The Economic Baloney of The Sharing Economy

The sharing economy is one of those phrases that make it very difficult to be mean. Who could diss it? It’s nice. The fact is, the sharing economy does not stand up to a whole lot of scrutiny. No doubt you will have seen the graphic explaining the sharing economy  (it has morphed a little into an “asset light” economy):

  1. The world’s biggest taxi company that owns no cars
  2. The world’s largest accommodation provider owns no real estate
  3. The world’s most populous content owner creates no content
  4. And so on

A year ago Fast Company said it was dead. Rightly, they pointed out, that when it began the sharing economy was all about sharing things like garden tools, or renting the car to a neighbour. In fact, as FastCo points out, the power drill became the symbol of sharing and “bringing humanness back”.

The baton though has passed to companies like Uber and Airbnb, hence the snappy list above

The funny thing about this “trend” -whether it is sharing or asset light – is that it is not new.

Airbnb is built on the same principles as couchsurfing – expect that couchsurfers pay no money. Airbnb has been experimenting with more of the couchsurfers’ ethical approach with “experiences”. Experiences allow people to hook up with locals and see something of a city through local eyes.  It doesn’t seem to be sticking. Having said that, Airbnb is a great business and very skilled at managing trust. It has other characteristics that make it novel and attractive but I’ll come to those.

In essence though Airbnb is a booking service. It has liberated people to make money and brought real estate that might have been used for long term dwelling into the short term market. But the idea that it is new as a business model is a stretch. It is a booking service just like booking.com (with one essential difference, below) or Expedia.

Just to add a little spice to the argument, didn’t InterContinental Hotel Group  (IHG) sell off most of its hotels anyway, deciding its business was in hospitality not physical asset management? This is their strategy:

We focus on strengthening our portfolio of preferred and differentiated brands, building scale in key markets, creating a long-lasting relationship with our guests and delivering revenue to hotels through the lowest cost, direct channels. Our proposition to owners is highly competitive and drives superior returns.

It is asset light and asset light has been around a while. When the Baltic States went into recession in 2008 it turned out that the majority of fleet vehicles in these countries were owned by the banks – most transportation companies leased rather than bought. Many golf courses and resorts around the world are made up of apartments owned by a member and rented out by the club or resort.

Companies like Expedia, though, have innovated the online business model significantly. Five years ago Expedia turned its affiliate network (remember affiliates? They are what got Amazon up and running) into an API community. It now partners with 8,000 companies who run independent travel businesses through the Expedia platform. That’s a strong platform strategy.

TechCrunch has an interesting proposition that the essence of Uber and Airbnb is that they own the user interface, via their apps. A short while back Facebook won plaudits for doing something similar – Facebook Home in effect took the Android/Google, interface away from the handset operating system and maker and made it Facebook’s. The user interface is undoubtedly an important asset in mobile devices, and is very limited screen space.

But the sharing economy/collaborative economy argument misses some essential points. That IHG strategy I mentioned above has the benefit of allowing the company to scale and to manage its brands more effectively. Executive bandwidth goes into these activities – finding hotels to secure a management tole in, building and projecting brands, scaling the business, finding ways to build deeper relationships with customers, working up the price premium.

One of the points Nick and I have made in The Elastic Enterprise (IHG Is a great example) is that externalising previously core functions (like asset management) frees management up to do other tasks, like seeking scale and value. We also pointed out that this allows a completely new approach to adjacencies, a point taken up recently by Deloitte. Adjacencies are now back in fashion in M&A.

A second point we have made is that the essence of the platform is the transaction engine. Booking.com does not take money from you – the hotel does that. Perhaps that was Booking.com’s missed opportunity. Airbnb takes the cash and settles with owners. Uber, likewise. In theory both can control rates (Uber certainly does) and have just to flick a switch to change the fees going to the centre as opposed to the operative/owner. Apple, Uber, Airbnb do control cash.

That is a very important distinction to make. It means that they have scaled cashflow from across the world. In a world starved of liquidity, being a liquidity business is an incredibly powerful position to hold. It is the distinction between highly scaleable platform businesses and non-platform businesses. The platform is a transaction engine. Companies that control liquidity have the means to scale. It is not the only distinction but in the cold calculations behind the “sharing economy” it is a very important one.

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