This post originally appeared on TheAtlantic.com:

How Steve Case and His Company Are Driving the Sharing Economy

By Derek Thompson

The folks that brought you America Online have quietly launched Zipcar, LivingSocial and the Web 3.0. But is the sharing economy a peculiarity of the recession or the beginning of a brave new market?

Three days after Steve Case, the founder of America Online, stepped down as chairman of AOL Time Warner in 2003, he took a longtime colleague out for pizza. Case wanted to get back to building companies. He wanted to open a new venture capital firm to attack old industries with the same dynamic, unwieldy Internet that AOL had harnessed before it was trampled in the mid-2000s.

One year later, his firm, Revolution, had acquired a vacation-home sharing company that now owns $1 billion in mansions around the world. Three years later, it helped to create what you know as Zipcar, now the world’s largest car-sharing company. The same year, it invested in a new company started by four former employees called LivingSocial, an online social commerce company with more than 45 million global members.

A luxury-home network. A car-sharing company. An explosive deal site. Maybe you see three random ideas. Case and his team saw three bets that paid off thanks to a new Web economy that promotes power in numbers and access over ownership. The so-called sharing economy has taken off in the Great Recession, as companies like Netflix and Zipcar have allowed the exchange of DVDs, cars, clothes, couches, and even kitchen utensils. The promise of a post-ownership society is that we can do more, own less, and rent the rest with Web-enabled companies. That’s a huge break for cash-strapped families in a weak recovery. Whether it’s good news for companies who rely on customers to buy new things, rather than share old purchases, is much more complicated.

On January 10, 2000, Steve Case signed a deal that married AOL, then the largest Internet company in the world, to Time Warner, the world’s largest media and entertainment company. At $165 billion, it was the most expensive merger in American history, designed to produce the world’s next great media conglomerate.

The marriage didn’t last the decade.

AOL was a juggernaut of disruptive innovation with a stock worth twice as much as Time Warner at the time of the merger. But the Internet bubble of the late-1990s, and the online ad surge that rode its mighty expansion, was already beginning to pop. AOL’s top source of income was paid subscriptions for dial-up and e-mail. In the years after the merger, the Internet faced what Case himself called a “nuclear winter” of Web advertising. Simultaneously, new online start-ups were disrupting the Disruptor by turning the Web and email into free commodities. In short, AOL was being usurped by the very forces of Internet innovation that it helped to revolutionize.

And so, on January 12, 2003, nearly three years to the day after the merger was sealed, Case resigned as the chairman of AOL Time Warner. Late that spring, he left the company. It was a Friday. On Monday, he and his longtime colleague Donn Davis had lunch at a California Pizza Kitchen a block south of Dupont Circle in Washington, D.C.

“I feel like everything we’ve done came out of that one lunch,” said Davis, a five-year veteran of AOL and now a general partner at Revolution (and once baseball’s youngest contract lawyer for the Chicago Cubs). “I remember eating a barbeque chicken pizza and talking about how at AOL we had been attackers. We wondered what if we attacked big traditional industries where there has been very little change and very little innovation.”

At a meeting in Steve Case’s current office at Revolution, in a converted townhouse on Rhode Island Avenue a few blocks from their foundational pizza lunch, Case recounted his transition between AOLand Revolution with brisk matter-of-factness.

“I spent almost 20 years building up AOL,” he said. “The first decade was the pioneering decade. The second decade was prime time. I really enjoyed the first phase better. I wanted to take the things I learned in the first phase and apply them to other consumer businesses.”

Like any venture firm, Revolution would spread its bets across a variety of projects. Before it would find the companies that helped revolutionize the car and discount industries, its first unequivocal success was a small vacation-sharing company called Exclusive Resorts.

It was a Tuesday, four days after his boss stepped down as chairman of AOL Time Warner, when Donn Davis arrived at the Case Family offices around 10:30 am. Case was already there, already excited about a new idea.

“You know I’ve been thinking,” Case told him, “what about doing something with vacation homes? It’s a huge industry. It’s an expensive hassle to maintain the houses. There’s gotta be something there.”

He was right. Vacation homes are indeed an expensive hassle, as you’ll agree if you’re among the tiny group of Americans who owns one. The average cost of owning a summer home is more than $100,000 a year in mortgage, upkeep, and insurance, according to Revolution’s research. The average use is only 17 days a year. That comes out to almost $6,000 per vacation day — equal to four rooms at the Four Seasons Hotel George V in Paris — and that’s after you’ve bought the home.

Two weeks after leaving AOL Time Warner, Case discovered Exclusive Resorts, a club that shared a handful of luxury condos and houses among a select group of members. He liked what he saw. And, because he was interested in luxury homes anyway, because he saw an opportunity to try out a new theory of business, and well, because he’s Steve Case, he decided to buy the company.

