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The Sharing Economy: A New Way of Doing Business

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Before it had a name and became a cutting-edge concept, the sharing economy had outposts in the American economy. Carpooling, for instance, has long been a way of sharing both the cost of commuting and leveraging an expensive asset — the private automobile (which sits idle more than 90% of the time).

Few observers in the last few decades recognized carpooling as a vanguard phenomenon, but that’s what it was. The same basic concept, technologically assisted, has been applied to nearly every aspect of modern life. And it’s enabled cost savings, convenience and environmental benefits on a large scale.

As a result, the peer-to-peer story is one of stellar growth. From modest roots, the international sharing economy reached about $15 billion in 2014, reports PricewaterhouseCoopers (PwC), and it is on track to reach $335 billion by 2025. Public opt-in to the collaborative economy almost doubled from 2013 to 2014. An AGC Partners report said that investors committed $4.93 billion to 71 deals related to the sharing economy in 2014, up five times from 2013.

“The success of Uber, Airbnb and TaskRabbit isn’t a fad — it’s a new way of doing business,” PwC said.

The two essentials are lumpiness and technology. In a groundbreaking paper, “Sharing Nicely: On Shareable Goods and the Emergence of Sharing as a Modality of Economic Production” (Yale Law Journal, 2004), Yochai Benkler, an entrepreneurial legal studies professor at Harvard, used carpooling as an example of large-scale sharing of private goods. Cars, he pointed out, are “lumpy” goods, that is, they have to be purchased in units that exceed the buyer’s immediate needs. People invest in such goods when the lifetime value of the item is greater than its price (loans and leases, of course, help bend the cost curve to match the long period during which expensive items offer value).

At least until recently, car buyers haven’t worried about the excess capacity they were purchasing, as long as the lifetime value of the vehicle was greater for them than its lifetime cost. But the reality is that all that time the private automobile sits idle, economic value is going unrealized. And cars are by no means alone in their lumpiness. Houses, apartments, offices, bikes, computers, clothes, books, toys — all represent goods that individuals buy for their own use, but which bring with them a good deal of excess capacity. And don’t forget physical and intellectual labor: A handyman’s ability to fix things goes unused much of the time, as does an engineer’s ability to design solutions to specific problems.

“In the collaborative economy it’s not the idea of sharing that’s new… What’s different now is the introduction of technology into the concept.” — H.O. Maycotte, Umbel

All this excess capacity is what makes the sharing economy possible. According to Oscar Salazar, the founding chief technology officer at Uber, now CTO at carpooling startup Ride and an executive advisor to Rubicon Global, one reason the transportation sector has been so successfully “shared” is, “a lot of people own cars; in some countries the number of vehicles surpasses the human population.”

But excess capacity existed long before anyone began talking about an economy based on sharing (the term “sharing economy” wasn’t used to describe this kind of enterprise until the mid-2000s.) What empowered this new way of doing business was technology.

As it existed in the post-war years, carpooling was a widespread phenomenon. According to Benkler, it had become the second-largest commuter transportation system in the U.S. But it was not an activity that could be scaled up to the level of a commercial enterprise. Neither was offering a room to a guest, selling old clothes or toys at a garage sale or fixing a neighbor’s sink.

What made Uber, Airbnb, eBay, TaskRabbit and all the other sharing-economy companies possible is the combination of Big Data analytics, low-cost cloud storage, prevalence of social media and widespread use of mobile devices.

Virtually all the sharing companies establish trust through crowdsourcing. Online reviews are at the heart of the sharing economy.

“In the collaborative economy it’s not the idea of sharing that’s new; people have been doing that for eons,” notes H.O. Maycotte, founder and CEO of data rights management company Umbel in an article published on Dell.com. “What’s different now is the introduction of technology into the concept — particularly easy-to-use digital technologies like location-based GPS that allow people to quickly make and respond to requests for goods and services.”

A Sharing or Asset-light Economy?

Before there was a sharing economy, there was a rental industry, which created excess capacity at a scale that could be commercialized. Hotel companies built large structures and then rented out individual rooms to make a profit. Car rental companies purchased large fleets of cars, which they rented out by the day very profitably. But such rental-based business models demand not just capacity but also infrastructure. Hotels have to maintain properties, clean rooms, take reservations and provide a host of other services. Similarly, car rental companies have to maintain and store cars that are not in use, schedule pick-ups and drop-offs, build and staff rental offices and provide customer service.

Uber and Airbnb, on the other hand, don’t have to worry much about infrastructure. Airbnb doesn’t own any hotels and yet it has more rooms for rent than Marriott and Hilton, according to The New York Times. And Uber said in a blog post that it provided 140 million car rides in 53 countries and more than 250 cities in 2013 without owning any cars or employing any full-time drivers.

Both companies do have full-time staff, of course, for customer service of various kinds and most importantly for technology. But neither private company is forthcoming about the number of people on its corporate staff. A check of open positions suggests that Airbnb and Uber incur significantly less labor costs than their brick and mortar competitors. On a recent day, Airbnb listed just 204 open positions worldwide, while Hilton had more than 10 times that number of jobs posted in just the U.S. and the U.K. That’s a huge difference in salaries and benefits, generally a significant part of a company’s cost structure.

