Steve Case’s New Gig: The Middle-Class Millionaire

Steve Case’s New Gig

By: Russ Alan
Prince and Lewis Schiff

In this excerpt from the book The Middle-Class
, authors Russ Alan Prince and Lewis Schiff discuss the AOL
founder’s new role as majority owner and Chairman of Exclusive Resorts.


Steve Case might be the closet thing imaginable to a family-oriented,
self-made middle-class billionaire. Like "ordinary" Middle-Class Millionaires,
Case sees vacations as opportunities for his family to spend time together. Yet
with all his considerable resources, he seldom had satisfactory experiences when
vacationing with his wife and their five children. They owned three rarely used
vacation homes around the country, which Case says left him feeling guilty when
the family would vacation someone else for the sake of variety. On those
occasions, accommodating the large family presented other problems. They’d
either get adjacent hotel suites with inconvenient connecting doors or rent a
vacation home sight unseen. They once rented a house in Hawaii with seven
bedrooms, only to find three of the bedrooms were accessed by a flight of stairs
outside the building. Rather than risk navigating the outdoor steps at night,
some children wound up sleeping on couches in the living room.

Frustrated, Case began looking into vacation alternatives. During a quick
online search in May 2003, he stumbled across the Web site for Exclusive
Resorts, a small "destination club" that managed just four vacation homes shared
by its twenty-five members. For an initial membership deposit of $120,000 and
membership dues of $16,000 per year, Exclusive Resorts offered access to luxury
condos at a Colorado ski resort and Trump Tower in New York and vacation homes
in Baja California and Hawaii. This was everything Case was looking for: a
variety of locations, predictable quality, sophisticated service, and all at a
price far below that of the three vacation homes he already owned. He filled out
the online firm requesting more information.

When Case’s name — with an AOL e-mail address — appeared on the list of
inquiries at the company’s Denver headquarters, co-founder Brent Handler
couldn’t quite believe that this was the Steve Case, asking for a callback. He
decided to make the follow-up call personally. It wasn’t long into his first
conversation with Case that Handler realized the billionaire wanted to join
Exclusive Resorts not only as a member but as an investor, too. The two men met
in San Diego three days after Case’s initial inquiry, by which time Case had
decided he wanted to buy the company. By November, Case owned 80 percent of
Exclusive Resorts.

In our survey of Middle-Class Millionaire households, (families with
self-made wealth between $1 million and $10 million) about 60 percent pointed to
"spending time with family" as an important function of vacation time. Slightly
fewer than 38 percent cited "rest and relaxation." Among our middle-class survey
sample (families with household income between $50,000 and $80,000 and a net
worth under $1 million), these two results were quite nearly reversed. For the
middle-class, the most commonly cited purpose for taking a vacation was "rest
and relaxation," at 68 percent. Spending time with family was far less
frequently chosen, at just under 28 percent.

Since Case took over Exclusive Resorts, membership rolls have grown so fast
that the club is having a hard time closing on enough property to accommodate
all those new vacationers. Destination clubs as a rule try to maintain a ratio
of six to eight members for each vacation house they own. By the time Exclusive
Resorts’ membership topped 2,400 in 2006 more than 200 names were stranded on a
wait list because the company hadn’t secured enough properties to stay within
that ideal membership-to-property ratio.

Excusive Resorts, now by far the industry leader, already boasts a real
estate portfolio that exceeds $1 billion in value. Case’s five year goal of
10,000 members implies that the company will need to buy at least 1,000 more
vacation homes in that brief time frame — approximately $3 billion worth of
prime resort real estate. Case brags that thanks to Exclusive Resorts’ buying
power, developers are approaching them early on and offering first dibs on homes
in some of the best remaining resort locations in the entire world.

Far from diluting the product, this growth actually benefits members. The
more members a club has, the more destinations it can offer for the same fee.
It’s a business philosophy based o the "network effect," in which the relative
value of each membership in a network rises as more members sign up. Case has
done this before. As the founder of America Online, he built it up to the
largest private interactive network ever and turned email, with its famous
"you’ve got mail" chime into a household utility.

Today, Destination clubs are the fastest-growing segment of the entire
vacation industry. Particularly in North America, the biggest players in the
field are making development decisions that have completely disrupted real
estate markets in choice vacation spots such as Cabo San Lucas, Mexico.
According to the market research firm Ragatz Associates, sales to destination
clubs more than doubled to $2 billion in 2006 from $1 billion in 2004.

Fractional ownership clubs have already begun to scale down their offerings
to reach a wider, less affluent market. Today’s most modestly priced destination
club, Denver-based High Country Club, requires $20,000 for an affiliate
membership, plus $4,200 in annual dues. The club’s 110 members have access to
twenty-two homes with an average value of $850,000 in locations as varied as the
Bahamas Costa Rica, Lake Tahoe, and London.

Nobel-prize winning economist Milton Friedman once said that when it comes to
innovation, "the rich work for the poor." The Destination Club market has taken
a page from Friedman by trying out its innovative concept at the high end of the
market where the profit margins are greatest, commensurate with the risk of
trying to do anything for the very first time. If an industry has a chance of
taking its offerings and scaling them down toward the mass market, the basic
concept will need to hit it big first among consumers at the top end of the
middle-class — the Middle-Class Millionaires. They can either hold the door
open to further innovation or slam it shut.

Copyright © 2008 by Russ Alan Prince and Lewis Schiff
From the book THE
MIDDLE-CLASS MILLIONAIRE by Russ Alan Prince and Lewis Schiff, published by
Currency Books/Doubleday, a division of Random House, Inc. Reprinted with

From Issue | February 2008


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