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28 November 2015

The Sharing Economy

Tag(s): Politics & Economics
I recently attended a seminar organised by PwC to discuss the sharing economy.[i] I came away thinking that while there is significant disruption taking place and all businesses are at risk if they simply think they can carry on as usual, nevertheless there is a substantial amount of hoopla and not much is new under the sun.

But first the thesis. The essence of the sharing economy is to allow individuals and organisations to monetise their underused assets. There is already a trade body for this trend called Sharing Economy UK (SEUK) and they define it as:

“The sharing economy involves using internet technologies to connect distributed groups of people and organisations to make better use of goods, skills, services, capital and spaces, sharing access and so reducing the need for ownership.”

The concept is part of a broader set of overlapping and digitally-powered trends. These include[ii]:

·         the Crowd economy where an organisation mobilises a “crowd” to find and assemble common knowledge, ideas or resources. The motivation is to achieve mutually beneficial goals. E.g. crowdcube, a crowd funding set up.
·         The Circular economy implementing “closed loop” supply chains where the maximum value is extracted from resources which are recovered and regenerated at the end of their life e.g. freecycle, a not for profit recycling network.
·         The On-demand economy, digital platforms that allow consumer demands to be fulfilled immediately, promoting the access to goods and services over ownership, e.g. Netflix, Uber.
·         The Collaborative economy, initiatives based on horizontal networks within a community of like-minded participants. These are often associated with a social rather than commercial motivation, e.g. EatWith, a form of Airbnb for home-cooked meals.
·         The Peer-to-Peer (P2P) economy where individuals are able to borrow or rent assets owned by another individual, bypassing traditional intermediaries. Assets can be physical or financial e.g. LendingClub, a US based P2P lending club.
·         The Gig economy, short-term, individual tasks (or “gigs”) that are traded online and provided by freelancers working full- or part-time, e.g. TaskRabbit, an online platform that connects people to get things done.

PwC find that there are four main pillars of the sharing economy that distinguish it from other forms of business:

1.       Digital platforms that connect spare capacity and demand
2.       Transactions that offer access over ownership
3.       More collaborative and trust-based forms of consumption
4.       Branded experiences that drive consumption, i.e. more experiential than transactional.

The sharing economy may also be being enabled by certain megatrends e.g.
·         Technological developments such as the internet of things
·         Rapid urbanisation so that by 2025 there could be nearly 40 cities with a population of over 10 million[iii]
·         Climate change and resource scarcity so that one car club car takes up to 17 private cars off the road[iv]; (though unless riders share the car its emissions may be the same).
·         Social change so that an active Facebook user is three times more likely than a non-internet user to think that most people are trustworthy[v]; (but is this because they’re younger?)

There is no doubt that recently founded sharing economy firms such as Airbnb and Uber have enjoyed considerable success. 20% of the foreign visitors to Brazil for the 2014 World Cup used Airbnb for their accommodation. In five years Uber has competed 2.4 billion kilometres and is available in 309 cities in 58 countries. [vi]17 so-called unicorn companies, i.e. worth over $1 billion, have been created though eight are based in California and only five outside the US.[vii]

Politicians are divided on their potential impact. Robert Reich, former US Secretary of Labour says “The sharing economy will be our undoing” while our own Secretary of State for Business, Innovation and Skills (BIS) Sajid Javid says “the sharing economy has enormous potential to create jobs and growth.” Indeed the UK government wants the UK to be the global centre of this new economy but only one of the 17 unicorns is British, TransferWise, a low-cost online money transfer service, no doubt exploiting the hole created by the UK government’s regulation of the major banks!

Some of those threatened by this new trend are taking matters into their own hand. Taxi drivers are particularly aggrieved as they believe Uber breaks every rule in the book. Hotel operators believe that Airbnb similarly evades all the health and safety regulations that traditional hotels are subject to. Airbnb is now worth the same as Hilton but employs 1000 people directly versus Hilton’s 150,000.

Nevertheless PwC, analysing the rapid take up of these new services, forecast that these sectors will grow by c30% per annum, generating $335bn in global revenues by 2025, at that time equal to the traditional rental sector while in 2013 it was just 5% of it.

Those familiar with the sharing economy perceive high levels of benefit including:
·         Based on trust
·         Makes life affordable
·         Makes life more convenient
·         Builds a stronger community
·         Better for the environment
·         More fun than traditional business

However, many of them are concerned that the “sharing economy” is not consistent and generally will not trust “sharing economy “products until they are recommended by someone they trust. But as with the earlier research, this “someone” could be a “Like” on Facebook whom they’ve never met.

