The sharing economy is a fast-growing innovation opportunity. PricewaterhouseCoopers projects a 20-fold increase between 2016 and 2025 – reaching €570 billion ($674 billion). Its best know representatives are Uber and Airbnb. But there are many other wonderful examples and types of sharing economy platform business models.
It is common understanding that the role of the innovator is to introduce new methods, ideas, products/services or business models. But does it end there?
The answer is a resounding “no”. After having built one of the highest valued start-ups (by market capitalisation), Uber CEO and co-founder Travis Kalanick had to step down as top executive. The reason were not a lack of growth or bad financial results. It was due to the poor management of negative impacts of the platform. At the same time, Airbnb is awaiting dozens of regulatory decisions all over the world that can wipe off a considerable amount of their housing stock in the affected cities.
Innovators have to understand and manage the implications of their ideas to participants and non-participants before a negative public opinion forms which would put pressure on regulators to introduce heavy-handed, innovation-stifling measures in place.
Today we will look how innovators can help manage the foot print of their companies, the public discourse and regulations in a positive way using innovative ideas.
Types of sharing platforms
Last time I have shown how the platform business model can unlock the potential of the sharing economy. The sharing economy is a significant socio-economic trend with massive potential. Here is the platform business model value chain that we came up with last time.
I am distinguishing between two of the most common types asset sharing platforms and service sharing platforms. Uber and Airbnb are both asset+service sharing platforms which for today’s purposes I will be putting in the same category as service sharing platforms. Thus, our focus today is on these two types:
- (Pure) Asset sharing platforms, e.g. Turo, Zipcar, Sharedesk, Peerby, Ofo, Mobike
- Service sharing platforms, e.g. Freelancer.com, Fiverr, TaskRabbit and asset+service platforms, e.g. Uber, Airbnb, Foodora
Today’s focus is on the wider effects of sharing economy platforms. We are going to look at:
- Positive and negative,
- direct and indirect effects on
- participants and non-participants;
- innovative (and restrictive) regulations and
- innovative solutions to the negative effects within the platform
Asset sharing platforms: negative externalities
You have seen last time that platforms can decide between different asset distribution models:
- Centralised location
- Decentralised location:
- Owner determined location
- End-user determined
- On-demand location
Most of the early bike-sharing companies required bikes to be picked up and dropped of at docking stations. More recent ones have gone to dockless bikes. The idea behind it is the reduction of search and transaction costs. Given a sufficient supply the big – and to be tested – assumption is that users will drop the bikes off where others want to pick it up. The following snippet from Sydney shows this may not be always the case.
Business Insider reports about one of the negative externalities to the councils: “A week after the council unanimously backed his plan to begin removing the bikes from the streets, rangers impounded 60 on Monday. It will cost $70 to get them back, but the council is currently seeking legal advice on whether it can charge up to $500 for their return under environmental legislation.
The region, which includes some of the city’s most famous beaches and tourism spots, including Bondi, Bronte, Rose Bay and Clovelly, has been grappling with the issue of dumped bikes for the last six months. The area’s hilly topography means the bikes are often ridden to the bottom of a hill, such as Bronte beach, and left there.“
The drawbacks associated are called negative externalities. It means that our innovation poses issues and risks to non-users (think of car polution or aircraft noise that affects the respective neighborhoods).
Negative externalities and risks
With end-user determined asset distribution models comes the risk of damage, theft, abandonment and negative externalities such as excessive build-up but also safety and illegal/unsafe parking.
But Sydney is tiny compared to other cases. Bike-sharing companies in China trying to gain an elusive first-mover advantage end up with an over-supply which exacerbates negative externalities.
You have seen in our examples article that innovators have started sharing items on the go, such as umbrellas, phone batteries, etc but from a docking/dispensing station. Other innovators have gone the next step to make these items dockless as well.
