The Unicorn Model
The Most Effective Business Strategy of the 21st Century
In the last few decades, the United States has seen a rise in highly successful start-ups, aka unicorns. Their cosmic success comes from a few factors like our lack of data privacy, yet one of the key ingredients has yet to be identified: Asset Decoupling.
Asset Decoupling is a Natural Fortification that protects a business model from incumbent competition by undermining an incumbents’ assets. Existing companies struggle to compete with a model that, if copied, would take away value from their existing revenue streams and assets.
Innovation is often associated with revolutionary technology, but the innovations of unicorns are not usually technological. Business professor David Teece shows modern innovation is business model innovation. Technology enables business strategy, but technology is not a business strategy itself. Take a look at any of your favorite modern start-ups and you’ll find this to be true. Uber, Airbnb, Instagram, etc., all use off-the-shelf web, mobile, and AI technology. Those beautiful, rainbow farting, money-excreting unicorns were not born from tech but from business model innovations in the customer value chain.
Teixeira took Teece’s business model insights a step further by creating a framework for business model innovation in the 21st century. Asset Decoupling is based on Alexander Teixeira’s work in Unlocking the Customer Value Chain, so before delving into Asset Decoupling, we’re going to have a crash course on Teixeira’s work:
The “customer value chain” is not your classic Porter value chain. It is the set of steps that a customer takes to perform an action. Simple enough.
Each step can be:
- Value Creating
- Value Eroding
- Value Charging
Value creating is something we like doing, such as watching TV. Value eroding is something we don’t like doing, such as watching ads. Value charging is something we pay for, such as buying a cable service.
So watching TV looks something like this:
And TiVo’s customer value chain innovation would look something like this:
Another example is Uber. Uber took the value chain of transportation for the average American and cut out a large portion of the value-eroding activities.
Instead of this:
You can now do this:
(My diagrams are beautiful, I know, thanks.)
I’m simplifying Teixeira’s analysis to the point he’d probably be upset if he read this article (sorry, Thales!). A real customer value chain would be an incredibly detailed analysis of every action a customer takes. One could also include things like purchasing a TV, getting up to go pee, etc. All are part of the customer value chain and each one touches different revenues and assets. However, this will give you the gist. You should read his book for more — it is underrated (you’re welcome, Thales!).
Teixeira’s model is helpful in both its customer centricity and its ability to lay out plausible business models explicitly. It can describe the success of any modern company from Twitch to Twitter, Dollar Shave Club, to Dick’s Sporting Goods.
But Teixeira missed a causal factor that makes customer value chain decouplers so successful. Companies that use value chain decoupling often, either on purpose or by accident, disrupt the value charging activities of incumbents. This is Asset Decoupling.
Asset Decoupling
Teixeira’s model is all about the customer experience. But why couldn’t an incumbent just copy your innovation? To answer this question, we want to connect changes made in the customer experience to existing revenue streams and assets. If your customer value chain decouples a revenue stream from an incumbent, that incumbent will be unable to copy your business model innovation. This is a massive barrier to entry for the incumbent, and the larger the revenue stream, the larger the barrier.
Airbnb is one of the cleanest examples of Asset Decoupling. The major players in the hospitality space cannot compete with Airbnb’s model without undermining themselves. If, say, the Hyatt chose to start a home-sharing website, they would be actively working against the interest of their own hotels. Each room sold on their hame-sharing site would be money lost from their hotels, every marketing dollar spent selling the concept of home-sharing would reduce the value of their hotels. At some point, home-sharing might become so ubiquitous that the Hyatt Corporation will have no choice but to enter the market. There will be a large number of home-sharing customers who won’t even consider hotels as an option and the Hyatt could advertise their own home-sharing without massively undermining hotel revenues. For now, however, the Hyatt can’t do jack shit.
Other decouplings are less straightforward. Instagram, Twitter, and WhatsApp decoupled photo sharing, text sharing, and messaging from other parts of social media. Facebook could not copy either without cutting out a significant portion of their platform. Text, Photos, and Message are all important content assets and part of the attention-derived revenue streams for Facebook. This means that despite facebooks huge network effects the only recourse they have to social media upstarts is to purchase them.
