The Unfulfilled Potential of the Sharing Economy
The challenges that WeWork and Uber are facing, and what they mean for the future of the sharing economy
Remember a time about five years ago when the world is abuzz about the rise of a “sharing economy,” ushered in by companies like Uber, AirBnb, and WeWork? Fast forward to now, many of these services have gone fully mainstream and become a part of daily life for millions of global consumers, yet the enthusiasm surrounding their transformative potential has subsided considerably.
Despite their scale and cultural impact, none of the once-promising startups championing the sharing economy turned out to be very financially successful so far. Softbank, a leading VC investor in Uber and WeWork, has reportedly lost over $5 billion due to the poor financial performance of the two companies. Meanwhile, there has been increasing chatter about regulating the “sharing economy” companies for abusing their technologies, mistreating freelance workers, and disrupting the stable market orders in industries such as transportation and real estate. In China, many sharing economy startups, such as a basketball-sharing service, an umbrella-sharing service, as well as several high-profile bike-sharing services, have already gone through a boom-and-bust cycle, with no second round of boom in sight.
Where did the sharing economy go wrong? And where is it going from here?
The Unfulfilled Potential
The “sharing economy” first emerged as an innovation buzzword about a decade ago when, following the initial success of Uber, many startups and VC investors went for broke for the “Uber-for-X” model, hoping that they could establish a new economic order by creating various digital platforms to facilitate matching between customers and service providers in real time. The underlying philosophy seemed to be with the wide adoption of smartphones, we should be able to get everything we need on-demand, therefore eliminating the need to own most things. Instead, those services will allow us to access those shared assets (be it cars, apartments, or office spaces) as needed.
These sharing platforms also vet service providers to make sure they are trustworthy, and the two-way review system many on-demand services employ ensures both sides will be on their best behavior and not bring damage to those shared assets. In a word, the sharing economy is supposed to digitize trust. So far, they have mostly succeeded in normalizing behaviors like jumping into a total stranger’s car or letting a stranger stay in your apartment while you’re on vacation. However, that trust is generated by mutual policing facilitated by the platforms instead of being a byproduct of sharing. Instead of trusting each other, we have been trained to trust the platform instead.
It is becoming increasingly obvious that the companies that are supposed to be about “sharing” are really more about “accessing.” The social implications of a “sharing economy,” such as community-building and reciprocity, are far outweighed by consumer demand for lower cost and convenience. When sharing becomes something that is mediated by the market, consumers quickly realized they are simply paying to access services, not to share the ownership of the tangible assets that necessitate those services. The fact that Uber has a “quiet mode” for riders who prefer to avoid small talk but not for drivers is a stark reminder of the market dynamic these on-demand services engender. There is a fundamental mismatch between the original premise of the sharing economy and the market reality, and that unfulfilled potential is the original sin of trying to make a sharing economy work in a market economy.
When sharing becomes something that is mediated by the market, consumers quickly realized they are simply paying to access services, not to share the ownership of the tangible assets.
Therefore, it is not hard to see why the sharing economy has lost some of its more idealistic sheen. The mindset shift of “access over ownership” has taken root, especially among younger generations, but the focus has been course-corrected towards convenient access and transactional efficiency. Instead of building communities that thrive on sharing goods and services, today’s “sharing economy” companies aim to package communities into a commoditized service, easily accessible via a few taps on your phone. Yet, this commoditization comes with high hidden costs, both to the investors or the workers, that underlines the instability of their business models, as we will see in the following two cases of WeWork and Uber.
The WeWork Debacle
WeWork was once a shining unicorn startup that rode the wave of the sharing economy. The founders wanted to create a flexible office space where the workers can “be part of something greater than themselves, a community that brought meaning to their lives.” For a while, they succeeded, fostering a few local entrepreneur communities by hosting various events at WeWork locations and encouraging members to socialize. It also built an app for members to tap into the entire community of freelancers and entrepreneurs to network for connections, exchange and discuss ideas, and find or list job opportunities. Over 2018, the company rebranded itself as The We Co. and launched other sharing initiatives such as WeLive, a commune-living concept, but WeWork remained its core business. In a New York Times piece on the WeWork community, the author notes that “what WeWork offered was not just rhetoric… but true shelter from a pervasive sense of alienation” for the new class of deinstitutionalized workers.