By the end of the year, Revolution would own 80 percent of Exclusive Resorts. In three years, membership grew by 100-fold. The real estate portfolio grew to more than $1 billion.

The simple idea behind Exclusive Resorts was “fractional ownership,” which is a more syllabic way of saying “sharing.” Wealthy families pay a membership fee for access to one of hundreds of large homes in choice locations, from Peninsula Papagayo in Costa Rica to the Eden Club in St. Andrews, Scotland.

This was 2003 – a geological epoch in the past, by Web standards. There was no such thing as YouTube. Facebook was a few months old. The sharing economy was so young, it didn’t even have a name.

Still, Case and Davis knew they were onto something. If thousands of families would pay for access to homes, maybe they’d pay for access to other things. What was similar to a vacation home — expensive to buy and a hassle to own — but with much broader appeal? It would have to be something that people spend thousands of dollars to buy but could just as well use without owning.

What about cars?

“An important aspect of entrepreneurship is paying attention and noticing things,” Case explained to me in his corner office at Revolution. And one day in 2005, two years after leaving AOL Time Warner, he did notice something on the street. It was called a Flexcar.

“I though, huh, what’s a Flexcar?” A few weeks later, he noticed something else. Something called a Zipcar. “I thought, huh, what’s a Zipcar?” After a little snooping online, Case got his first taste of the car-sharing economy. It was small. But it was promising.

So Case called the CEOs of Flexcar and Zipcar to talk about their companies. “I said, ‘Hey I’m Steve Case, you’re doing something interesting, and maybe I’d like to work with you.'”

That year, Case and Revolution bought control of Flexcar. He brought in a new CEO. He assembled an all-star board headlined by Lee Iacocca, the former CEO of Chrysler and presidential candidate, and Joe Vittoria, the former CEO of both Hertz and Avis. Then he merged both car-sharing companies and held on to about 30 percent of the new entity. They called it Zipcar.

Car-sharing offered two distinct challenges for the Revolution team. The first challenge was getting car moguls on board. (“Only hippies share cars!” one Revolution executive said, rehearsing for me the initial reaction among some investors.) The second challenge was getting insurers on board to put Zipcars on college campuses.

The college move turned out to be a genius stroke. Urban and suburban campuses provided the perfect place to share cars, not only because they’re dense, but also because parents will pay for the first few years of Zipcar use. If the students move on to big cities with decent public transportation, Revolution realized, the graduates would take their Zipcar loyalties with them.

So they did. Zipcar is a publicly traded company today, operating in 14 major metro areas and more than 230 college campuses. Sharing cars is so standard in crowded U.S. metros today that it’s hard to imagine how foreign the concept seemed to other investors just six years ago.

“We decided it would be a mainstream phenomenon. Now it’s a multi-billion industry,” Case said. But the industry that Revolution is most famous for helping to transform is even bigger than luxury homes or cars.

That would be the business of buying.

Just as Zipcar was taking off, a young, promising employee from Revolution told Case he was quitting the company and taking three friends with him. Case wished him well and expressed interest in backing the new project. The employee’s name was Tim O’Shaughnessy. He’s the CEO of LivingSocial.

LivingSocial wasn’t always what you know as LivingSocial. It began as a family of Facebook applications to let people show off their favorite books and beers. Revolution bankrolled the company a bit of seed capital.

But even with millions of visitors, the apps weren’t making much money. It turned out that getting users was harder than getting paying customers. So O’Shaughnessy called a meeting in his office inD.C.’s Chinatown. He announced he wanted to pivot away from apps. He wanted the company to be more aggressive about making money by interacting with customers. He wanted to get into the business of online vouchers.

Some members of the team were skeptical. This was, after all, a pretty significant pivot. But Tige Savage, another co-founder of Revolution and a LivingSocial board member who was sitting at the table, wasn’t one of the skeptics. The eureka moment, he said, came when the company bought an app called Buy Your Friend a Drink, which created Web coupons for free drinks at local bars.

“This app used mass messaging to get friends to meet up at a merchant,” Savage said. “And that’s what we wanted to do. So we took the salespeople from that business and used them to help launch the company.” The LivingSocial team was still nervous about the transition, as the Washington Post reported, but Savage and O’Shaughnessy saw the potential for a global breakthrough. They were right. Today, LivingSocial has more than 45 million worldwide users. Along with its larger rival Groupon (which went public last week at a valuation of more than $13 billion) and other online social commerce sites, it has reinvented local advertising by using coordinated marketing campaigns to send consumers to smaller “brick-and-mortar businesses” that were threatened by chains and big box corporations.