Further, for these forecasts to come true there are significant barriers to overcome. Many believe that sharing transactions are illegal but even though Court decisions have been mixed politicians, scared of the threat to millions of jobs of their constituents, may simply ratchet up the regulations. The lack of consistency at the extremes can raise significant concerns as with Airbnb renters who’ve trashed owners’ properties. Uber already seems to be planning to disrupt itself by using driverless vehicles at which point one wonders what sharing would be going on. And while some dinosaurs will fail to recognise the threat others may respond and muscle in on what has always been their territory. Of all of these threats regulation is probably the biggest.

So how should organisations respond to this? PwC recommend a five step approach:

1.       Understand sharing models and the potential role they could play in your sector
2.       Take action: Protect, prepare or pivot
3.       Focus on the consumer experience
4.       Conduct a ‘sharing audit’ of your organisation’s asset base – tangible and intangible
5.       Anticipate regulation and highlight the value of your organisation.

They warn that innovation in the sharing economy is far from over and other sectors may be disrupted in the future, even acknowledging that their own sector of consultancy is at risk. Uber, which seems to have adopted the megalomaniac properties of Google, has trialled new Uber-style services in the following sectors just since 2013: Bus, Christmas tree delivery, Helicopter rides, delivery of essential groceries, delivery of local lunch options, on-demand courier service, delivery of flu prevention packs and personalised day-of-travel reminders in partnership with Hilton Hotels.

To expand somewhat on Step Three there are three broad strategic options for organisations responding to the sharing economy:

Protect: I.e. lobby aggressively and acquire to neutralise tactical threats.
Prepare: engage in sharing platforms; invest in strategic partnerships.
Pivot: build own sharing concepts; buy and integrate sharing brands.

Some new business models will be required to “lubricate” transactions in the sharing economy such as insurance, payments, key exchange, background checking and online reputation scoring. All of these provide opportunities for existing players.

And if you’re a Non-Executive Director here’s some questions you should ask the executive on the sharing economy:

·         Could alternative consumption models (renting, on-demand, subscription) emerge in our sector?
·         Do we understand the mind-set of the cohort of consumers who engage with the sharing economy?
·         What new partnerships could we form with sharing economy companies?
·         Taking a fresh look at our asset base (tangible and intangible), which parts could we do more to monetise?
·         What parts of our business could we open up to the crowd? (staffing, R&D, financing etc)

Now, I mentioned that nothing much is new and I’m grateful to the always excellent Helen Edwards in a recent article in Marketing[viii] who reminds us that there was a sharing economy in 1830 when the Building Society movement began, or in 1844 when the Rochdale pioneers started the Co-operative movement.   Others had tried similar stuff but all had failed because they gave credit. The Building Societies remained careful whom they lent to until they demutualised in the 1980s, i.e. stopped sharing, and crashed and burned in the following decades. Similarly the Co-op didn’t let people buy on tick.  Marx got it so wrong with the ideological purity of “from each according to his ability, to each according to his needs” because this is just another sharing model of the ‘commons’ so brilliantly dissected by the ecologist Garrett Hardin  a century or so later.

In his seminal essay “The Tragedy of the Commons”[ix] he shows how if "an area of pasture" is “owned by no one and open to all” then each herdsman will act in his own interests and expand his herd because he knows the others will too. The consequence is that the pasture quickly becomes exhausted. We see it today in the tragedy of the National Health Service which is rapidly going bankrupt because if something is free at the point of use then demand can never be satisfied but no politician will debate it honestly. And we are now seeing it with Wikipedia which is being swamped by PR releases corrupting its supposedly factual records.

The bottom line is that while technology changes human nature does not. As Helen says “People are complex and only too capable of selfishness, deceit and the will to gain advantage”.


[i] Five steps to success in the sharing economy PwC 2015
[ii] PwC analysis of various sources
[iii] Cisco Internet Business Solutions Group (2011)
[iv] Zipcar (2014)
[v] “Social networking sites and our lives” Pew Research (2010)
[vi] Company websites
[vii] Jeremiah Owyang, Web Strategist
[viii] “What we all share” Helen Edwards Marketing November 2015
[ix] “The Tragedy of the Commons” Garrett Hardin Science magazine 1968
 
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