SUPPOSE YOU COULD find all the socks you ever lost. Now suppose getting those socks back enabled you to earn a better living, or work faster and smarter. Wouldn’t you be willing to pay someone to locate those socks on a worldwide sock exchange? That’s the crux of a business category that some entrepreneurs and investors find pregnant with opportunity. “We think this is the next hot thing,” says Jeanne Sullivan, an executive at StarVest Partners, a New York venture-capital firm developing a specialty in this area.
Unfortunately, the business world has given this baby a jargony name: Data as a Service, or its diminutive, DaaS. It rhymes with SaaS, its better-known cousin that stands for Software as a Service. SaaS is the catchall name for on-demand software applications like those on an iPhone. DaaS, in contrast, recognizes that software is becoming a commodity; it’s data mixed with software that’s king.
DaaS offers some intriguing possibilities for start-up types—a chance to build a lucrative business that can grow rapidly without needing a big workforce to keep it running. Better still, if you’re the first to build that sock database, you can have a near monopoly. So while start-up costs can be high—think anywhere up to $10 million to set up servers and a slick Web presence—profit margins tend to be fat. That’s because the business model involves gathering information that’s relatively inexpensive or even free to the collector, analyzing it and slicing it into easy-to-consume pieces for people who will pay for it again and again. In business-school speak, “it’s monetizing rich data,” says Sullivan. Imagine, for example, being able to search the sock exchange to find socks that match a user’s singleton socks exactly and then to find the buyers nearest to the user who are willing to meet his price.
Some established businesses, like the Zagat Survey restaurant guides, already roughly fit the category—Zagat gets consumers to fill out restaurant surveys and organizes them into guides that grow stale and need replacing, like last year’s fashions. Much more DaaS-like, and one-upping them considerably, is OpenTable. The company sells restaurant-reservation software to restaurants and offers diners online reservations and the ability to search restaurants by geography, cuisine and price; its recent IPO was seen as one of the brighter moments in the postcrash economy. The datacentric companies are among the fastest-growing these days, according to Louise Garnett, an analyst with information research firm Outsell: “I see two to three new ones each week.” Where 1990s-style Web businesses often kept the technical and content elements separate, she notes, the growth today comes from companies that can integrate the two. Overall, the information industry grows 5 to 10 percent a year, according to Outsell.
What do all these ventures have in common? Lemons. George Akerlof’s lemons, to be precise. In the late 1960s the Nobel Prize–winning University of California, Berkeley, economist sought to answer the age-old question of why buying used cars favored the seller over the buyer. The buyer couldn’t know whether the seller was selling because he needed the cash, or because the junker had unseen repair and maintenance issues. Akerlof proved that the buyer’s inability to discern the difference between a good car and a lemon drove down the prices of all used cars. Buyers don’t like uncertainty, so many would simply walk away from the transaction. Fewer buyers means lower prices—hence the canyon-like price differential between new cars versus those driven even slightly. (And here we thought consumers were willing to pay thousands more for that fresh-car smell.) In financial markets, investors unable to distinguish between a great business and a loser will put their money into cash and leave start-ups without funding. Under Akerlof’s logic, providing more information, with a level playing field for buyer and seller, creates business opportunity.