But then, as all successful startups are bound to do, WeWork started expanding, and troubles soon followed. SoftBank, a Japanese telecom giant whose $100 billion Vision Fund investment arm is a major force in Silicon Valley and has funded many well-known tech startups including Uber and Slack, first invested in WeWork in 2017. It now owns nearly a third of the company. Fueled by the influx of cash provided by SoftBank and other VC investors, WeWork started expanding at a breakneck speed. At one point, the company was on average opening two new locations per day. In September 2018, WeWork became the biggest private office tenant in Manhattan after becoming the largest occupier of office space in London and Washington, D.C. earlier that year. By early 2019, it was operating 485 offices in 105 cities and evaluated at nearly $50 billion. Talks of an imminent IPO quickly started to swirl.
The funny thing is, public investors tend to see the bigger picture more clearly than private investors, who are understandably more inclined to gloss over the potential issues and focus on hyping up the evaluation of the startups they invested in. As soon as a WeWork IPO was on the table, its business model and company culture were rightfully put under scrutiny. Suddenly, the company’s track record of burning cash without a discernible path to profitability, its shady insider dealings, and the poor executive judgment of its CEO Adam Neumann were all called into question, which built up an enormous wave of skepticism towards WeWork that eventually forced the company to postpone its IPO and oust Neumann last month. Just like that, a shining example of the sharing economy lost its luster.
It is particularly interesting to see the company’s underwhelming finances called into question, considering how much work WeWork has done trying to convince investors that it is a tech company build upon the promise of efficient space-sharing, and therefore the huge losses at this stage do not matter as it is par for the course for tech startups in early stages of expansion. However, WeWork is obviously not a tech company. While the tech platforms it created for customers do add to the overall user experience, they do not factor into its fundamental business model. Instead, the company operates like a house-flipper on steroids as it leases long-term, fixed commercial spaces, fixes them up into modern open-floor offices, and then rents them out to freelancers and startups on a short-term basis.
WeWork is obviously not a tech company… Instead, the company operates like a house-flipper on steroids.
Further disproving its claim as a tech company, WeWork does not have the benefits of low growth cost — a defining characteristic of a tech company, where the marginal cost of adding an additional user is close to or equals zero. Quite the opposite, WeWork’s growth stems directly from massive spending because there’s no other way to lease more office spaces. Acquiring more users requires massive fixed capital expenditure.
Even sadder, WeWork does not even get to enjoy the network effect (meaning that a product/service gets better as more people start to use it), which should’ve been a defining trait of a company operating in a sharing economy model. It is no surprise that community building, once its biggest differentiation point from other commercial real estate companies, stopped being the core mission of WeWork once the company started its rapid expansion. After all, communities take time to foster, and they don’t scale nearly as quickly as WeWork did. Losing sight of what is truly valuable to its business, WeWork received a harsh reckoning.
Uber vs. AB5
While WeWork was imploding on the verge of a blockbuster IPO, Uber, the crown jewel of SoftBank’s Vision Fund, was busy dealing with another contested issue of the sharing economy — worker’s rights.
On-demand services make up a big part of the sharing economy, and one of the growing tension points for companies like Uber and DoorDash is their lack of worker benefits. Most on-demand services categorize their workers as independent contractors rather than employees, thus allowing them to cut costs by providing a variety of employee benefits such as minimum wage and healthcare insurance, which is crucial to the bottom line of these companies. However, with more and more people joining the sharing economy and supporting themselves with freelance work, their frustration over compromised employee rights have been drawing attention from regulators, cumulating in California’s impending Assembly Bill 5 (AB5), a high-profile case that could determine the trajectory of the sharing economy.
Interestingly, AB5 does not aim to dictate how companies like Uber should categorize their workers, or what worker benefits they should provide. Rather, it seeks to set a higher bar for all companies to demonstrate that independent workers are indeed independent using a new three-step test. For on-demand service companies, whose entire business model hinges on a modularized supply side, the biggest challenge in passing this new test is meeting the requirement that a company must prove that the work that contractors perform is “outside the usual course of its business.”
Naturally, as the poster child for the sharing economy, Uber is emerging as a key opponent to this impending bill, which is scheduled to take effect in January 2020. To meet that aforementioned requirement, Uber is arguing that its “usual course of business” is not about providing rides to consumers, and that its drivers “aren’t core to its business,” which the company says is “serving as a technology platform for several different types of digital marketplaces.”