“Chinese umbrella-sharing firm remains upbeat despite losing most of its 300,000 brollies [within 2 weeks]
Just weeks after making 300,000 brollies available to the public via a rental scheme, Sharing E Umbrella announced that most of them had gone missing, news website Thepaper.cn reported on Thursday. After seeing the launch of bike-sharing schemes across the country, the Shenzhen, Guangdong province-based businessman said he “thought that everything on the street can now be shared”
“Although it costs the company about 60 yuan (US$9) for each umbrella lost, Zhao said he still plans to make 30 million of them available across the country by the end of the year. The company was launched in April – with an investment of 10 million yuan – and by the end of last month had been rolled out to 11 cities on China’s mainland, including Shanghai, Nanjing, Guangzhou and Nanchang, the report said. In principle, the scheme works by members of the public borrowing umbrellas – from stands located mostly at subway and bus stations – for a deposit of 19 yuan and a fee of 0.50 yuan for every 30 minutes, it said.”
How communities manage negative externalities
Let’s look at one example how communities tackle this. We are now back in Sydney where the scale of the problem is not as big. The City of Sydney has published guidelines Some of the concerns it addresses are (download here, pdf):
- Safety of the bikes, mandatory usage of helmets
- Faulty/damaged bikes to be deactivated immediately and taken care of in a timely manner
- Safe placement of bikes and illegal parking
- Distribution and redistribution of bikes (excessive build up in certain areas)
- Insurance and indemnity
- Council staff access to bikes for the purpose of relocation if required (e.g. event management)
These are reasonable regulatory concerns. As an innovator you can take these into account proactively or hope to muddle your way through. But the latter “approach” might end up costing you a lot of money as can be seen in the case of abandoned, damaged and stolen items. People affected by negative externalities may decide to express their opinion in unacceptable or over-reacting ways. No doubt a proactive approach will be the better choice. Before I come back to this, first let’s look at positive externalities.
Asset sharing platform: positive externalities
It’s not all bad. Of course our ideas can also have positive externalities, i.e. beneficial effect to non-users. In the case of bike-sharing it can stimulate the local economy.
Now, the question is how to take advantage of these kind of positive externalities. One way is to enter mutually-beneficial collaboration with those that reap the benefits of the positive externalisties. In this case, the bike-sharing company could collaborate with local shops and offer special deals to the bike users. Or both could enter reciprocal special offers. This could stimulate both the local shops and the sharing platform.
It brings us back to the point that the sharing economy allows us to connect with people in our neighbourhood that we didn’t interact with previously. The platform business model unlocks many new ways to connect and transact with people nearby.
Service sharing platforms
The impacts associated with asset sharing are a challenge but they are dwarfed by the direct and indirect impacts of service (and asset + service) sharing platforms. Many of these platforms are included in the term “gig-economy”. Now, the gig-economy is wider than sharing platforms and includes contract, temporary and freelance work arrangements. But food delivery platforms and Uber are some of the poster children of this type of labour market.
This is why (for the sake of this discussion) I categorised asset + service platforms in the same bucket as service platforms (TaskRabbit, Freelancer.com, etc).
Some innovators are not aware of the externalities caused by their ideas. But the larger platforms take this topic very seriously. And there are great innovation opportunities in this field.
This is what we are going to look at:
- The risks and issues:
- How does the public see the state of “gig-work”?
- What are the contentious topics (direct effects)?
- What are some indirect effect (externalities on non-users)?
- Positive contributions and solutions
- What the platforms can do: Can innovation be the solution?
- What the regulator can do: What to do with existing regulations put in place for a different type of economy?
- Joint efforts:
- Innovators proposal: guiding principles for long-term solutions?
- Regulators proposal: Types of|? governance
Is the gig-economy evil in disguise or a saviour?
You will not be surprised to hear that left-leaning sources condemn the gig-economy as exploitative while liberal sources see it as an opportunity that should not be stifled by heavy regulatory burden. But what do people think?
That is exactly the question the PEW Research Center surveyed for. See below for their results – this is my interpretation of it:
- The first three questions show a majority of people taking note of the opportunities associated with the gig-economy
- They also see the risks associated with this type of work not being a great career opportunity (question 6)
- They seem to be tentative in their judgement on exploitation of workers (note the large “not sure” respondents to questions 4 and 5 below)
I find it revealing that the wisdom of the crowds seems has not yet settled on a final opinion whether or not platforms taking advantage of workers. It is a complex topic and regulators take their time to regulate on the negative sides without completely stifling the opportunities. (In the mean time the risk of bad excesses have to be mitigated by existing laws. In different countries in Europe individual court cases are being decided upon. Further, there are other accountability-asserting mechanisms such as social media and broadcast media and the public reaction thereupon.)
