How Capitalism and Regulation Will Reshape the Sharing Economy
Every story about the sharing economy starts the same way. An individual constrained by the limits and demands of a job has found a way to make an easy living, thanks to [Airbnb, Vaunt, Dogvacay, SnapGoods]. You fill in the blank.
Between the recession and the growing divide between the rich and poor, the sharing economy — a $26B market in which the web acts as matchmaker, allowing strangers to provide resources for one another and take an attractive profit in return — could not have come at a more opportune time.
But is the exuberance deserved? Can this new set of marketplaces continue to make admirable profits while enabling the casual owner to monetize possessions or skills that were otherwise collecting dust? To answer these questions, we need to look at what makes the sharing economy different from previous marketplaces — and then analyze some older models to see what has happened to them over time.
Three differentiators make the sharing economy distinctive, enabling new sellers to enter the market: scale, access and trust. What all sharing economy startups have in common is the ability to connect sellers with consumers on a scale that is astronomical in comparison with what was possible even a few years ago.
Moreover, aggregation allows these marketplaces to take many of the risks out of dabbling in small business. For example, Relay Rides pre-screen drivers and offer $1M in insurance on every rental. Finally, the coupling of share-enabling services with social networking yields the added bonus of creating trust even among strangers in different cities. Whether through reviews, seller ratings, or recommendations from Facebook friends, it is this fostering of confidence that allows people to feel comfortable staying at a rental instead of a hotel, or using Lyft rather than a well-known taxicab company.
On one hand, the trust aspects of these platforms like these have their roots in some pretty ancient history: As documented in this insightful book by Professor Avner Grief, the Maghribi traders of 11th century Northern Africa evolved their own reputation-based “institutions” to deal with the uncertainties of international commerce and steer participants away from the short-term gains of cheating.
So, at its core, the dynamics of the sharing economy are actually not new. They don’t come from an alien universe where the laws of capitalism don’t apply — they operate in a way so as to make capitalism more efficient. The Washington Post’s Dominic Basulto offers this insight:
“…these sharing economy companies are going places where Adam Smith’s “invisible hand” cannot. They are re-calibrating supply and demand, giving consumers access to otherwise unused capacity or idle assets. Instead of representing an entirely new underground economy, the companies of the sharing economy represent more of a supplement, adding capacity while driving down prices in ways that help consumers.”
It is the very fact of this efficiency that is allowing its early adopters to make such economic strides so easily. Instead of working at Starbucks, one student earns over a $1000/month of supplemental income by opening up her home via DogVacay. A downsized photographer makes a respectable living renting out his home and offering rides on Lyft.
What many have forgotten is that these are exactly the kinds of narratives that peer-to-peer marketplaces like Ebay first made famous. When Ebay launched in the mid-nineties, its sellers were mainly “a motley collection of individuals.” They touted the ease of the platform: “‘We make sales of up to $1,500 a month,” [one user explained], simply from searching garage sales and reselling the items online.” However, the seller demographics soon shifted to include a sizable contingent of medium businesses and major corporations. The rules changed to reflect the clientele, including restricted payment options and limiting new sellers in certain categories. Likewise, when Amazon opened up its affiliate channel, nearly all the sellers were small merchants or individuals. By 2009 the New York Times was reporting that “online marketplaces eBay and Amazon once seemed like surefire places to make extra money or to build an online retail business. It’s not quite so simple anymore.”
Signs of a similar trend are already visible in the sharing economy. Many listings on Airbnb now come from professional property managers, and when the company hired a “head of global hospitality” this fall, users became concerned that the focus on standards and requirements may shut the door on casual hosts. Car sharing services are also experiencing a movement towards professionalism. Individual owner/practitioners are now moving into operating small fleets of cars exclusively for rental on places like Uber.
Another development that may stem the sharing exuberance is the lengthening arm of government regulation. Part of what has made the sharing economy so attractive is the ability to ignore or overlook rules that apply to normal businesses, most notably taxes and licensing requirements. But, as many established businesses have pointed out, winning on an uneven playing field is essentially cheating. In New Orleans, local property owners complain about the influx of short-term rentals:
“…licensed hotels, motels, inns and bed-and-breakfasts annually lose $13 million in revenue to short-term rental scofflaws. That adds up to about $1.4 million in taxes and licensing fees…”
The tide is beginning to turn. Tax-free shopping online — once the strongest lure of any online retailer from Ebay to Amazon — is being legislated away. Airbnb is embroiled in a conflict with New York City over its hotel law that prohibits short term rentals, and has already received a subpoena.
What becomes obvious through tracking trajectories of older marketplaces is that eventually, as new marketplaces mature the gold-rush mentality tapers off. Although new marketplaces provide value service by opening up resources and increase efficiency in our economy, the long-term winners are often not the same early adopters who jump in to explore new waters. Instead they are those rational actors who can bring time and resources to bear. As a popular training manual for online retail cautions: “eBay is not a get-rich-quick scheme. Building an eBay business takes commitment and time. PowerSellers are some of the hardest working people we know.”
With Contribution by Sarah Tory of Hippo Reads
