It’s back to school time and the market is telling us to brush up on our business model knowledge because things have changed significantly since the halcyon days of the early tech bubble. Two stories much in the news that are not associated with things emanating from Washington make the point. They are Bitcoin’s relentless climb to market prowess and Über’s appointment of Dara Khosrowshahi as its new CEO. The two are related, bookends to this story.

Bitcoin, and other stateless, fiat, crypto-, distributed ledger currencies, continue to gain altitude and people worry about a bubble forming. They should and shouldn’t according to Luke Burgess at WealthDaily.com. In a story posted on Sunday, August 28th, he writes that Bitcoin is a bubble and that it is not necessarily a bad thing since markets do recover from bubbles—at least some of them. A word of caution, some people will likely lose money when the bubble pops and for them Bitcoin will be remembered as, perhaps, one that got away. But the market will likely continue.

Burgess’s larger point is that all markets go through bubble phases when things are very new and we don’t have a clue about how to value them. He says:

The truth is, market bubbles are highly misunderstood. To a layman, a bubble burst might mean the complete collapse of a market. Of course, as investors, we know that's simply not true.

To Burgess, a bubble is the market’s way of determining the long-term value of a new or disruptive innovation, as he puts it:

When a new asset is first introduced, its real value is unknown. It ultimately needs to be tested. And that's where speculators step in. If speculators believe a new asset will be worth more in the future, their demand will drive up prices. And in a free market, this is simply what causes bubbles. But this is also what allows new assets to be properly valued.

Burgess gives us a raft of examples of things that have had bubbles from Dutch Tulip bulbs to this century’s housing bubble and even Bitcoin. His major point is that the bubble is an exercise in assigning value and it’s important to know two things about this process.

Nnot all fads that experience a bubble end up on the other side with continuing markets. Burgess uses Pet Rocks and housing to make his point. Pet rocks are gonzo but housing is still with us as a necessity of life. What the housing bubble was testing was the value and utility of subprime loans and derivatives as the market went through a business model shift and what we discovered was a need for greater transparency.

Bitcoin might be at a similar spot. With a valuation of $70 billion it’s way beyond pet rock status. Still, as with subprime loans and derivatives the jury is still out on the safety and non-transparency of aspects of crypto currencies of which Bitcoin is a player. It’s all business model at this point and Bitcoin’s value in society is far from settled so beware.

Over to Uber

Now transition to Über and it’s new CEO Dara Khosrowshahi who comes from a successful 12 year run as CEO at Expedia, the travel site started by Microsoft. Khosrowshahi’s tenure was not without a few bumps in the road and an article in the New York Times 2 identifies a big one, which was all about Expedia’s early business model.

According to Times reporter, Farhad Manjoo, in the early years of Khosrowshahi’s tenure:

Expedia then operated according to what’s known as the “merchant model.” Under this system, when you booked a hotel, you would pay up front to Expedia, which would take a profitable cut of the deal and buy the room on your behalf. Expedia’s margins were startling — the company got 25 percent or more of what you paid for the room.

But trouble was on the horizon in the form of Boooking.com, acting as a disruptor using an agency model that enabled it to take smaller margins on individual transactions. The agency model enabled Booking.com to be more customer centric charging less, taking a smaller cut, and also letting customers pay when they arrived at their hotel rather than up front as was the Expedia model.

The difference is profound. For Booking.com, the agency model enabled the company to build market share quickly and to eclipse Expedia before that company eventually began fighting back with a revised model under Khosrowshahi.

My take

The irony is that selecting a business model is a key decision that every emerging company makes in an effort to capture as much market share as possible in the early yeasty years when a market is growing exponentially. But selection of a model is directly tied to the vision of the eventual outcome. Do the founders, investors, and first executives want to conquer the world a la Amazon and Jeff Bezos or Über and Travis Kalanick? Or do they wish to create a sizeable niche in an established market co-existing with earlier or mightier entrants as Expedia eventually did?

Bitcoin is at a transition point. It’s too big to fall apart when its bubble bursts but it’s also hard to see if it can become a global currency rivaling the dollar or the euro without the full faith and credit of a nation state behind it with all of its regulatory power. Über is in much the same boat and for it and Bitcoin in different ways the next weeks will reveal the directions of each business’s models and therefore vision and much that will follow.