LivingSocial is a “once-in-a-generation bet,” says Davis. (“Wouldn’t it be cool if it were this easy to look around and find a great company? It’s not.”) By September this year, the company employed several thousand employees around the world, and it has helped to put Washington, D.C., on the map as a mini-Silicon Valley of the East.

But even more important is what LivingSocial represents: the power of new Internet companies to move people off the Internet and get them buying stuff and doing stuff they wouldn’t have otherwise. LivingSocial isn’t a typical “sharing” company like Exclusive Resorts or Zipcar. But it works off a similar playbook, giving more people access to more goods and activities for less.

A luxury-home club. A car-sharing company. An online social commerce giant. On the surface, these companies have nothing to do with another. In fact, they share something fundamental. Steve Case would call it “a disruptive attack on legacy industries” like homes, cars, and stores. You can call it “a war on waste.”

Is a sharing economy a smaller economy?

Recall that a typical summer home costs $100,000 a year for 17 days. Exclusive Resorts eliminates that waste by giving families access to homes they never have to buy. The typical car costs $20,000 dollars and sits in a garage or parking spot for 20 hours a day. Zipcar gives drivers access to cars they don’t have to own. Every day, 30 percent of all food in the U.S., equal to $50 billion of inventory, sits idle in restaurants. LivingSocial gives merchants a way to coordinate deals to drive customers to underutilized inventory.

It all adds up to more economic activity with less waste. Thirty years ago after launching AOL to bring people to the Internet to read things, Case is focused on bringing the Internet to people so they can get out and do things.

“These companies are part of a second Internet revolution,” Case said. “For example, Zipcar is not an Internet business per se, but it is enabled and powered and animated by the Internet. You can have your smart phone and see there’s a car a block from here, book it, walk up, push a button and drive away. Before the Internet, you had to go to the rental counter and stand in line for two hours.”

***

Sharing cars and snagging deals fits the recession lifestyle. In the aftermath of the credit and spending binge, customers are looking for ways to do more and pay less. But there are plenty of people who think the sharing fad won’t last the recovery. After all, Zipcar, a publicly traded company, is still waiting for its quarterly profit. Netflix, the DVD-sharing and video-streaming company with 25 million global users, saw its stock plummet 70 percent this year after the company mulled splitting the company and bungled a price hike. Airbnb, which lets people rent their personal space to strangers, faced a noisy controversy over a robbery at one of its locals, raising questions about whether customers can trust the kind of peer-to-peer companies that distinguish the sharing economy.

Meanwhile, online deal businesses are facing their own backlash. LivingSocial is still a private company that doesn’t share its financial details, but we know much more about its main competitor: Groupon. Once the fastest growing company in American history, Groupon found itself the subject of a media frenzy over its too-clever-by-half accounting. Its IPO last week opened at $20 a share, valuing the company at $13 billion — twice what it turned down from Google but half its estimated valuation from earlier this year. Some of this might be natural gyrations in a young market. But some of it might represent illusory growth. What if the same families that were happy to hunt for deals and share clothes and rent cars during the economic downturn will decide in a few years that they’re not so desperate for deals and prefer owning?

Eight years after stumbling on the sharing economy, Revolution still thinks that access-over-ownership is the future. “This is just starting,” Davis said. “With CDs, movies, cars, homes, and group buying, we’re tapping into this sharing economy that’s going for access versus ownership and convenience versus ego.”

But what does the sharing economy really mean for consumers, workers and producers? If we all buy fewer movies, cars, and hotel rooms, that means customers can do more on a budget. But it also means less money for music, smaller car makers, poorer hotels — and fewer people employed to work for these industries.

The U.S. economy is an efficiency game. For decades, it was the corporations winning at productivity by shipping manufacturing and IT jobs overseas and automating middle-wage work. But today, consumers are the ones cutting out the middle man. Netflix means we don’t have to buy a movie ever again. Spotify means the same for music. Airbnb wants to mean the same for hotels, and Zipcar for cars, and LivingSocial for retail prices. In a weak economy, they’re divinely auspicious for cash-strapped families.

What happens when millions of people spend 10 percent less on new things and 10 percent more sharing old things or getting sophisticated deals? It’s easy to say that sharing is good for efficient markets. It’s not so easy to say that sharing is good for a growing economy that depends on new shoppers.

The pessimist would say that the sharing economy is a smaller economy. The optimist would respond that by spending less money on homes, cars and clothes, we could get back to focusing on new projects. More family savings would find their way to banks and investment firms. That capital would flow into exciting entrepreneurial projects looking to answer more big problems. Young start-ups waiting to change the world with their new ideas would benefit from the capital that flows from all this new investment.

Revolution’s team are the optimists. And that’s why they’re out there, joining the start-ups in the hunt for better ideas, and looking for the next big hit.