Asset decoupling is so strong because the larger the player, the more they have to lose. Even the most profitable and operationally excellent companies can be stopped in their tracks, held hostage by their own revenues.
Let’s take a look at two major players: Netflix and TiVo, and use asset decoupling to identify the critical inputs to the success and failure of these companies. By Teixeira’s analysis, Netflix and TIVO had similar customer value chain innovations, yet Netflix smashed expectations while TiVo undershot its potential. What happened?
TiVo
In case you’re not familiar with TiVo’s story, here’s a quick recap. TiVo was a beloved product that launched in 1999. It was a hit. Customers were smitten by the godly power of fast-forwarding and recording TV. Chronos himself would have been impressed.
TiVo amassed a book of patents and IP to protect their invention. However, the market was slow to pick up TiVo. They didn’t understand the power! So TiVo had to share the good word. Their efforts were successful, if a bit slow. Oprah loved the product so much she gave away TiVos on her show. Former President Donald Trump said, “TiVo is one of the greatest inventions of all time.”
TiVo was such a unique tool that it became the verb to describe digital video recording. But as TiVo reached infamy, its competitors decided to take action. With better distribution channels and millions in advertising dollars, competitors got people who loved TiVo to turn around and purchase their product instead. To add insult to injury, people still referred to TV recording as “TiVoing” sometimes without even realizing they weren’t using a TiVo device. It is rumored that Doland Trump thinks he has a TiVo but actually has a generic DVR.*
TiVo’s story is often told as a warning to those starting a new market. TiVo didn’t spend enough money on marketing, and when they did, they were bearing the burden of creating a new market. It’s a parable to foretell the dangers and costs of educating a new product market.
I call BS. They just didn’t have the right business strategy in place.
Square, the successful ‘point of sale’ company, had to create its own market. Square taught a whole class of small businesses to accept credit cards in a completely novel way. And most of the marketing, especially in early years, was done through word of mouth. Square’s founders attribute their success to starting a new market instead of fighting in an existing one. Clearly, educating a market isn’t as much of a problem as TiVo made it out to be.
So if TiVo had legendary technology, a perfect moat, and a great market, what happened?
…
Let’s look at TiVo again and compare it with Netflix. We’re going to modify Teixeira’s value chain with an added emphasis on determining the origin of the value charges. We assign each value charge to an entity. So here’s our oversimplified TV model but with the modification:
And here is Tivo again:
And Netflix:
At a high level, TiVo and Netflix did a similar decoupling by effectively cutting out ads for the customer. But here’s the thing: TiVo was poised to compete with cable providers, but they decoupled network revenues, not cable providers. HBO and Stars hated DVR and could do nothing about it, but that had no strategic value to TiVo.
TiVo went toe to toe with cable providers who had no problem ripping off TiVo’s product and riding the wave of TiVo’s success. DVR features were swallowed up by the box that cable and satellite companies use. In the end, it was nothing more than a feature for their service.
On the other hand, Netflix is a media company, and their competition is HBO and Stars. These networks could do nothing to enter the space because it would have only accelerated the loss of their advertisement revenue. (You might notice that Netflix also decoupled cable, but this doesn’t count as asset decoupling because the same companies own cable and internet.)
Asset Decoupling made all the difference to their success.
Netflix
Netflix chose to compete with television networks and video rental by licensing content. Even at the beginning, when they had no money, they selected the cheap, niche films that the mainstream media had forgotten. This was Netflix’s first successful strategic move; the use of a Small Pond. They gained traction with the small group of film fanatics who loved choosing from movies off the beaten path.
Netflix’s first competition was video rental. Their business model decoupled both the video stores and late fees from the customer value chain. This means that blockbuster, with massive assets in brick and mortar stores and a significant source of revenue from late fees, was in trouble. The executives of Blockbuster weren’t daft. They saw Netflix coming. With their A-movie selections, distribution networks, and customer base, they could have easily rolled out a website to ship movies to their customers.
