The Sharing Economy is over-hyped

The “Sharing Economy” has often been hyped on the idea that if a person needs something that they do not frequently use, that they can simply go out and borrow it, for a nominal fee. The idea first became mainstream around 2010 by Rachel Botsman, author of The Rise of Collaborative Consumption, who gave a Tedx talk discussing the concept. You can read more about this in her article here.

The idea was that the sharing economy would increase the usage of existing assets, thereby reducing waste, reducing our environmental footprint, and building a stronger sense of community. 

In practice, this is not going to work nearly as well as the concept. The problem with this is that while communal arrangements for living and for sharing items across different households can help reduce consumption and minimize waste, that does not work as well for higher priced items because it does not take into account wear, and many sharing economy companies themselves have come under fire.

Building a sense of community?

A big problem is that this whole idea was intended to foster a sense of community. Before reading on, please go back to the article previously written by Botsman. Note her emphasis on the collective good and fostering a sense of community.

In practice, what has occurred is that the primary reason why people engage in the sharing economy is due to cost.

There was a survey done back in 2016 across the US and the UK that specifically noted this:

The Sharing Economy is all about new experiences and relationships, right? Not always. Our survey showed that saving money was actually the number one reason for people to participate in the Sharing Economy, with 82% of respondents telling us this was very or somewhat important to them.

Closely following the importance of saving money came personal safety and the confidence that whatever is being shared would be well looked after – with 80% and 78% respectively. Not far behind was the reputation of the platform, with nearly three-quarters (73%) of respondents ranking this as very or somewhat important to them.

There are some differences by gender, with women more concerned about personal safety when engaged in a Sharing Economy transaction – 69% of women said this was very important compared to 57% of men. Men, on the other hand, appear slightly more focused on the money making potential with 50% stating that making money was very important to them, compared to 40% of women.

This is a far cry from the claim that the Sharing Economy would build a stronger community that Botsman was initially claiming. The primary motivation appears to be economics as opposed to building a sense of community. People are also concerned about whether or not their goods would be well looked after and if the platform itself was reliable. The Utopian, egalitarian ideal was never really achieved. Most people who engage in the sharing economy want to use an asset cheaply than in any alternatives and in a way that does not threaten their physical safety. 

In practice, what has happened is largely that business is unchanged. For example, the idea of “car sharing” is a good example: 

This is hardly a “revolution” fostering community. While this may provide new business marketing opportunities for existing players in the automotive industry, this is not going to foster any community. It is also not a radical departure from existing business models. 

It is also unlikely that this will reduce waste. Car rental companies already only purchase the vehicles for their fleets that will generate returns for them. Similarly, car manufacturers only have the capacity that is required. Both are in low margin industries that would quickly become unprofitable if there is large amounts of overcapacity. Economics, rather than any sense of community or any other ideal will be the primary motivation.

Trust itself is a barrier

As the survey previously showed, the majority of people are not going to be willing to “share” their vehicle.

Like our cars, with nearly three-quarters (72%) of respondents telling us they were extremely or somewhat uncomfortable sharing their car with a stranger.

Perhaps unsurprisingly, we’re not that keen lending money to strangers either, but we’re a little more comfortable borrowing money from someone we’ve never met.

This immediately leaves a bottleneck because a big reason why advocates of the sharing economy believe it is a boon is to provide trust in the community and to offer new sources of financing. 

The problem is that people cannot merely lend their vehicles without some assurance that they are going to receive their vehicles in good condition. To give an example, a car rental company will have you walk around a vehicle and do an inspection. They then do an inspection themselves after you return the vehicle. This is because there is no sense of trust – the car rental company is renting for revenue a vehicle to complete strangers as a business transaction. 

A similar problem occurs with lending money. It is difficult to trust someone who is a total stranger with money. If a person asks for financing at a bank for example, they have dedicated analysts whose job is to analyze your risk of default to the bank. Your risk will dictate your interest rate and if the bank loans you money at all. 

How the sharing economy is going to allow ordinary people to overcome these remains unclear. If for example, one has to deposit some money before (for example, companies like Enterprise do ask you to authorize this before renting and apartments ask for deposits too), then that severely impacts the actual usage of the sharing economy, which is to save the end user money.

There is a cost to “sharing” 

In the case of cars, it is important to note that the majority of citizens are not willing to lend their vehicles. Concerns about how other people will use the vehicle, whether or not it will end up in a car accident, etc, are all very valid concerns. 

In particular, let us consider “sharing” vehicles:

  • Immediately and most obvious to most people are the high costs of fuel 
  • However there are also other costs of car ownership such as maintenance, because vehicles that drive require oil changes, tire changes, inspections, and other scheduled maintenance
  • Then there is also the higher insurance premiums that must be paid as this is no longer a vehicle for personal usage, but a business generating asset
  • Yet another, and often unconsidered expense is depreciation, which reflects that vehicles with less wear and lower mileage are more valuable 
  • Finally, there may be government regulations, taxes, and other fees

Another consideration about sharing one’s vehicle is that people are paying for a vehicle to be ready when they need it, where they need it. That is partly why people are willing to pay for parking. By no means is a private citizen’s car, which is going to be idle the majority of the day, “wasted” from that person’s point of view.  Effectively this means that car sharing is largely a taxi service or another shorter term car rental service.

In the case of companies that have drivers working for them, such as Uber, once these costs are taken into account, the net hourly pay after expenses has been found to be significantly less than minimum wage. This is not the only report that has found bleak earnings potential for Uber drivers. Here is another on LinkedIn. Rideshare drivers have been forced to turn to additional sources of revenue.  The end result is also extremely high turnover.

