The Sharing Economy

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It's communism, ya dig?

Background

Early Sharing

The idea of sharing resources has been around a long time - taxis let people share rides, and hotels let people share rooms. However, the internet boom in the last twenty years has given rise to a new kind of sharing - peer to peer. In the nineties, Napster allowed users to share music. It connected users to other users who owned music, and let them send the files across the internet to each other to share with each other. Rather than having to go through the difficult process of printing individual copies of albums, users could just share one copy, cutting down the price of ownership to nothing. Napster's business model was deemed illegal, but the idea of using technology to share stuck around. With the internet, users could share things that would have been too expensive to facilitate before - if someone had a boat they only used once a year taking up space at their house, they could justify keeping it around by having others pay to use it on occasion. As this idea broadened, entrepreneurs realized that sharing could challenge monopolistic industries. Buildling on the idea of mom-and-pop bed and breakfasts, Airbnb leveraged the ease of communication and scability the internet provides to create a massive Bed and Breakfast service that rivals the hotel industry. Uber challenged the taxi monopoly by providing large scale car-sharing. By disconnecting the service from the provider through the use of the internet, these companies have been able to be incredibly profitable.

Uber

In late 2008, Travis Kalanick and Garrett Camp were together at a tech conference in Paris, France. They had both recently sold their start-ups to larger companies and were searching for a new problem to tackle. Being from San Fransisco the two were very aware of the taxi problem in the city, getting stranded on random streets in the middle of the city. Their original idea was a limo sharing service, where Kalanick and Camp shared a Mercedes S Class and split the cost of a driver and a parking spot. This would allow either of the two to get anywhere they needed to only using their smart phone. This joke quickly became reality as the idea got venture capital funding in 2009 and the first test run was held in New York City in January of 2010. [1]

Airbnb

Started by Brian Chesky and Joe Gebbia, Airbnb had modest roots. The two couldn't afford to pay rent, so they started a small website that allowed guests to sleep at their place on air beds and be served breakfast[2]. In return, the guests would pay for part of their rent. This idea quickly snowballed and led to them launching their website in 2008 during the housing crisis. Their idea was that many people were out of jobs, out of houses or almost of of homes from the Great Recession, and sharing the rent for a while could go a long way for those in need. By 2011, their business has skyrocketed and rentals have gone up 800%. Then, in Summer 2011, one user's home was destroyed, with all their belongings stolen over the course of a week. Another user came back to find their house trashed, with meth pipes left all over. At first, Airbnb did nothing to help, but later decided against this and started offering $50,000 a guarantee to cover damages. The next year they upped this to $1,000,000, and by winter 2012, they surpassed Hilton in nights booked. In summer 2013, a legal battle begins about the legality of Airbnb's practice emerge as a NYC renter is fined for hosting guests. However, Airbnb continued to grow, and is now evaluated in the 10 billion dollar range.

Other

A variety of other early services are considered to be pioneers of the sharing economy, particularly with the early development of the web.

Pirate Bay

Though not strictly legal, the Pirate Bay is an early example of peer-to-peer exchange and sharing facilitated by the internet. In many ways, pirate bay and other sites like it demonstrated the potential for intermediaries to develop using the web as a platform of exchange. Prior to the development of the web, such connection between users was much more difficult and time consuming, and early innovation from a variety of sources capitalized on this need.

Ebay

Ebay is a particularly important example because of its place as an online marketplace very early in the game. The well-know online auction site was a particularly salient (and legal) demonstration of the potential for the sharing economy. It's popularity and success diffused doubts about security and uptake of online financial transactions.

Business Model

Overview

There are seven general business models for collaborative consumption: service fee, white label, freemim, on-sale, flat membership, tiered subscription plans, and membership plus usage.[3]

Collaborative Consumption business models.
Model Explanation Examples
Service Fee This business model represents companies which match clients (buyers and sellers, etc.) for a fee.[3] These companies act as intermediaries and facilitate sharing, so to speak. This is one of the most salient business models for the sharing economy, and has been driven by the recent advances in technology.
  • Uber
  • AirBnB
  • Ebay
  • Craigslist
White Label White label is when a company develops and sells enterprise software.[3] The key aspect of this business model is that the businesses then all have different versions of the same software.
  • Bloomberg
  • Tableau
  • Various educational and healthcare programs
Freemium Companies that offer software for free and then offer additional features for fees.[3]
  • Spotify
  • Pandora
  • Microsoft
On-Sale This is when companies purchase used products and sells them for a mark-up.[3]
  • Gazelle
Flat Membership Customers pay a regular fee for access, regardless of usage.[3]
  • Amazon Prime
  • Blizzard
  • Norton
Tiered Subscription Plans A variety of subscription plans are available to customers, dependent on different variables.[3]
  • Comcast
  • Google
  • Netflix
Membership Plus Usages An annual fee plus additional fees charged based usage.[3]
  • DriveNow
  • Car2Go
  • AT&T

Uber

Although Uber is in the same space as taxi services, their business models could not be more different. Where taxicab drivers are employees of taxi service companies, Uber drivers are self-employed drivers that use Uber to be matched with customers. Anyone with a car that passes Uber's screening process can become a driver. Unlike taxi drivers, Uber drivers make their own hours and work whenever they want to. Uber takes a slice of the fare given to the driver, usually around 20% but that rate fluctuates in cities with competition such as Lyft and Hailo. Although Uber drivers are self-employed in a sense, all fares are decided by Uber much like taxi fares are decided by their respective companies. [4] This level of autonomy is able to be achieved because of mobile technology. The pervasiveness of smartphones allow individuals to track Uber drivers and be matched with a driver with no human-interaction other than the driver responding to the request. This allows Uber to work with as little non-technology infrastructure as possible.

