The sharing economy is a hot topic today because firms like Uber and Airbnb have captured the attention of the markets, headlines and the banner of heroic entrepreneurship. The sharing economy means that individuals sell services that are related to underutilised resources. In other words, people may have unused goods, time or skills, which that they provide to others against payment. In the case of Uber these resources are a car and time, for Airbnb, accommodation. In addition to these two ultra-popular services, on the Internet one can find a wide range of other goods and services provided by private individuals.
This phenomenon has come to be called the sharing economy, even though it is clearly revolving around the sale of services. If one was interested in actually “sharing” goods and services in the sharing economy, focusing on community based services such as Craigslistin and Freecyclen would be the way to go. Craigslist was founded in 1995 in San Francisco with the intention to share with the residents of the city “cool events”. From here it quickly spread to the housing and labour markets; both of which were difficult in the San Fransico of the late 1990s. For its part, the Freecycle Network is a recycling service, where, for free, one could get rid of, say, the extra furniture or unneeded dishes. The service started in Arizona in 2003, with the aim to “instil a sense of generosity of spirit as they strengthen local community ties and promote environmental sustainability and reuse”
Freecycle and Craigslist began as by non-profit-oriented organisations. Conversely, Airbnb and Uber, patiently supported by their investors, intend to become market leaders globally through scale and by driving competitors out of the market. That may be rather difficult in practice; it is rumoured that Uber’s more moderate and slower growing competitor, Lyft, may become profitable sooner. Similarly, Airbnb’s market has many profitable, and well entrenched, competitors such as VRBO-Vacation Rentals By Owner – which is, quite literally, a company by and for owners of vacation rental property.
So what sharing economy? And why? If these services have little if anything to do with actual sharing, perhaps it would be intellectually more honest to talk about digital marketplaces for services? The internet after all has long paid host to marketplaces for labour (eg. Monster founded in 1994), used books (AbeBooks, est. 1995), Cars (Cars, est. 1998), computer programming (TopCoder, est. 2001) and all kinds of strange stuff (eBay, per., 1995). Digital marketplaces are a much older phenomenon than Uber (2009) or Airbnb (2007).
Then why, since the 1990s, have we seen such strong growth in digital marketplaces? Evolving information and communication technologies have significantly lowered the costs of coordination, communication and commerce. A comprehensive and commercial internet and broadband combined with personal mobile data processing have made it possible for people to become active online. When the coordination and communication are essential to your business, digitalisation can have a huge impact on organisations and the structure of the industry.
In a world of low-cost coordination traded can occur in smaller units. Work may consist of tasks and not full day “jobs” in long-term organizations. Products can be put together from parts sourced all over the world through complex value chains and very little needs to be combined in house. Even music can sold a song at a time while the concept of the album has begun to die. In the same way, the use of a car or an apartment can be decomposed or a tool rented or a dog walking service sold in the “sharing economy”.
What then is actually new and different in the “sharing economy”? Dividing resources and time into smaller and smaller sellable units is a common trend in the digital economy. Digital marketplaces have emerged in many areas. What is new is perhaps the willingness of venture capitalists to fund global conquest to the tune of billions at least in the case of some individual companies. Is Uber a good business, and should investors to be patient? Billions will disappear into legal tassels and in a war against regulation, not to mention into recruiting drivers. After all, Airbnb is projected to end its decade of losses in 2017 and a stock market listing is certainly not far off in the future. It remains to be seen what kind of returns investors receive. From an economic point of view, we should perhaps think about whether or not there is healthy competition, when a large number of extremely wealthy private equity investors use their tech companies to drive competitors from the marker by doing business for a long time at dumping prices and at a loss. Then, when the market is effectively cornered by their monopoly, market entry for competitors becomes almost impossible, and consumers can expect a rapid rise in prices.
About the author: Aija Leiponen is a Professor at Cornell University. Her research extends into, among other things, digitalisation, innovation strategy, organisations and technological change. Aija has worked as a researcher at Berkley, at Imperial College London and at ETLA, where she is a Senior Research Fellow.
Read more about Aija Leiponen, her work and areas of expertise here.