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What Is the 'Sharing Economy'? - Outside View by Nitin Gregory

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What Is the 'Sharing Economy'?
Jun 1, 2017

This new phenomenon has many names - peer-to-peer, access economy, collaborative economy - but 'sharing economy' remains the most popular.

Now, let me ask you: If you pay to use or benefit from something you don't own, is that sharing or renting?

At any rate, this new model - typified by Uber and Airbnb - is characterised by online transactions. Technology is at the heart of this new economy. More specifically, information technology.

We now have online platforms that make sharing information extremely easy and mostly safe. The seeds of the sharing economy started long before Uber and Airbnb with the advent of the internet and the 'information age'.

Wave I - Information related to 'capital exchanges'

Let us take a trip to the past...

It's 1980 and Raj wants to sell his house. He depends on a broker to connect him to potential buyers. The broker has something Raj wants - information.

Today, online real estate listing sites have hit the brokers hard. This Information is no longer hidden; it is available for all. This was Wave I.

This period saw information related to the exchange of products and services become much easier to come by. Combine that with ease of access through a home computer, and later, a smartphone, and you have a paradigm-changing combination.

Some big names from Wave I include Amazon, eBay, and Uber. Amazon and eBay provide an online platform for the sale of goods. Uber provides an online platform to sell taxi services. This means the information is available at your fingertips. The user does not have to go to a store or broker or taxi stand. Similar business models include food menu aggregators and car sites that help you sell cars.

Wave II - Information related to 'capital usage patterns'

The year is now 2017. Raj now owns a house on a hill station. He does not want to sell it or rent it out permanently. He wants to use it as a retreat for his family for a couple out of months the year. In economic terms, this means Raj has spare capacity the other ten months of the year. This information is a bit complicated. It changes every year. It's hard to know when he can get the whole family together for a holiday. Meanwhile, the demand for hill station accommodation fluctuates throughout the year.

In 1980, making use of this spare capacity would have been difficult. Raj's house is not an established hotel. He isn't interested in investing in branding, sales, or additional capacity to meet tourist demands at his hill station. It would have been nearly impossible to rent out his spare capacity on short stints.

But today, Raj is an Airbnb 'Superhost'. Through the online accommodation hosting platform, he is able to share information with holidaymakers regarding his 'spare capacity' and then rent it out.

In addition to accommodation 'sharing' services, other platforms to develop in Wave II were car sharing and peer-to-peer (P2P) lending services.

This is all powered by better access to information about how capacity and capital is being used. Everyone on the platform knows exactly when excess capacity is free to be used by a second user.

Hotels, banks, and car-rental services deploy capital on a large scale to ensure there is spare capacity for when demand rises. In the past, the upfront capital required to ensure this spare capacity created a moat, or entry barrier, around these businesses.

It was hard for smaller players to compete with large hotels, big banks, or car-rental agencies with large fleets. But today, you don't need large capital investments to start taking advantage of demand. Your car, house, and savings account can be put to use on a common platform that facilities the sharing of information.

What Next?

It is interesting that we are getting better at sharing...information. We still use capital and labour to generate profits. Yet books like Zero Marginal Cost by Jeremy Rifkin predict the death of capitalism in this new sharing economy. These arguments are mistaking the abundance created by technological productivity and the sharing of information for a change in human nature.

Car-pooling is an old concept. But better information makes it easier to car-pool (even with strangers). More people sharing a ride to work with relative ease, does not change the fundamental nature of the driver or passengers. The sharing economy is about squeezing out the middle man and making transactions easier and cheaper.

The sharing economy is here to stay. As it advances to the next wave and beyond, it will face challenges related to regulation and trust. (Waves I and II were slowed by trust issues and we are seeing regulation crop its ugly head. Buy goods from somebody I can't even see or get a ride with some unregulated stranger who happens to be nearby with a car?)

The next wave in this new economy appears to be flexible labour. If you can rent spare capital, why not spare labour? Sites like Taskrabbit already assign errands to users with available time. Could the next generation of laborers work purely as contactors?

This column is authored by Nitin Gregory. Nitin, who graduated from IIM-Calcutta, is currently pursuing a finance role with an automotive major. He has a deep interest in Macroeconomics and pens a blog at Gregonomics.

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The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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