Airbnb

Airbnb's business model revolves around connecting potential renters to potential leasers. Their target audience are those who may not have otherwise thought, or been willing, to put the time into renting some part of their home, as well as people looking for places to stay. The "classic" renter is a person who has an extra guest room in their house - Airbnb encourages people like this to put that room to use and make some money to help pay for rent, mortgage, etc. Because the rentals are often parts of people's homes that they don't use anyway, rental charges can be lower than hotels', giving an incentive for renters to use the service. Furthermore, renting a room in a home appeals to some guests as it is more comforting than a hotel, and often immerses the renter in the culture of the city better than a hotel does.

Airbnb's part in this process is simply as the connection-maker. They do not make claims about the renter, and they don't own the properties. This allows them to escape from some of the expensive regulatory practices that Hotels must deal with. Ebay doesn't "guarantee the existence, quality, safety, or legality of items advertised,"[5] and Airbnb follows a similar rule. Though they guarantee renters up to a million in damages, it only applies if the host cannot confront the guest about it, and even then it does not cover some items such as "shared areas."[6] For Airbnb, this means that they can save quite a bit of money on "clean up" costs, which lets them charge less for rentals, helping to create business.

Policy Issues

Uber

Uber has come under fire from publicity incidents regarding their driver screening and insurance policy. If Uber wants to supplant the taxi industry in the long run, they must be able to address the following concerns.

Insurance Policy

Uber drivers are required to purchase their own commercial insurance, however Uber provides $1 million of liability per accident. There have been complications though, including an incident where an Uber driver struck and killed a 6 year-old in San Fransisco. In this instance the $1 million wasn't provided because the driver didn't currently have a fare. Since this incident Uber has included coverage for the "insurance gap".[7] This new coverage is provided by Metromile, who provides pay-per-mile car insurance. Uber and Metromile have their technologies work together in order to determine when a driver is on-duty or off-duty, since the insurance only kicks in when the driver is off-duty. For now Metromile's service is only available to Uber drivers in California, Illinois and Washington and not similar services', such as Lyft, drivers.[8] Technology has also enabled Metromile to offer this type of service. They require that drivers under their insurance plug in a device that monitors driving activity as well as car health.

Driver Screening

Uber has come under fire recently from multiple sexual assault allegations. Although taxi services have a history of sexual assault as well, Uber is more susceptible due to their novelty and recent rise to popularity. The service was banned in New Delhi after a woman accused an Uber driver of raping her. There have also been accusations of sexual assault and kidnapping in London and Chicago. Law enforcement officials have also raised concerns over how Uber drivers are screened. The San Fransisco District Attorney, George Gascon, has said that Uber's background checks are completely useless because they do not fingerprint the drivers.[7] Uber has also engaged in promoting policy that lowers the burden of background checks. For example in California Uber and similar companies helped kill a law that would require drivers undergo a background check by the state's justice department, a requirement for taxi drivers.[9]

Airbnb

Airbnb's business model revolves around the fact that it is not particularly liable for the people on either end of its service. This was illustrated by the incidents in 2011 that led to their insurance guarantee. Before the incidents took place, Airbnb had no response to guests who had bad hosts, or for hosts who had bad guests. There is almost no regulation on what the transaction provider must enforce, so any regulations are self imposed. For Airbnb, the $1,000,000 guarantee helps drive business because renters are more likely to work with them, but there is no law in place specifically stating what they must cover and what monetary value a victim deserves.

Another issue Airbnb has faced is the presentation of security. When users go through Airbnb, much of the direct connection between renter and guest is abstracted away, giving them only minimal ways to contact each other. The user, "EJ," who had her house destroyed in 2011, explains that

on Craigslist, I am warned loudly and repeatedly that use of the site is at my own risk. I am encouraged to take certain precautions, and I have the ability to do so by gaining quick access to the email addresses, phone numbers, and other identifying information of the person(s) I am communicating with... Alternatively, Airbnb.com tightly controls the communication between host and traveler, disallowing the exchange of personal contact information until the point in which a reservation is already confirmed and paid for.[10]

To have a massively scaled website, this abstraction is somewhat necessary, since it makes logistics simpler and protects individuals' privacy concerns. However, it also allows for more anonymity, which is dangerous when sharing your belongings with others. Unlike craigslist, Airbnb gives the impression that both hosts and guests have been deemed trustable by taking away direct communications, while in reality Airbnb hasn't done background checks on its users. This opens up a vulnerability, which can be exploited by clever criminals. On sites like craigslist, the user feels as though they are in the wild west - no one can be trusted, so ensuring your safety is up to you. Airbnb purport to be safer, which lets it charge more for its services. However, since it is simply the mediator between the parties, it has no right to make this claim.

