Is the sharing economy in trouble?
First let me say that the term “sharing economy” makes it sound like this socialist hippie everyone is happy utopia where everything is free. In my view it has more in common with pure unadulterated capitalism a la 19th century with rules being flaunted and politicians looking the other way than a Kibbutz. Since the sharing economy is not run like a Soviet Kolkhoz, so what are sharing economy companies?
Let’s call an orange an orange and companies like Uber and AirBnB online middle men. Yes that’s right they are nothing more than middle men. They render no services directly, do not own any of the assets used to render services, and face little or no liability for the service, and cannot guarantee the quality of the service. In short they are middle men that do nothing but get supply and demand together for a fee. If history is correct, in the long run middle men get squeezed by the consumers, the suppliers, and competition.
First let us look back at why and when the whole sharing economy supposedly started taking off. I say supposedly, because last time I checked middle men have been around since trade was invented and these companies are not as innovative as their CEO’s want you to believe. The latest reincarnation of the middle man was born from the ashes of the 2008 crash and the subsequent slow recovery and stagnant economy. The crash created the perfect incubation environment for the sharing economy because of the following factors:
- The crash created a large number of people that owned assets that where underwater with little rental or resale opportunity
- Investment dried for everything from personal loans to funding of commercial hotels.
- High unemployed or underemployed.
- No real wage growth for years
- Job insecurity and worries about the economy created a new type of consumer that wanted to cut back on costs as much as possible.
- Governments facing high unemployment, underemployment, millions of underwater mortgages, and worries that the entire system was about to collapse were too busy at first to take notice and then simply decided to look the other way.
- Technology, internet penetration, usage and trust in online transactions all reached high levels
The 2008 crash gave home and vehicle owners the incentive and the need to seek out new revenue streams due to depressed wages. Consumers need to save money on cabs and hotel rooms thus creating a greater market. Rental of vacation homes has been around for decades and Flexcar was a for-profit car sharing company that started back in 1998.
The crash also left governments with a dilemma. Stifle the few jobs that were being created or enforce the rules for taxis licenses and hotel use. They decided to close their eyes and let companies like Uber run an illegal taxi company and AirBnB run hotels without paying occupancy taxes. Without the crash of 2008, I doubt that the sharing economy would have been adopted so quickly and that regulators would have been so amiable.
To this we must add Millennials who embraced the concept and technology. But we should be careful not to give them too much credit. It was more of a result of low and stagnant wages and poor job prospects that push them to embrace the idea of the shared economy than their technological prowess. Generation X adopted cell phones, the internet, email, and even emoji’s (originally for cell phones) which at the time was a much bigger leap then say learning to write in 140 characters.
Nine years later things are a little different. Growth is back and has been stable even though it has been on the low side. Unemployment is down, wages are rising slowly and the real estate market is pushing prices in major markets thru the roof. The latest consumer studies show that consumers are feeling better about the economy but are still looking for bargains.
The major factors that helped the sharing economy grow are now disappearing. The real estate market is red hot which makes long term rentals or selling more advantageous. Airbnb Hosts are being asked to do more and earn less due to increase competition and a resurgent hotel industry which has cut costs and is offering more services is more competitive after years of little to no new hotel construction. The same is happening for Uber and their competitors. The once lucrative sharing gig with Uber now pays slightly more than McDonalds. Yes McDonalds. If you take Uber’s cut, deduct their fees and expenses (insurance, gas, depreciation, car payments) your average UberX driver is making $8-13/hour in most markets (Buzzfeed: How Much Uber Drivers Actually Make Per Hour).
Regulators are no longer enthusiastic about the sharing economy and have started putting the squeeze on the industry. With growing deficits and more likely cuts to services and programs, municipalities are rethinking their previous policy of looking the other way and forgoing billions of dollars of lost tax revenues. Cities across the country and around the world are limiting short term rentals and asking Airbnb, Uber and other companies for taxes, fees and imposing regulation on them.
Consumers are still looking for bargains but generation X is starting to mature and what was great in your 20’s/early 30’s is not always the case in your late 30s, 40s and beyond. With growing incomes, settling down and having kids, more cases of bad backs, Generation X will move to more traditional consumer habits even if they do a lot of it online. I predict that hotels will make a comeback in the next decade as this generation grows older and find hotel amenities such as pools, gyms, room service, clean linens every day, turn down service and the chocolate on that fresh cushion more and more appealing. Getting and expecting the same level of quality no matter where you go becomes more important with age and bad backs. It will be difficult for Airbnb to offer more services and standardize quality without significantly increasing costs and without getting their hosts upset with the added operating burdens and lower margins.
At the end the middle men are going to get squeeze by all sides. The independent contractors (hosts, drivers) are going to ask for more pay, regulators are going demand taxes and fees, and consumers are going to insist on more services. And let us not forget that at the end, companies like Uber and Airbnb are nothing more than an app/website which is not much of a barrier to entry so competition is going to crush margins. The drivers, the hosts, the consumers are free to move to whomever offers them the best value. The shared economy will have a place in the market but the boom years are coming to an end. Even the Wild Wild West was tamed.