Some have argued in fact, that the sharing economy is really nothing of the sort. “Sharing is a form of social exchange that takes place among people known to each other, without any profit, argues a recent article in the Harvard Business Review. “When ‘sharing’ is market-mediated — when a company is an intermediary between consumers who don’t know each other — it is no longer sharing at all. Rather, consumers are paying to access someone else’s goods or services for a particular period of time. It is an economic exchange.”

Seen in this light, the distinctive feature of the sharing economy — its use of technology — is less about sharing and more about reducing costs by enabling vast numbers of customers and freelance workers to do business with each other, under the umbrella of the companies’ brands. Robin Chase, co-founder of Zipcar, describes the process as “leveraging excess capacity, building platforms for participation that organize and simplify the work of these collaborating peers.” Chase said that her book Peers Inc. is based on the thesis that tapping into all that extra value is only possible with platforms “that make the effort of sharing assets, ideas and networks very simple.”

Many peer-to-peer companies begin with a simple idea of leveraging excess capacity, but it is the technology-enabled ease of use that makes them work. Marc Gorlin started Roadie when he realized that he could build an alternative to traditional shipping companies such as FedEx and UPS by leveraging existing passenger vehicles already on the road. “Someone is leaving somewhere and going somewhere else all the time,” he said. “Suppose they could also earn money and other benefits by carrying packages to that destination?”

But the key to Roadie’s future was making it incredibly simple for drivers and customers to connect and do business. The company’s mobile app enables an entire transaction to take place in moments (the Roadie keeps 80% of the contracted amount; the company 20%). One user reports standing in line to buy a rug at Ikea that was too big for his car, and a Roadie driver offering to deliver it for him before he’d reached the cash register. The Waffle House chain, with some 1,750 restaurants in 25 states, is now a Roadie partner (drivers get a free waffle as part of the bargain), and Roadie employs no full-time drivers or vehicles to meet the demand.

Another possible term for this approach is asset-light, and some of the largest hotel chains are embracing a far less technological approach to achieve the same corporate objective. A 2014 article in Medill Reports notes that Hyatt, Hilton, Marriott and Starwood (Marriott recently announced plans to acquire Starwood) have all “adopted what’s known as an ‘asset-light’ model. Using this model, a hospitality company places more emphasis on franchising and managing hotels, rather than being the direct owner of hotel properties. The physical owner of a hotel property pays franchise royalties to the hospitality company for the right to operate under its name.  This strategy requires less capital from the hotel chain.”

Value Proposition Unchanged

However you define it, the sharing economy is a disruptive force in a slew of industries, particularly travel, consumer goods, services, taxis, bicycles and car rental, finance, music, employment and waste. And the disruption may be long-term if the new businesses permanently change consumers’ attitudes towards ownership. In the PwC study, 81% of people familiar with the sharing economy agreed that “it is less expensive to share goods than to own them individually” and 57% agreed, “Access is the new ownership. Twitter 

Shelby Clark, CEO of Peers described the disruption in the automotive sector. “I think the biggest change that we’re seeing here is that people are choosing to buy mobility as opposed to just buying a car.” Or as the saying goes, “I don’t need a drill, I need a hole in the wall.”

Whether attitudes towards ownership change for good remains to be seen. Another supposed aspect of disruption seems far less likely to endure. While 78% of the people surveyed by PwC said that the new sharing companies helped build a stronger community and 86% agreed that it was more fun doing business with these “upstarts” than with traditional companies, research published in the Journal of Consumer Research takes issue with this “romanticized view on access.”

According to the researchers, Giana M. Eckhardt (Royal Holloway University of London) and Fleura Bardhi (City University London), users of Zipcar “don’t feel any of the reciprocal obligations that arise when sharing with one another. They experience Zipcar in the anonymous way one experiences a hotel; they know others have used the cars, but have no desire to interact with them. They don’t view other Zipsters as co-sharers of the cars, but rather are mistrustful of them, and rely on the company to police the sharing system so it’s equitable for everyone.”

In fact, companies take the trust issue very seriously. Some go so far as to carefully vet those they do business with. DogVacay has a five-step screening process that certifies only 15% of applicants to offer dog sitting services. TaskRabbit runs identity and criminal record checks as well as in-person interviews. And many companies provide some level of insurance.

“Consumers simply want to make savvy purchases, and access economy companies allow them to achieve this, by offering more convenience at  lower price.” — Giana M. Eckhardt and Fleura Bardhi, researchers

Virtually all the sharing companies establish trust through crowdsourcing. Online reviews are at the heart of the sharing economy. Before anyone agrees to use an Uber driver, rent an Airbnb room, sleep on a Couchsurfing couch or hire a TaskRabbit handyman, they check out what others who’ve used the particular service have to say. And companies facilitate this through easy-to-use technology and easy–to-understand rating systems.

If community and trust are not key variables in the value proposition for the sharing economy, what is important is what has always been of most value to consumers: convenience and cost. In the PwC survey, 86% and 83% respectively agreed that sharing companies make life more affordable and more convenient and efficient. According to Eckhardt and Bardhi, “Our research shows that consumers simply want to make savvy purchases, and access economy companies allow them to achieve this, by offering more convenience at  lower price.”

 

 

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