The main focus of allegations against Airbnb come from the fact that its users may violate housing regulations put in place by the city. In one landmark case, in NYC a man was fined $2400 for renting his room. Airbnb took up the case, explaining that if the owner is present while the guest is there, it doesn't violate the short term rental laws.[11] However, if an entire home is put on Airbnb in NYC, it will violate the rental law because it is not a shared space. The rental law was written to prevent landlords from buying up large amounts of property in neighborhoods to use as hotels. Airbnb walks a fine line here - they themselves are not landlords, but they are creating many more rooms to stay than a single landlord would. By separating the ownership from the listing, they are able to escape the rental laws while still getting many of the benefits landlords would. Arguably, there is much less impact on the neighborhoods with Airbnb than makeshift hotels because no one establishment has all the short term residents, but there is an increase in the overall number of people staying in the neighborhoods, which can be disruptive. On top of this, it is likely that one third of Airbnb's hosts are actually violating NYC's laws. Many of Airbnb's users are not in their apartments, and are renting out their whole place without paying the 5% hotel tax. Airbnb may not be liable for these hosts, but they are enabling users to violate the law.[12]

One last issue is that in high demand tourist areas, many property owners would rather rent to Airbnb than to permanent tenants. With Airbnb, a home can be rented for $150 a night, a significant amount more than they could get from permanent renters.[13] The fear is that the property owners will evict their permanent residents so that they can rent through Airbnb and make much more money, or up-charge them unreasonable amounts. Even if they are paying hotel taxes, in areas with high demand for hotels property owners can much more money. There have been attempts to mitigate this problem - in San Francisco there are laws that don't allow rent to be arbitrarily increased, and give stricter laws for how and when a tenant can be evicted.[14] Despite these laws, many property owners attempt to make up for some of the profits they are losing by treating their long term tenants badly by taking a long time to fix broken appliances. There may not be an easy fix for this issue, but it seems necessary for cities to address this problem with laws to protect permanent renters and home owners.

At the same time, Airbnb has massively positive impacts on the city's economy, so laws should not deter the business entirely. Many guests spend money in the neighborhood they stay in, and 1.5 times as much as an average tourist in the city. In NYC, 63% of guests say that renting their room helped them afford to stay in their house. In San Francisco, Airbnb guests generated about 56 million dollars worth of local spending, and 632 million in NYC.[15] Because of this, laws should should be focused more on limiting how and when hosts can rent, and how much each host should be charged. There doesn't seem to be any burden on Airbnb to enforce hotel taxes or other local laws, but by strongly enforcing hotel tax laws, it might force Airbnb to spend some money on actively monitor their hosts.

Other

Beyond these other specific examples, several other aspects of the sharing economy face challenges when it comes to regulation and policy. The very nature of peer-to-peer transactions puts customers at risk. By eliminating the middle man, you've also eliminated the safety and legal procedures guaranteed by the middle man.[16]

Meal Sharing

Meal sharing is a relative new comer to the sharing economy. The idea is that cooks and potential diners connect to cook/eat meals together. Often, but not always, there is a charge for the meal. Sometimes the cooks can be professional, and sometimes they can be amateurs who simply enjoy cooking. The obvious issue concerns the health and safety regulations which normal meal serving businesses would be subject to, but which don't apply to these private transactions. Most meal sharing platforms currently explicitly operate at least on some level on a system of trust and ratings, however most also have some sort of application process for cooks, the rigor of which varies wildly. The FDA also currently does not enforce any health and safety standards, though this could be because of the relative youth of this service. As meal sharing becomes more popular this laissez-faire treatment could lead to incidences which prompt new or application of existing regulation

Task Rabbit

TaskRabbit is a service which connects people who want to give/receive services. Such services could be anything from picking up laundry to mowing the lawn, but the key is just the peer-to-peer nature of the transactions facilitated by TaskRabbit itself. The nature of that facilitation is precisely what has caused the company concern about regulation. Under the original scheme, the recipient of the service paid TaskRabbit directly, which took its cut of the proceeds before distributing the money to the providers. The question arose then whether TaskRabbit should be considered a "money transmitter," which would require the company to acquire certain state licenses.[17] The company ended up getting around the problem by hiring a third party company, Braintree, to handle the money and regulation complications.

References

  1. The founding of Uber
  2. History of Airbnb
  3. 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 The 7 business models
  4. A Disruptive Cab Ride to Riches: The Uber Payoff
  5. Airbnb model fallacy
  6. Airbnb guarantee
  7. 7.0 7.1 The rising safety issues that could throttle Uber
  8. Uber aims to squash its off-duty insurance problem
  9. Uber’s System for Screening Drivers Draws Scrutiny
  10. EJ Explains Airbnb
  11. Airbnb in NYC
  12. Airbnb is illegal
  13. Airbnb vs Permanent Renters
  14. SF Renter Laws
  15. Airbnb Economic Impact
  16. Sharing Economy Pushing Legal Boundaries
  17. TaskRabbit Regulation