We know that people have been sharing and bartering since the earliest civilizations began. So, there is nothing innovative about farmers sharing their tools and we letting our friends to stay over at our place for a night or two. These have more to do with sharing and nothing in terms of business.
It’s different when people do similar things with strangers for a fee. Technology has delivered ease of use and convenience for organizing a wide range of peer-to-peer commercial exchange that has given birth to Airbnb, Uber, Lyft, TaskRabbit and many more.
Uber and Lyft, for example, enable individuals to turn their own cars into taxis. These individuals have the liberty to decide when to drive and for how long. For some of them it’s a gig and for many others it’s the main source of income. Airbnb enables residential property owners to turn their properties into hotels and TaskRabbit is your errand boy.
These apps are enablers for those who did not have the means or skills to bring their goods and services to the global market individually. They provide branding, legitimacy and market to the participating individuals. In return, they take a cut from the profits.
‘Sharing’ via these apps is not free of charge and the apps are in fact owned by business entities. Therefore a better definition instead of the vague ‘Sharing Economy’ would be good or maybe required. So, the Economics and Statistics Administration of the U.S. Commerce Department (http://esa.gov) has labelled businesses in this sector as ‘Digital matching firms’. It defines them through the following characteristics.
- They use information technology (IT systems), typically available via web-based platforms, such as mobile “apps” on Internet- enabled devices, to facilitate peer-to-peer transactions.
- They rely on user-based rating systems for quality control, ensuring a level of trust between consumers and service providers who have not previously met.
- They offer the workers who provide services via digital matching platforms flexibility in deciding their typical working hours.
- To the extent that tools and assets are necessary to provide a service, digital matching firms rely on the workers using their own.
I’ll use the term ‘sharing economy’ hereafter since this is the umbrella term that covers whole range of these platforms. Besides ‘sharing economy’ and ‘digital economy’, ‘digital matching platforms’, ‘collaborative economy’ and ‘peer economy’ are the other terms in common use.
Growth of Sharing Economy
Sharing economy is considered as the biggest shift in the business landscape since the proliferation of the internet itself. PwC predicts that global revenues of the sharing economy could go from $11.5bn in 2014 to $294bn by 2025. By 2025 the sharing economy will also have achieved parity with traditional industry in sectors such as holiday accommodation and ridesharing or car rental.
The almost infinite strength and capacity to produce value in sharing economy is in the platform it operates. For example, Uber is the biggest platform among the ride-hailing service providers. According to Marshall Van Alstyne of Boston University, online platforms are essentially conduits for third parties to connect through, enabling them to create communities that add value to the platform via the ‘network effect’. The network effect is often observed in social media platforms wherein each new user of a network, such as Facebook or Twitter, increases the usefulness of the network for other users as well as its overall value.
In sharing economy an online network consists of consumers and workers who offer goods or services. When the network grows, its usefulness too grows for the users and its owners. The usefulness and capacity of the network is called network utility. The increase in network utility draws more users to join the platform since it’s more efficient to go where everyone else is already. This creates a high potential marketplace which enables effective consumer-worker connections and exponentially increases business exchange. The users eventually bond with the platform and feel sense of empowerment. This is the strength of sharing economy based platforms that gain the capacity to grow infinitely.
Embrace of Sharing Economy
In traditional economy a corporate entity creates value by extracting natural resources and human resources in the form of products and services. Sharing economy is not directly based on resource extraction. Value is created by users and workers together by capitalising on their underused individual assets or resources and interacting online. This is called ‘shared value creation’ and it seems environmentally more sustainable because it facilitates optimal use of existing resources.
It is also changing how people consume. It has driven people to value access over ownership through engaging in traditional practices of bartering, gifting, lending, renting, sharing, and swapping on a scale not possible before the internet.
The innovations introduced by digital matching firms have reduced the inconvenient aspects of service transactions, increasing consumer welfare. For example, both Lyft and Uber allow consumers to pay for their services via their respective apps, removing the post-ride in-person transaction that is often required when they use traditional taxi.
Digital matching platforms provide mechanism for self-regulating and creating trust with rating system. This has transformed how we trust people and also turned trust and reputation as the currencies of sharing economy. This is an efficient mechanism through which consumers are willing to trust complete strangers to provide goods and services.
The workers of sharing economy have low barrier to entry, enjoy more freedom and flexibility with the use of technology. Aside from providing employment opportunities for the unemployed and workers who require supplemental incomes, sharing economy also offers opportunities for non-traditional working populations, such as retired people and individuals with disabilities or health issues.
Politicians around the globe have begun to sharply feel the impact of sharing economy. There is concern over worker exploitation, platform monopolies and lack of regulation. Political and government discussions are rife on intervening, regulating and mitigating risks posed by sharing economy. There have been proposals to neutralize the monopolizing and exploiting effects of corporate digital platforms. A notable one is by Jeremy Corbyn, opposition leader of UK. Among others, he proposes cooperative ownership of digital platforms for distributing labour and selling services.
In a cooperative sharing platform users and especially workers have power over technology to change how they work and live. An example is Loconomics.com, which is a worker-owned alternative to TaskRabbit. Another one that may compete with Uber is Lazooz.org. This kind of platforms share control with users through giving them the power to democratically elect the board of directors to serve their best interests. Under this cooperative model, workers share earnings through dividends based on their contributions and collaborate with government to ‘self-regulate’. They more likely need a different approach to fundraising, such as crowdfunding rather than relying on venture capital so that workers are entitled to the same or more than shareholders.
Challenging Traditional Industries
Speaking in an entrepreneurship conference in Zhengzhou, China, a few days ago, Jack Ma said “In the next 30 years, the world will see much more pain than happiness,” regarding job disruptions caused by the Internet. He added that “Social conflicts in the next three decades will have an impact on all sorts of industries and walks of life.”
Sharing economy has presented itself as a new way of organizing economic activity which is considered crowd-based capitalism against traditional corporate-centred economic model. Increasing peer-to-peer commercial exchanges have created a large intersection of producers and consumers giving rise to a new group coined as ‘prosumers’. An entire industry can be disrupted by one revolutionary idea of sharing economy.
The traditional corporations including some of the stalwarts are engaging interesting strategies to manoeuvre through the challenges brought on by sharing platforms.
- Ford, the car giant offers a creative financing program to encourage new buyers to rent their new Ford car to peers on Getaround.com, a P2P online marketplace.
- Home Depot, the hardware chain offers a rental service for tools and heavy equipment, including trucks, so customers don’t need to buy expensive, infrequently used goods. This enables people to get access to tools while reducing cost of ownership.
- Walmart, the retail behemoth created an aftermarket for videogames, called Trade In, which enables customers to sell back cell phones and other electronics, enabling a used goods marketplace in their own stores and online.
- BMW’s DriveNow service offers urban luxury cars as a membership
model. Instead of dealing with insurance, parking and maintenance, customers can rent a 1-series electric vehicle at a designated lot in urban areas, and drive the car to another location, then promptly leave the vehicle for another person to access.
- Hyatt, invested in home sharing platform OneFineStay and has integrated their hospitality experience by allowing guests to use Hyatt premier properties as a resource for guests staying in luxury home properties. This shared brand gives OneFineStay guests the promise of the dependable Hyatt brand.
We could see how traditional businesses trying to spin-off their own sharing platforms and also partner with existing digital matching platforms to extend their brand value via the network effect.
These are interesting developments and challenges for an even interesting new millennia. I’m ending this by reflecting on the words of Jack Ma, “The world must change education systems and establish how to work with robots to help soften the blow caused by automation and the Internet economy”.