The Inexorable Logic of the Sharing Economy
MILAN
– When Amazon was founded in 1994, and eBay the following year, they
harnessed the connectivity of the Internet to create new, more efficient
markets. In the beginning, that meant new ways of buying and selling
books and collectibles; but now e-commerce is everywhere, offering
customers new goods and used goods – and becoming a global force in
logistics and retail. Likewise, while today’s sharing-economy companies
may be just out of their infancy, their services will one day be
ubiquitous.
By
now, most people have heard of Airbnb, the online apartment-rental
service. The company has just 600 employees but a million properties
listed for rent, making it larger than the world’s biggest hotel chains.
Of course, what Airbnb offers is different from what hotels provide;
but if Airbnb offered options for, say, maid service or food, they could
become closer competitors than one might initially imagine.
The
insight (obvious in retrospect) underlying Airbnb’s model – and the
burgeoning sharing economy in general – is that the world is replete
with under-utilized assets and resources. How much time do we spend
actually using the things – whether cars, bicycles, apartments, vacation
homes, tools, or yachts – that we own? What value do office buildings
or classrooms generate at night?
Answers
vary by asset, individual, household, or organization, but the
utilization numbers tend to be astonishingly low. One recent answer for
cars was 8%, and even that may seem high to someone not burdened by long
commutes.
But
those numbers are changing, as the Internet enables creative new
business models that increase not only a market’s efficiency but also
the utilization of our various assets. Hundreds of experiments are being
conducted. Clearly, not all of them will experience the astonishing
growth of Airbnb and Uber. Some, like Rent the Runway for designer
clothes and accessories, may find profitable niches; others will simply
fail.
The
digital platforms that act as the basis of all this e-commerce need to
meet two related challenges. The first is to produce a network effect,
so that buyers and sellers find one another often enough and rapidly
enough to make a business sustainable. Second, the platform must create
trust – in the product or the service – on both sides of the
transaction.
Trust
is crucial to the network effect; hence the need for two-way evaluation
systems that encourage buyers and sellers to be repeat users of the
relevant platform. Small players can then act in large markets, because –
over time – they become known quantities. The power of these platforms
derives from overcoming informational asymmetries, by dramatically
increasing the signal density of the market.
Indeed,
in order to encourage infrequent e-commerce users, innovators and
investors are exploring ways to combine the evaluation databases of
separate, even rival, platforms. Whatever the legal and technical issues
that must be overcome, down the road we can surely imagine the kind of
data consolidation already practiced internally by retail giants like
Amazon or Alibaba.
There
can, of course, be other incentives to support “good” behavior, such as
fines and deposits (for bicycles borrowed for too long or not returned,
for example). But punitive measures can easily lead to disputes and
inefficiency. By contrast, refining evaluation systems holds far more
promise.
The urge to exploit under-utilized resources should not be confined to material assets. The McKinsey Global Institute has recently studied internet-based approaches to the labor market and the challenge of matching demand for talent and skills with supply.
Some
sharing models – perhaps most – rely on both labor and other assets:
for example, a person and his or her car, computer, sewing machine, or
kitchen (for home-delivered meals). This throwback to the cottage
industries that preceded modern production is possible today because the
Internet is lowering the costs of dispersion that once compelled the
concentration of work in factories and offices.
Perhaps
inevitably, regulatory issues arise, as Uber is now discovering from
California to Europe. Taxis and limousines are to some extent protected
from competition because they need licenses to operate; they are also
regulated for customer safety. But then Uber invades their market with a
differentiated product, subject largely to its own regulations for
vehicles and drivers. In the process, it threatens to lower the value of
licenses just as surely as any official decision to issue new licenses
would. No wonder the taxi drivers of Paris and other French cities –
hitherto protected from competition – have protested so vehemently (and,
on occasion, violently).
An
intriguing question is how far the financial sector will embrace the
sharing economy. Peer-to-peer lending and crowdfunding already represent
new ways of matching borrowers with investors. Clearly, issues relating
to liability and insurance will have to be addressed in all
sharing-economy models, especially financial ones; but these are hardly
insurmountable obstacles.
The
truth is that the Internet-led process of exploiting under-utilized
resources – be they physical and financial capital or human capital and
talent – is both unstoppable and accelerating. The long-term benefits
consist not just in efficiency and productivity gains (large enough to
show up in macro data), but also in much-needed new jobs requiring a
broad range of skills. Indeed, those who fear the job-destroying and
job-shifting power of automation should look upon the sharing economy
and breathe a bit of a sigh of relief.
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