It is important that innovators manage the negative impacts before public opinion settles on a negative perception. Once this happens there will be pressure on the regulators for heavy intervention.
Who pays for entitlements?
Now let’s look at the raft of topics that need to be sorted out and how some of the most prominent innovators get involved in the discourse.
Most of the items below effect the supply side of service or asset+service platforms. And they are based on the fact that participants of sharing economy platforms are not employees of the respective platform but almost without exception freelancers. Platforms, when compared to traditional companies, they do not provide many of the traditional employee entitlements:
- Minimum wages: Almost every study that analyses the average hourly earning of Uber riders comes to a different conclusion on their hourly wages. “Independent” studies contracted by Uber confirm at least same pay levels as professional taxi drivers whereas others say it is below minimum wages. It is a complex topic depending on many assumptions
- Insurance: Uber, Airbnb and others provide insurance for accidents and the asset used (vehicle/home). But insurances are not necessarily widespread (e.g. bikes of food delivery freelancers are typically not covered and sometimes not even for accidents)
- Annual leave: Companies have to accrue annual leave for their employees. This is not the case for platform freelancers
- Sick leave: Same holds true for sick leave
- Work cover: Typically, there is some system for payment of work-related injuries (what ever it may be called in your country). Again, no such cover for freelancers
- Guaranteed hours: stability and predictability of income is an important factor in people’s financial planning. But with freelance work, there are no guaranteed works hours
- Safety or weather gear: Where relevant, the question is who will pay for safety or weather gear. Do DIY-jobbers need to have their own rain gear when working in someone’s garden in rain and what about food deliverers?
- Retirement savings: In many countries there is a system to put aside some money for retirement savings. There is often an employer contribution and a government “support” in terms of reduced (or exempted) taxes. Again, there is no established scheme for platform business workers as such
- Training / licensing: Many professionals that service sharing platforms compete with have some sort of traditional licensing scheme (e.g. for tradies, taxi drivers) which is not the case for sharing platforms. There is typically also no training program for platform freelancers
Beyond the direct negative impacts and risks, there are also negative externalities impacting non-participants of platform businesses. Here are a few frequently covered examples:
- It’s been speculated that Airbnb would contribute to house affordability problems in some cities by taking some supply of the market and thus pushing up rents. The probably most comprehensive study in the US finds “an estimated average increase of $131 every year. But not all of that growth is attributable to Airbnb. Controlling for other factors that influence housing costs—such as population growth, income, and employment rates—the findings would suggest that Airbnb was responsible for an estimated $27 of this increase.” (basically, $2 per month or 50 cents per week… full study here for those that have access)
- Many individuals taxi medallions owners in the US (or taxi plates in Australia) have experienced a massive drop in those prices since Uber has entered their cities in some cases severely reducing their net worth and retirement prospects
- The criticism arises that social safety nets (i.e. tax payers) will have to pay for the unpaid entitlements full-time freelancers on sharing platforms
- Further, service sharing platforms don’t pay payroll taxes (though, personally, I have not seen a good justification for those taxes)
So, this is the issues space. Before we get into the solution space, lets also have a quick look at positive impacts.
Positive externalities (service or service+asset)
Not all is bad. There are direct positive effects (i.e. on drivers and passengers) as well as positive externalities (i.e. on non-partcipants). Here are just a few examples:
- The biggest positive impact is that the gig-economy and sharing economy platforms creates additional income for supply-side participants and cheaper alternatives for demand-side participants delivering economic benefits to both participants. Professor of Sociology Juliet Schor states “These innovations can provide people with low-cost access to goods and space, and some offer opportunities to earn money, often to supplement regular income streams.” This facet is very complex and I will cover it in more depth in my concluding article on the sharing economy next time. In a wider sense, it creates new job markets
- It offers flexible work hours and the freedom of being your own boss
- Online freelancing platforms (such as Freelancer.com) offer the opportunity to improve your skills on real-world projects and build a portfolio that can open a whole lot of opportunities
Other examples for platform-specific positive effects are:
- A more recent US Fair Trading Commission (FTC) report (pdf), 2015 finds “that controlling for underlying trends and weather conditions that might affect taxi service, Uber’s increasing popularity is associated with a decline in consumer complaints per trip about taxis in New York. In Chicago, Uber’s growth is associated with a decline in particular types of complaints about taxis, including broken credit card machines, air conditioning and heating, rudeness, and talking on cell phones.” (The obvious causation is that losing their monopoly, taxis need to compete on dimensions such as customer experience)
- An Uber Austin case study (pdf) shows how Uber expands the local transport system
- A Deloitte report (pdf) shows Airbnb: “Airbnb plays an important role in supporting tourism in Australia, by facilitating accommodation bookings and advertising Australian destinations to consumers.” and “Tourism facilitated by Airbnb contributes $1.6 billion in value added, with 14,409 full time equivalent jobs supported around Australia”
- On their webpages, Uber claims that they contribute to safer road by reducing driving under influence
- A local newspaper points out the positive effects on small businesses outside of city centres
These are just a few sources. The obvious reason that Uber and Airbnb get so much airtime compared to other sharing economy platforms is their popularity.