To justify this bold claim that runs counter to the general perception of Uber’s business, the company has ramped up its efforts in diversifying its product. In late September, the company announced out of the blue that it is merging UberEats, its food delivery service, into its flagship app for ride-hailing. A week later, it launched Uber Works, a service for matching freelancers with companies seeking temp workers, in limited beta test in Chicago. It also made its on-demand helicopter service for rides to and from the JFK airport available to users in NYC.
Officially speaking, Uber is doing all these things as part of an ambitious bid to become “the operating system for your everyday life.” It only covers food delivery and ride-hailing for now, but says it could expand to more logistics-powered services like moving and last-mile delivery down the road. While this move fits the long-term multimodal growth plan for Uber, the incentive behind this hasty revamp seems to have more to do with defending itself from AB5. The more services that Uber offers in its main app, the easier it is to declare the drivers non-essential to its core business of being a marketplace platform.
The more services that Uber offers in its main app, the easier it is to declare the drivers non-essential to its core business of being a marketplace platform.
Make no mistake, gaining employee status will offer gig workers some much needed benefits and rights that they absolutely deserve. However, they will come at the cost of flexibility, a key perk of being a freelancer. As employees, the workers will no longer be able to work for a competing company, like the way that many drivers today use multiple ride-hailing platforms to pick up passengers, and they will be working mandated shifts instead of being able to set their own schedules. While some workers may welcome this change, others may not, thus limiting the supply pool for on-demand services and further undermining the viability of those marketplaces.
While Uber may have found a solution to preventing its workers from being categorized as employees and thus avoided upending its business model, other on-demand service companies are less likely to escape the effect of AB5, since many of them tend to focus on solving one task. Therefore, many of them will have to categorize their workers as part-time employees and offer them associated benefits. The increased cost in workforce management will likely be passed down to consumers, thus causing some users to abandon those on-demand services or start using them less, especially given that low price is a main draw. In short, it does not bode well for the future of the on-demand economy.
The complex implications of AB5 show that it is not enough to simply recategorize the workers from independent contractors to employees. Instead, a new category of employee status should be created for gig workers to ensure their legal rights and benefits without infringing on the flexibility that makes the on-demand economy work in the first place. The internet was not part of the consideration when the policymakers created many of the existing regulations and laws, and they need to be updated accordingly to take the new market reality into account.
A new category of employee status should be created for gig workers to ensure their legal rights and benefits without infringing on the flexibility they enjoy.
What the Future Holds
Earlier this week, WeWork announced it is pulling out of plans for multiple large NYC leases, signaling the start of a contraction. SoftBank is struggling to raise funding for the second Vision Fund after the WeWork debacle. Sensing the turning tides in the macroeconomy, Postmates, another tech startup that rode the wave of the on-demand economy, decided to postpone its IPO on Tuesday. Meanwhile, Lyft launched a reward program for drivers to keep them happy while putting together a $60 million campaign towards an uphill legal battle to keep drivers classified as independent contractors. It seems like, for the sharing economy, winter is coming.
For the sharing economy, winter is coming.
But a cooling period, as it turns out, may just be exactly what the sharing economy startups need right now. Rejecting the capital-driven need for rapid expansion and reprioritizing the more community-driven aspects of their businesses would help restore value to the user experience. Part of the skepticism directed at WeWork stems from fears over an impending economic downturn, and sticking together as a community fostered in a sharing economy is arguably the best way to survive another recession.
Looking forward, automation will undoubtedly usher in a new kind of sharing economy. Sooner or later, the gig workers powering the sharing economy today (many performing repetitive manual jobs) will be replaced by driverless cars, delivery drones, and robots with specific skills, thus prompting the platform owners to take full control of the supply side. In many cases, ownership of certain assets (say, driverless cars or caretaking robots) will be prohibitively high for most people that opting for a sharing service might be the only viable way to make it work at scale. Furthermore, with the adoption of digital payment solutions and blockchain technologies, eventually we will have a decentralized micropayment system that allows each freelancer to track exactly how much value their work is generating and be directly compensated for that, thus further mobilizing the white-collar workforce to join the sharing economy.
