vs hotels/motels.  My question: what’s the net effect on the economy as a whole?  Increased vehicle utilization = fewer cars sold = fewer manufacturing jobs.  Presumably, AirBnB = fewer hotel jobs.  Of course, increased capital utilization is good for those who own the vehicles/houses/whatever, but does this benefit everyone equally?  Doesn’t sound like it to me.   These trends are still in their infancy, so I guess we’ll have to wait and see.

See you next time!  (Hopefully, it won’t be another two years!)

5 thoughts on “Underutilized Capital Capacity

  1. Maybe I’m an idealist, but I think more efficient use of capital always leads to a positive net effect on an economy. So I think the trend you artfully describe is generally a good one, even if there are short-term “losers” oriented around previous, less capital-efficient models.

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  3. Hey Ethan – thanks for stopping by!

    Re your comments on net economic benefit: I’m not certain I’m quite there yet. Certainly the instinctive reaction of the closet-efficiency-freak within me agrees with you. Yet, I wonder if all that excess capacity (paid for by those able to afford it) was on some level an unexpected mechanism for wealth re-distribution, which created jobs, etc, etc. If increased capital efficiency leads to a higher savings rate among the wealthy, what happens to those who depended upon that (now-replaced) spending for their jobs and livelihoods?

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