Many years ago, I led a significant software development project for a leading international bank which handled the monthly transactions of billions of dollars with interest rate calculations granularized to 1 basis point, that is, 1/100 of a percent. When a Beta model was being tested, I encountered an interesting problem – that 1 + 1 did not necessarily add to 2. Because of the large scale of the financial numbers, the binary basis of a PC created a diverging result when transferred to decimal system: the jump from decimal to binary and back to decimal did not add up consistently during the many mathematical calculations. These discrepancies were not immaterial, reflecting millions of dollars on a monthly basis. And this problem began my realization that while the digital world might be efficient in its own binary system, it can face some discrepencies in the real decimal world. What I am getting at, that a beautiful functioning program or application that ignores the real world can face a reality check when deployed in the marketplace without a fully realistic business model.
For example, let us look at AirBnB, a great digital product for people to post available beds to rent online. Wonderful model. Simple. Then it encountered the real world –hotel occupancy taxes and personal income taxes. Now that very simple model has quite encountered a few wrinkles. Hotels, which duly charge such taxes to guests, must have been the first to alert the governmental authorities. Facing losing occupancy rates, they knew that AirBnB had to face the same regulatory and administrative expenses in running its business. Now AirBnB is investing considerable public relations resources to have the taxing authorities carve an exception to its business model, but I doubt it will in that battle. The taxing authorities know that it has to provide an even plane to the hotel industry. Otherwise, they will lose millions of dollars of tax revenues.
We have so many digital entrepreneurs hatching new businesses without applying non-technological issues which could go wrong in a business plan: competitive environment (hotels), regulatory (taxes, local and federal). As if someone forgot to include them in the perfect digital model. I see many apps being developed and financed without vetting them against real world marketing tests. Sometimes I believe that many of these digital wizards have led a very insular lifestyle. And many believe that a cool app should be simply successful because it works.
The real world is not perfect. And there are so many variables that surface when applying a simple business model or a software app. I still revert to my blogs discussing business strategy. Technology is only a component of strategy, not the totality. And that is why AirBnB is facing such resistance.
Going back to the software program I developed, I resolved the decimal system problem by applying an internal module that consistently rounded off the calculations throughout each phases of the program. Finally, 1 plus 1 did add to 2. I took into consideration the variation and corrected it. Equally true each new digital business plan has to take into account barriers which will impact its business model before finalizing its product.