Low wages correspond to a high turnover rate. While more than 800,000 people drive for Uber in a year, the average driver lasts around three months and drives less than half time, or only 17 hours per week. If you weigh Uber drivers by their time spent in the car each week, they’d amount to only 90,521 full-time, full-year equivalent workers. That’s only .07 percent of national workers employed full-time and full-year.

Apart from suggesting that Uber will not replace full time work, it also means that the sharing economy has a very limited impact on the regular economy.  Yet another study suggested that 96% of all Uber drivers stopped  driving for the company within one year. 

Sustainability of this business model

The big question remains, is this business model sustainable?  

One area that makes me ask the question is the website Naked Capitalism, which has a series of articles that are raising doubts about this. 

Here is the first part:

https://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-one-understanding-ubers-bleak-operating-economics.html 

Elsewhere, they have written on the magazine, the New Yorker in regards to the future of Uber:

http://nymag.com/intelligencer/2018/12/will-uber-survive-the-next-decade.html 

Here is the core problem:

Nor, after a certain point, does adding more drivers. Uber does regularly claim that its app creates economies of scale for drivers — but for that to be the case, adding more drivers would have to benefit drivers. It doesn’t. More drivers means more competition for available jobs, which means less utilization per driver. There is a trade-off between capacity and utilization in a transportation system, which you do not see in digital networks. The classic use of “network effects” referred to the design of an integrated transport network — an airline hub and spoke network which create utility for passengers (or packages) by having more opportunities to connect to more destinations versus linear point-to-point routes. Uber is obviously not a fixed network with integrated routes — taxi passengers do not connect between different vehicles.

Nor does being bigger make Uber a better business. As Hubert Horan explained in his series on Naked Capitalism, Uber has no competitive advantage compared to traditional taxi operators. Unlike digital businesses, the cab industry does not have significant scale economies; that’s why there have never been city-level cab monopolies, consolidation plays, or even significant regional operators. Size does not improve the economics of delivery of the taxi service, 85 percent of which are driver, vehicle, and fuel costs; the remaining 15 percent is typically overheads and profit. And Uber’s own results are proof. Uber has kept bulking up, yet it has failed to show the rapid margin improvements you’d see if costs fell as operations grew.

Unlike other businesses, there are limited opportunities for economies of scale in the taxi business. That is why there has not been the level of consolidation that has occurred in other businesses. The problem there is that Uber has not been able to improve its operating margins and that merely growing bigger cannot result in the cost savings that occur in other industries. Worse, as discussed in the article, Uber may be more expensive than most taxi companies. Cutting percentage of revenues to drivers does not appear to be a viable business either, as the article notes because of the high turnover from drivers. They have limited options in this regard. Uber cannot raise prices significantly or they will lose market share to traditional taxis. Indeed, the biggest reason why people took them was due to the lower fares. Where Uber has (this is known as “surge” pricing), it has often come under fire, such as after a bomb attack  or during a storm. Raising prices for normal out of surge rides is likely to lose market share. 

Compounding Uber’s problems, Uber has undergone quite a few controversies due to its business practices and in some areas has been outright banned

Uber is not the only company faced with these challenges. AirBnB has found itself mired in similar controversy. Due to the rising costs of housing, many areas are placing restrictions on AirBnB. There are now lists online of cities that are restricting or in some cases banning AirBnB. AirBnB has also been accused of evading taxes that are usually levied against hotels. Should these AirBnB rentals be subject to typical hotel taxes and inspections, I suspect the cost will go up significantly.  There are frequent calls for regulations of AirBnB and it has been suspected to worsen inequality.  The business is already trending in that direction. 

It would seem that there have been quite a few sharing economy businesses whose long term viability is in doubt.  That is the core problem, right now there is no viable business model that can break even and provide a major improvement to customers in some way. Uber right now is operating at a loss and there is no easy path to profitability in the near future. For now, if you use Uber (and I’ve tried it myself before), keep in mind that it may someday be forced to change dramatically or risk business failure. 

So is there a sharing economy that works?

Yes, your local library. Libraries provide books, internet access, and other resources for citizens. There are also tool lending libraries that lend tools. The library at times can actually foster a sense of community and provide a valuable service to society as a whole. This is consistent with the original goal of the sharing economy, which was to make society a better place. One does not have to purchase all the books that one wants to read for example from online or a bookstore. Most books (or at least the ones in the collection the library has) can be borrowed. The bigger the tax base, the more vast the library collection can be.

However here is a difference, the library is a public, not for profit, institution typically paid for with public tax funds and sometimes through philanthropy. It is not a Silicon Valley start-up or anything that is intended to make the community money. If anything, it costs taxpayer money to keep a library in operation.  

There are even not-for-profit car share organizations. These are co-operatives and whether or not they become as important as community libraries remains to be seen. Whatever else, it is unlikely that they will be building community or any of the other sharing economy hype. They might however provide a valuable service, an affordable automobile transport for those who do not need it frequently or cannot afford it. It remains to be seen what value they add in the long run over traditional car rentals. There are guides online on which is best for which circumstance, so perhaps these will exist alongside their for-profit car share counterparts.

Concluding remarks

It would seem that there is the possibility for community not for profit co-ops or taxpayer funded “sharing” economy services, but at this point, many for-profit start-ups are struggling to survive.

Far from attracting people who wanted to foster a sense of community, existing sharing economy start-ups are primarily built around economics, whether they be people who want to earn money or people who want to save on traditional services such as cabs and hotels. The long term viability of this model is in doubt, and they certainly do not have the community building that the original idea envisioned. Worse, they may be harming the community in some regards by worsening inequality.

At this time, it may very well be that the only viable model is through a not-for-profit or through the library. 

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