Can innovation be the solution?
Now let’s look at the solution space. In my view there are four elements to it: (1) what the sharing platforms can do (2) what regulation can do and (3) joint efforts and potentially (4) what 3rd parties can do. I am focusing on the first three in the next few sections as these are the best outlined options to date.
What can the platform business do? I suggest, they should do what they do best: innovate! Here are some examples:
- Calculations on Uber’s drivers hourly rates take a hit when the drivers’ input costs get factored in. Uber with its size has started to get discounts on some of the most important input costs with the respective providers. Here are some examples:
- In the UK, a number of work-related insurances for all active drivers who have completed at least 500 trips for £2 a week:
- “sickness and injury cover of up to £2,000 if unable to drive for two weeks or more
- occupational accident cover of £300 per week for up to 52 weeks if an accident takes place during a trip or while logged into the Uber app
- accidental death or permanent total disablement cover of £50,000 if an accident takes place during a trip or while logged into the Uber app
- free advice and support on paying tax as well as personal finance issues such as mortgages, pensions and saving for the future”
Uber might be “motivated” by losses in court over workers’ employment status in the UK. But these are interesting experiments that may be rolled out to other countries.
Review (existing) regulations
But the platforms can’t solve all problems by themselves. Some of the issues are simply caused by outdated regulations over a 100 years old.
For example taxi drivers’ input costs are driven up by a medallion system (basically a licensing scheme by which local government make revenues introduced during the great depression of the 1930s):
- In the US, the Fair Trading Commission (FTC) saw little justification for the medallion scheme (FTC report, 1984). Nothing has changed in the US in the 35 years since the FTC findings. Worse yet, the number of medallions in New York City today is lower than it was in 1937 when the medallions were introduced and this despite increasing population and mobility needs and traffic
- Here in Australia, the taxi plates cost (same as medallions) cost around $300,000. A productivity commission established by the government has found that these schemes offer no benefit to the consumer. The drivers have to work them off for decades to come. In the Australian case, this equated to an average of $2.37 (inflation adjusted) for the consumer for an 8km trip. This is a saving that a regular passenger will notice immediately and would make taxis more competitive to Uber
- Recently, the state of New South Wales here in Australia has significantly reduced one of the government charges (CTP green slips) to taxi companies. This is another element of levelling the playing field for the impacted party without adding regulations. It just is not very likely that the regulators generally will reduce their own revenues
- Some cities (here San Fran) now require that only registered homes are to be listed on the Airbnb pages. This is a request in order to ensure that incomes from home letting activities are being declared for tax and other compliance tacking purposes. While it sounds reasonable, these kind of rules always lead to less housing inventory on short-term rental sites
- Over the last few years, Airbnb has been subject to a number of new regulations. Many of them limit Airbnb rentals to a certain number of days per calendar year. 120 days seems to be a common measure. But there are many other rules associated. Check out two examples:
- Over the last years, regulations in Paris, most large cities in Spain and many others have ramped up a lot
- Airbnb contests that their platform contributes to long term rental affordability problems. Here is an Airbnb study on Madrid (pdf) (one of the restrictive cities that has seen steep rental increases over the last few years) that shows “60 percent of hosts in Madrid share their primary residence. Only entire home listings on Airbnb that would otherwise be on the long-term rental market can impact rental costs. In 2017 only 4,645 entire home listings were booked more than 90 nights in Madrid representing only 0.3% of the housing market”
- More regulations are in the pipeline, here examples LA and Boston all trending towards more restrictions
- Here is an options paper in the largest state of Australia on how to regulate short term holiday rental. It shows a good overview of relevant discussion points. Notably, it also states “However, the limited evidence currently available suggests that the impact of STHL [short term home letting] on rental availability is negligible.” and includes some self-regulatory measures for Airbnb
You can see a variety of approaches on the topic. Encouraging to self-regulate some of the elements and sharing of relevant data can be an innovative approach. Innovators need to be in constant constructive dialogue to contribute to mutually-beneficial outcomes.
