Why the Sharing Economy is Taking Over

It is unbelievable that people plunk down upwards of $20,000 for an asset that can be expected to lose a fifth of its value after the first year of ownership and spends 90% of its life in a parking spot.

People, especially the millennial generation, are rejecting traditional forms of ownership left and right. Car ownership is just one example.

Rent, Don’t Buy

Everything is for hire nowadays. That’s the principle behind the “sharing economy”. Why pay for something when you can just rent it cheaply from someone else?

It’s no wonder then that car sharing services like Zipcar and Car2Go are becoming increasingly popular in urban centers such as New York, Austin or London. That’s where most 20-and 30-somethings with college degrees are likely to congregate and they tend to be the ones making the most use of car sharing programs.

All About Efficiency

A sharing economy allows individuals to benefit from shared usage of costly resources. At its core it is about people, people who are active participants in a highly efficient sharing system. The line between supplier, creator, producer, distributor and consumer is becoming blurred. We are all suppliers and consumers of goods and services now.

Yet Zipcar is a form of a B2C business (business to consumer) that typifies most other businesses. There is also another form of the sharing economy, where the business to consumer model is replaced by the peer-to-peer business model. In this model there is generally an online marketplace that matches buyers and sellers to create an efficient market system.

sharing economy

Source: The Guardian

Just like how eBay allows anyone to become a retailer, platforms like AirBnB and Uber let anyone provide housing or taxi services. All you have to do is go online and make a profile. Sometimes it’s as simple as signing in with your facebook login.

Not Going Down Without a Fight

This consumer to consumer business model is furiously disrupting existing markets. Many taxi companies have protested against Uber, incensed that the revenue they once thought was guaranteed might be up for competition once again.

Depending on where you look the sharing economy is worth anywhere between $25 and $115 billion. Uber latest valuation alone stands at $40 billion. Here’s how they weasled their way to that valuation.

It’s easy to understand the scope of the sharing economy when you consider that most of these services can work on a global scale.

With 800,000 listings people can find all types of accommodation through AirBnB, a service that offers 800,000 rooms in 34,000 cities across 192 countries.

Uber is similarly spreading throughout the globe. Airbnb now has over 4 million listings across the same number of countries. And there are many other sites like Airbnb out there that are have over a million listings as well, including VRBO, HomeAway and Wimdu (which focuses on the European market).

Conditions are Perfect

The growth of the new sharing economy is a result of a perfect storm of inciting factors. The movement has been brewing for a while now, exacerbated by the growth and ubiquity of mobile technology. Given that more people have a powerful smartphone in their pocket; it’s become easier to make on-the-go market place transactions.

Put up your apartment on AirBnB while you have drinks with friends. And afterwards, at the end of the night, just open up Uber and call for a ride home.

sharing economy

The disenchantment with the global economy post-2008 recession also means people are looking for alternative money-making opportunities. When times are difficult, people will get creative and it’s no surprise that many sharing economy firms got their start during the financial crisis.

It is a sustainable economic ecosystem.

Owners make money from underused assets. For example: car owners can rent out their vehicles to others using RelayRides, earning on average $250 a month. That car no longer has to spend 90% of its life parked. AirBnB reports that users in San Francisco rent out their homes for about 58 days out of the year, pulling down a cool $9000 a year.

There are even stories of people who have quit their jobs and now run 6-figure AirBnB businesses.

One host even went as far as renting out six apartments, making over $20,000 on each apartment.

Blazing the Trail

The pioneers of the sharing economy are going through the growing paints that online shopping had to go through. At first people were worried. What about security?

Then Amazon came along, and everyone felt safe buying there. That sense of safety spread to all parts of the internet. Today the success of AirBnB and Uber means people are more willing to try out other peer to peer businesses.

sharing economy

Source: wired.com

As these platforms become wildly successful (and many of them already are) you will start to see corporate entities entering the market. It wouldn’t be surprising to see Hertz or Avis with accounts on RelayRides, offering up vehicles for short-term rentals. It makes sense. Established rental companies already have fleets of vehicles waiting to be used.

Regulation and Disruption

The danger comes in the form of regulatory and incumbent blowback. We touched briefly on how the established taxi companies, the incumbent, have battled against Uber. In some American cities, traditional taxi service companies have succeeded in banning peer to peer taxi services.

There’s also been issue taken up with AirBnB regarding hotel taxes. The New York attorney general stated that up to 72% of AirBnB rentals over a 4 year time frame were actually illegal – operating as hotels without paying the necessary hotel tax.

Regulators have been similarly unimpressed with Uber and Lyft, issuing fines in the area of $20,000 a few years ago. All three companies appealed and Uber even won but the issue is far from settled. Here is a summary of Uber protests and legal actions that have taken place before and after this article was originally written: https://en.wikipedia.org/wiki/Uber_protests_and_legal_actions

sharing economy

Collaborative consumption is here to stay. The next step in the sharing economy will likely be an all-access service model where all sharing economy marketplaces are integrated. Consumers will log onto one site to book all the services they need: order an Uber and book dinner reservations in fell swoop.

Disruption is bound to happen, but hopefully regulators will find the balance between blanket prohibition of peer-to-peer businesses and regulatory free-for-all.

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