Author: Courtney Goldsmith
11 Jul 2019
‘Disruption’ is the business buzzword of the moment. In any sector, disruptive innovation is what entrepreneurs exhort, incumbents fear and investors chase. In the late 2000s to early 2010s, the increasing digitalisation of the economy allowed a new breed of disruptor to emerge with the rise of the sharing economy.
Along with labels such as ‘gig economy’ and ‘platform economy’, the term attempts to pin down the phenomenon of businesses like Uber and Airbnb, which use digital systems to reshape relationships between workers, consumers and resources. The nebulous sector is an outgrowth of multisided-platform companies, which also include any system that enables participants to interact with one another, including eBay, Match.com and Ticketmaster.
For the past decade, a legion of sharing-economy start-ups has stormed onto the scene. Several of the sector’s biggest names are now preparing to list their shares on the public market, raising questions about the bumpy road they have weathered so far and what the future holds.
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The sharing industry has grown at a feverish pace, fuelled by a perfect mix of falling technology costs, rising use of the internet and increasing trust in online exchanges. In 2014, PwC estimated that revenue generated by sharing-economy companies would grow by a quarter each year over the next decade, reaching $335bn (€298.6bn) by 2025.
Disruption, in practice, is messy; sharing-economy start-ups don’t make many friends on the road to unicorn status
Investors have become enamoured with visions of a future where any idle resource – whether an empty room or a free afternoon – can be monetised, leading venture capital firms to invest $23bn (€20.5bn) in the sector between 2009 and 2016. The emergence of this sector has had – and will continue to have – a huge impact on traditional industries. For example, Barclays has estimated that the growth of car-sharing and autonomous driving technology could lead to a 60 percent drop in the number of cars on the roads globally.
On a deeper level, sharing-economy companies have raised questions about what the future of work and consumption could look like. The industry’s major players (such as ride-sharing firms Uber, Lyft and Ola, room-sharing platform Airbnb, and bicycle and scooter start-up Lime) have faced a near-constant barrage of practical hurdles as governments and regulators struggle to understand how their services fit into the cities and towns in which they’ve appeared.
“This is not merely about sharing, but also about a more disaggregated form of entrepreneurship and capitalism,” Joakim Wernberg, Research Director at the Swedish Entrepreneurship Forum’s Global Megatrends programme, told European CEO. “The result is a new organisation of the economy, which may exhibit frictions with, or even be at odds with, pre-existing regulatory frameworks.”
Disruption, in practice, is messy; sharing-economy start-ups don’t make many friends on the road to unicorn status. “Once disruptor companies become more mainstream in their activities and practices, they get noticed by tax authorities or regulatory bodies,” said Jordan Hiscott, Chief Trader at Ayondo Markets. “As established players in the sector notice their revenues [declining], they become vocally critical of the perceived unfair
advantage the disruptor has.”
Airbnb, for instance, receives criticism and praise in equal measure. Since it was founded in 2008, the firm has checked in more than half a billion guests. Between 2008 and 2015, Airbnb went from making one booking a day to making one booking every one to two seconds.
As customers flock to Airbnb for the low prices and ‘authentic’ travel experience it offers, its market value has soared to $38bn (€33.9bn), according to internal valuations. As of March 2019, the company had more than six million listings around the world – a greater offering than the six largest hotel groups combined. But Airbnb has faced challenges to its enormous growth as a number of cities – including Los Angeles, Amsterdam and Paris – pushed back with regulatory measures limiting the number of nights per year a property can be rented out and requiring hosts to register with the local government for a licence.
Cities’ frustrations with Airbnb stem from the fact that they struggle to enforce municipal laws and collect taxes from it in the same way they can with traditional hotels. Airbnb has also been blamed for inflating housing costs for locals and transforming residential neighbourhoods into tourist spots.
A 2019 report by the Economic Policy Institute went as far as saying that Airbnb’s economic costs outweigh the benefits to travellers and property owners. Uber has also faced restrictions in cities globally, with strict regulations working to prevent its drivers from outperforming local taxis. The dockless electric scooter and bike companies that have sprung up in Uber’s wake will likely face a similar fate over issues with permits and safety.
As sharing economy companies expand into more areas, they are forced to adapt to more varied regulations. “As a platform grows, its core function (matching supply and demand)… becomes an increasingly more complex task,” Wernberg explained. “The more specific different regulatory frameworks are, the harder it is to scale the service internationally.”
In theory, services like Uber and Airbnb could offer Netflix-style, country-specific interfaces, according to Wernberg. But he warned that even this option would pose scaling challenges: “At some point, this not only limits the company’s business model or the users’ universal access, but also inhibits future competition because of the workload and investments related to tailoring the service for every country.”
This conflict between sharing-economy companies and regulators is not inherent to the business model. In fact, the two could have a productive relationship: companies could use their data-driven models to provide better information to tax authorities or more transparent reports on the work conducted across their platforms, Wernberg said. He added: “Platform economies might even contribute to a better understanding of the labour market and a more flexible or adaptable – and more goal-appropriate – regulation of it, i.e. a more efficient economy.”
Regulatory challenges aside, Hiscott expects the fundraising environment for the sharing economy will become a problem as investors grow wary of extremely high valuations. “The expansion of businesses like these requires a huge amount of capital,” Hiscott said. “In Lyft’s case, they needed five different rounds of funding before becoming a listed company.” In spite of these obstacles, he believes the sharing economy will grow “dramatically” in the coming years due to its numerous efficiencies and benefits for consumers.
But the sector is changing; Uber and Airbnb are growing away from what made them sharing companies in the first place. Once Uber eliminates the need for its drivers by introducing self-driving technology, Wernberg said the company would cease to be a part of the sharing economy. Airbnb, meanwhile, is making what Hiscott called an “extremely smart” move by becoming an end-to-end travel platform. Not only does the firm now sell users local ‘experiences’ in addition to their purchase of accommodation, but it has also agreed to buy hotel booking site HotelTonight and take a stake in Indian hotel start-up OYO, diversifying the business away from room sharing.
To Wernberg, these movements signal a shift in the market. “In five to 10 years, we will not be speaking of the sharing economy as something coherent and mutually exclusive from other types of multisided-platform companies,” Wernberg said. Instead, a divide will open up between ‘pure’ multisided-platform economies (those that have stuck to the sharing business model) and ‘transitional’ multisided-platform economies (those that provide a significant part of their content and services themselves), he explained. In the future, the sharing economy could exist as a sort of “larva state” for companies as they work to diversify into other areas of business, Wernberg said.
As the multisided-platform market continues to shift alongside advances in artificial intelligence and machine learning, it has the potential to reshape the economy. “Companies like Uber trying out autonomous vehicles is only the beginning,” Wernberg said. Businesses that are part of the sharing economy have already sparked great change in the industries in which they operate. Their disruptive power is only set to increase as the gig model evolves.