They just didn’t want to.
Even if they saw the future, they probably wouldn’t be able to do anything. There would have been massive pushback from the existing corporate structure, whose revenues would have taken a beating. They would undermine their brick and mortar assets and the expertise and logistics they developed around them. In addition, they would need to cut out late fees, which accounted for 15% of the companies’ revenue. Blockbuster was structurally incapable of competing with Netflix.
Maybe someday companies will develop a skill like autophagy — the ability to auto-cannibalize no longer needed in parts of the business — and adapt quickly. However, we haven’t created a company structure with that level of fluid, biological intelligence yet.
Let’s aIn order to model Netflix’s strategy, let’s add some more to our value chain model. We will make another modification and add any assets associated with the steps in the customer value chain. The goal is to connect customer actions/ interactions with the revenues and assets of the companies that touch the customer.
Video Rental at Blockbuster:
If Blockbuster had tried to replicate Netflix’s customer value chain, it would mean actively working against and undermining their video store model. They would have to cannibalize themselves to compete. The switch was untenable, and Blockbuster failed to adapt.
Once Netflix switched to streaming, it left the confused and mangled video rental market behind to compete with another media provider: Television Networks.
Let’s compare the customer value chain of television networks to Netflix:
Networks:
Netflix:
As with rental stores, television networks were under attack, and there was nothing they could do. To effectively compete with Netflix, these companies would have to abandon their most significant revenue stream: ads. Eventually, companies did copy the Netflix streaming model, but they did so only once Netflix became an existential threat.
You might say that Netflix did have an advantage over Tivo — a massively disruptive and life-changing technology — the internet. But the internet was a tool available to everyone. It enabled Netflix’s business model; it didn’t define Netflix’s business model. Looking back at Netflix’s origins in shipping DVDs — the customer value chain at this point was roughly the same as it is now. The internet just made it better by removing the value erosion of waiting for and mailing movies.
So what should TiVo have done?
TiVo did not have a viable business strategy to compete in the market. In contrast, Netflix used two Natural Fortifications for competition with the market: a small pond strategy and asset decoupling.
What Tivo did have, was an intellectual property moat. They could have used it more effectively. IP moats are effective for Architectural or Licensing plays. TiVo needed to either use their proprietary technology to make a play for completely replacing cable providers, or they needed to license their technology to these providers as a feature. An architectural or licensing play would have looked like this.
In an architectural play, TiVo would start its own cable company to compete with an intellectual property advantage. In a licensing play, TiVo would license its product to cable companies.
They eventually did change their strategy. TiVo Started licensing its technology to the likes of DirecTV and found their success. While TiVo’s technology is still available to purchase, their play in the B2C market is generally considered a failure, while their licensing is a highly profitable business.
I call Asset Decoupling the Unicorn Model because it is a particularly effective strategy in large markets with wealthy incumbents. Without Asset Decoupling, incumbents in these markets would keep stomping out competing companies to keep their market dominance.
Asset decoupling isn’t the only way to flush out an entrenched incumbent. Sometimes competition can come in from tangential markets such as audacious competitors like Tesla, Square, and Southwest, which decided to compete by moving outside the existing market boundaries. These companies become highly effective at providing a service that eventually grows to compete with the incumbents. However, directly competing within an existing market almost always requires Asset Decoupling.
The weakness of Asset Decoupling has to do with the magnitude of the market potential. Asset Decoupling can draw new competition looking to take advantage of the innovation. This often leads to capital-intensive battles for dominance over the new customer value chain. Uber and Lyft are such an example. Neither of these companies had to worry about incumbent competition, but they both operated at a venture capital-funded deficit for many years competing between themselves and other start-ups.
Other Natural Fortifications can mitigate the competitive risk from copycat start-ups. Rivers, small ponds, and blue oceans are effective here.
Customer Value Chain Innovation with Asset Decoupling has and will continue to change the face of every industry. Everything from medical supplies (Buttn) to prescription glasses (Warby Parker) to video games (Twitch) is undergoing this form of business model innovation, with the resulting companies finding astounding success on the market.
