The big share
HBS historian examines a new kind of connectivity
*** Originally posted on by Colleen Walsh, Harvard Staff Writer
Need a ride but don’t want to call a taxi? How about a place to stay instead of a hotel? Or maybe you just need someone to fix your washer? If you can access the Internet, you’re in luck.
With the click of a mouse or the tap of a smartphone, users around the world are joining the “sharing economy,” an expanding network of buyers searching for a product or service and sellers eager to deliver what they need.
Savvy entrepreneurs have tapped into this culture of “collaborative consumption,” connecting searchers and sellers for a price. Ride-sharing companies such as Uber and Lyft link passengers and drivers through a smartphone app, and travelers who log onto Airbnb can rent everything from a private yurt in Malibu to a room in an Upper East Side apartment.
Investors like what these companies are offering. Uber recently raised $1.2 billion and was valued at more than $18 billion. In the spring, Airbnb raised $450 million and was valued at $10 billion.
But the new sharing economy raises many questions. Some city officials are calling for more oversight — after a long battle, Uber recently reached a deal with New York’s attorney general regarding its fees — and some experts wonder what “sharing” startups will mean not just for the economy, but for the future of the workforce.
The Gazette spoke via email with the Business School’s Nancy Koehn, a historian and the James E. Robison Professor of Business Administration, about the sharing economy and its implications.
GAZETTE: Can you define the sharing economy?
KOEHN: The sharing economy refers to the system of direct exchange of goods and services among individuals — without an intermediary directly facilitating every transaction. This is theoretical language for peer-to-peer exchange of everything from car rides to spare bedrooms to advice on buying a new television or finding a good plumber. Virtually all of this interchange is enabled by individuals’ access to the Internet, particularly through smartphones, which allow billions of people around the world to connect to each other at any hour of the day or night.
We usually don’t associate the word “sharing” with buying and selling for mutual gain. But that is what is happening in more places than not on the new landscape of this hyper-connected global marketplace. Consumers log into their smartphones to call an Uber ride because the value that each of these individuals derives from the service, such as convenience, comfort, speed of transport, is at least equal to the price they will pay for the ride. Suppliers, including the drivers and Uber, the company broker overseeing all this activity, make a surplus or profit on the difference between what it costs to supply the ride, in the case of the drivers, or what it costs to run the “switchboard” that connects riders and drivers in the case of Uber.
Analogously for Airbnb, this company claims a percentage of the price of the room rented each night from both the individual staying in the room and the person renting out the extra space they have available. Ditto for Angie’s List, which is in the advice or referral business.
As children, we learned to share without any connection to money or tit-for-tat. But make no mistake about it, today’s sharing economy is big business, involving lots and lots of money and all kinds of players motivated powerfully by financial gain.
GAZETTE: What do you think attracts consumers and suppliers to the types of companies in the shared economy, and what role does technology play?
KOEHN: First, there is a directness about calling a limo ride yourself on Uber or Lyft and then rating the driver and car after you get to your destination that is both empowering and seemingly more transparent than calling a car service or hailing a taxi. One has the sense that as a consumer there is more control involved in this kind of transaction than in a more traditional exchange. We live in a very turbulent moment. Whether we are talking about technology, global politics, airline travel, world financial markets, climate change … everywhere we turn, we are confronted with VUCA — volatility, uncertainty, complexity, and ambiguity. Small wonder that consumers are seeking more control in what they buy and how they purchase it. And suppliers want agency over what they sell and how they sell it.
Second, around the world, there is a yawning trust vacuum. Individuals from all walks of life, particularly younger consumers, simply do not have much trust in established business, governmental, and other large-scale organizations. Against this backdrop, many consumers — and sellers — find peer-to-peer buying and selling to be more appealing because it is not so closely associated with a big business that may (or may not) have a mixed track record in their minds.
Remember the early days of eBay? This was one of the real pioneers in the sharing or connected economy. Consumers jumped on because eBay opened up a treasure trove of previously unavailable goods, almost all of which were initially being offered for sale by people seemingly just like them. Suppliers jumped on because suddenly they had a ready-made garage sale for all kinds of stuff they owned and because they suddenly had mercantile power and reach of their own. Of course, eBay, like Uber and Airbnb, took a nice percentage of all these exchanges and became a big, established company in its own right. But, in the beginning, it seemed to be a kind of “power-to-the-people” marketplace that attracted folks on both sides of the exchange, just like Airbnb today.