And what about the gig-economy? Here is one such example where innovators try to contribute to the discussion. One group of thought leaders composed of researchers and practitioners have come up with 5 guiding principles as a starting point for discussions with legislators:
- “Independent: any worker should be able to access a certain basic set of protections as an individual regardless of where they source income opportunities;
- Flexible and pro-rated: People are pulling together income from a variety of sources, so any vehicle should support contributions that can be pro-rated by units of money earned, jobs done, or time worked, covering new ways of micro-working across different employers or platforms.
- Portable: a person should be able to take benefits and protections with them in and out of various work scenarios;
- Universal: all workers should have access to a basic set of benefits regardless of employment status;
- Supportive of innovation: businesses should be empowered to explore and pilot safety net options regardless of the worker classification they utilize.”
This is also what professor Sundararajan has proposed in a policy briefing (pdf) to the policy department of the European Union (though with small tweaks).
Uber has joined this proposal: “Uber is committed to engaging in constructive discussions on how technologies such as ours can contribute to new models of social protection that harness the potential of flexible independent earning opportunities in Australia,” its submission said. It pointed to a joint letter, signed last month by Uber chief executive Dara Khosrowshahi and US union leader David Rolf, calling on Washington state policymakers to develop “an account- based system of portable benefits scheme”
The scheme would allow drivers to build up benefits, such as paid sick leave, that would follow them from job to job.
Self-regulation can (and should) be a valuable part of regulating sharing economy platform businesses. There are different forms in which self-regulation can come. Here is a brief summary from professor Sundararajan’s policy briefing (pdf) to the European Union. He distinguishes between three approaches:
- Peer regulation: This is referring to the review system that is built into most of the current platform businesses. He states that “this approach is also advantageous because no single benchmark needs to apply to every model; the market doesn’t demand that the standards for renting a small studio be the same as those for renting a luxury condo. […] The platform thus supports myriad context- and customer-specific standards within a single regulatory framework.”
- Self-Regulatory Collectives: “In a self-regulatory collective, defining and/or enforcing of regulation is done by an organized third party that is not the government. […] An early example of a self-regulatory approach for the collaborative economy is embodied in what was formulated by the State of California in 2013, and updated in 2016. At this time, the state Public Utilities Commission created the framework for and the first instance of Transportation Network Companies (TNCs) to establish a self-regulatory approach for peer-to-peer transportation platforms such as Lyft and Uber.”
- Data-Driven Delegation: “… wherein rather than having a platform transfer data from within its systems to the government, the data is instead left inside the platform’s own systems, while allowing the use of the data for regulation by delegating regulatory responsibility to the platform. […] This approach raises fewer familiar privacy concerns and poses lower risks of leaking competitively harmful information. There is precedent to this approach—publicly traded corporations are, in some sense, also regulated in a delegated data-driven way. They provide audited summary evidence rather than being asked to provide raw operational data for a regulator to use in confirming compliance.”
These are all very good approaches that would likely be used some combination.
Not everything will be solved in self regulation. Some elements will always have some external parties involved. So, to conclude let’s have a look at which generic roles and activities may be involved in governing sharing platforms.
Here is a little infographic summarising the article. I am sure you agree that sharing economy platform businesses can provide economic benefits to their participants when done right.
Finally, here are some valuable links to my previous articles on the topic:
- The fundamental elements of the platform business model: a comprehensive guide or all articles
- Other articles on the sharing economy
- Airbnb’s business model and strategy
- Uber’s business model and strategy
- The sharing economy platform business value chain
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