Incidentally, Airbnb, Uber, and other new entrants into the connected economy are organizing all kinds of public-relations initiatives focused on getting this message out to the public. Some of this outreach, for example, urges consumers to support Airbnb in its regulatory battles against the New York State attorney general on the grounds that the company represents the power of the people against the overbearing arm of the government. This is by no means the full story of what is going on in New York. But Airbnb knows that the libertarian hook is a powerful card with consumers, and the company is playing this for all its worth.
A third reason that consumers and suppliers embrace the connected economy is that both regard it as good value. This, of course, is the bedrock of all enduring markets. Consumers can efficiently find a huge assortment of goods and services — at reasonable prices — that they might not otherwise find. Suppliers can offer their time, material assets, and energy quickly, efficiently, and profitably to a wide swath of potential customers through companies like eBay, Airbnb, or Lyft.
GAZETTE: What does the future hold for companies like Uber and Airbnb? Their executive officers seem to argue that they are beyond certain regulations required for standard hotel or taxi services, and therefore don’t deserve to be treated the same, yet many city and state officials are urging more oversight. Will stricter regulations harm or even shut down the sharing economy?
KOEHN: The law always lags innovation (the Sherman Antitrust Act of 1890, for example, was created to deal with the enormous power of the Standard Oil Company, which had been founded a number of years earlier). So it is no surprise that Uber, Airbnb, and other new companies find themselves operating in an area where the application of existing laws is potentially unclear. It is also not surprising that these companies are fighting efforts by regulators to apply government rules and standards to their growing market.
If history is any guide, virtually all of these companies will come under the visible hand of government regulation to some degree or another. Existing standards or licensing requirements will be applied to ride-sharing companies as they now are to taxi operators; health and tax code regulations will apply to individuals who supply rooms on Airbnb as these requirements now obtain to hotel companies; and other younger businesses, still coming to commercial shape in the eyes of all kinds of entrepreneurs, will find themselves subject to government requirements and regulations.
There is very little historical evidence that the presence of government oversight shuts down productive economic activity. Rather, the enterprises that succeed and endure are those that understand how to compete effectively within the framework of government regulation because these players understand what is really at stake in the specific lawmaking.
There is a wonderful example of this from the early 20th century when food regulation was in its infancy. In 1906, Henry Heinz, who had founded the pickle and ketchup company of the same name several decades earlier, decided he was going to work for the passage of the Pure Food and Drug Act. Why would he do this? Because he believed that government regulations that required a range of safety and purity standards were good for the larger market of processed food. These regulations would help raise the bar for all food companies and thus increase consumer confidence in food that they did not make at home. Also important to Heinz’s calculations was his own realization that his company was already doing a lot of what the 1906 law was going to mandate. So he was ahead of the game relative to his competition.
GAZETTE: What does the sharing economy mean for the future of the more traditional workforce? What does it mean for the future of the more traditional company?
KOEHN: The sharing or connected economy is part of a larger shift in our collective notions about work. For more than 100 years after the beginning of the industrial economy in the mid-19th century, work for most individuals was done in relation to a larger institution, such as a factory, store, service, or manufacturing business, or a government or nonprofit organization. To be sure, farmers, entrepreneurs, and small business owners worked for themselves. But these latter groups were a much smaller slice of the workforce than the former groups. For much of this time, if one worked for a big organization, one could expect to hold this job for a long time and to earn enough in salary and benefits to live what Americans call a middle-class life.
In the last several decades, this broad social contract and the underlying notions of work associated with it began breaking down. It is still too early to discern precisely what will replace such a contract and our accompanying understanding of work. But some large outlines are emerging. We know, for example, that entrepreneurial work is becoming much more important ― and not just for techies and inventors in Silicon Valley or Boston. We know as well that many of us can expect to work for a range of organizations — of different sizes — during the course of our lifetimes. It is a pretty safe bet that most people will earn their keep doing more than one or two activities and that they, not some big institution, will be the chief architect of their own training and development. In all these respects, the connected economy is emblematic of the future of work.