25% Tech, 75% Marketing, 100% Hype – Inside the #SharingEconomy

3 Questions to Tom Slee, author of the book What’s Yours Is Mine

You know it’s time to weed out the real story from the hype when you find EU Commission Vice President Andrus Ansip retweeting nuggets of wisdom from the leaders of the sharing economy at Davos. Great then, that Canadian author Tom Slee has a new book out where he does a lot of weeding. What’s Yours Is Mine (OR Books, 2016) is reviewed by Netopia contributor Ralf Grötker’s here. In the mean time, Netopia had some burning questions for the author.

Per Strömbäck: How can sharing economy-services be so much cheaper than its traditional competitors?

Tom Slee: Let’s take one step back. Sharing economy services are not always so much cheaper than traditional competitors. Take the two leading Sharing Economy companies. Uber was as expensive as taxis in many cities for some time: for example, in its biggest market of New York City some say it was more expensive for trips under $35 (link). And the “surge pricing” feature of Uber can make it very expensive, depending on when you want a ride. And Airbnb offers some very high price luxury suites, as the occasional stories of celebrity listings on Airbnb remind us.

The “traditional competitor” can be a bit misleading. Despite its PR messages, Airbnb does not compete much against the big hotel chains. Instead, it competes against independent budget hotels, bed & breakfast homes, and hostels — and it’s not always much cheaper than those.

But still, after a series of price cuts, Uber is generally cheaper than taxis in many cities when surge pricing is not in effect. One part of the reason is the technology behind the company – the ability to match riders with drivers. But that’s far from the whole story. The ability to offload insurance costs, sales taxes (in many cities), car maintenance costs, gives Uber a big cost advantage. (And they know that most drivers are not going to follow through on those costs). While taxi services are obliged to supply services to the disabled, Uber has consistently failed to do so and is being taken to court as a result.

Perhaps even more important is the simple fact that Uber is able to run at a loss: a recent leak of Uber’s financial documents shows that it lost about $1 Billion in the first half of 2015. It raised so much money that it can burn through cash at a phenomenal rate in order to become the incumbent service in cities around the world.

Airbnb benefits from some of the same factors. It pushes costs like fire and safety inspections, sales taxes, and (in many cities) tourist taxes onto the hosts, knowing full well that many of them will never pay them or make investments in the safety equipment that traditional Bed & Breakfasts, for example, have to. And Airbnb also avoids some of the responsibilities that hotels have around universal service: there is good evidence that people of colour find it more difficult and expensive to act as host or guest on Airbnb, and no hotel could last long if that became a feature of their business.

In some cities, Airbnb does agree to pay tourist taxes on behalf of its hosts, but it still does so while keeping the details of its business private, so that many Airbnb listings can avoid zoning regulations and other limits that cities put in place.

To sum up: the biggest Sharing Economy companies keep costs low by being parasitic on the cities in which they live, in ways that are deeply undemocratic, and by pushing as many costs as they can onto their service providers. And while I’ve focused here on Airbnb and Uber, the same goes for areas like “peer-to-peer lending”: data scientist Cathy O’Neill has shown convincingly how these algorithm-driven platforms end up violating non-discrimination laws in the US.

PS: Is the ”sharing economy” about technology? Are apps like Uber technological innovations?

TS: There is an element of technological innovation. These companies build on previous innovations: Airbnb and Uber would not be possible without Web 2.0 platforms, Uber would have no play at all without smartphones, and cloud computing infrastuctures (such as Amazon Web Services) are essential to companies like this. The engineering teams of both companies are smart and creative, and have built some very impressive technology stacks.

But like many technology companies, most of the companies expenses are not in the engineering realm. The leak of Uber’s financials in January shows that R&D expenses in the first half of 2015 came to just under $100 million, while the sales and marketing efforts cost about three times that.

The companies do love to play on their technology foundation, and present themselves as an inevitable future that only a Luddite could object to (not that there’s anything wrong with Luddites), but avoiding regulatory and insurance costs is just as much part of their advantage as technology.

The technology angle has, however, been a very effective screen for the companies to avoid costly responsibilities. One way this works in the USA is that they have taken advantage of a law called Section 230 of the Communications Decency Act. It is an unlikely law to be relevant to taxi rides and short-term rentals, but at its core it absolves software platforms (like YouTube) of responsibility for what users do on their site. When Uber collects about 25% of every fare, and Airbnb collects about 15% of every booking, it seems far-fetched that they can wash their hands of responsibility for what happens on their platforms, but they do.

PS: Uber CEO Travis Kalanick told EU Vice President Andrus Ansip at the World Economic Forum last week in Davos ”Everybody should follow rules, but rules must also embrace modernisation”. Your comment?

TS: It’s nothing new for technology leaders to be woefully ignorant of other aspects of society, and here Travis Kalanick is just throwing out a claim with nothing behind it. There are many problems with taxi services in cities around the world, but you also have to ask why cities everywhere have brought in regulations.

One simple reason is that, as a customer we can’t assess the safety of the car we are riding in or the home we are staying in, and no number of five-star ratings can do that for us. And of course technology doesn’t do anything particularly useful here either, so what is Travis Kalanick really arguing? He’s saying that cities should not have the right to put their own safety requirements on taxis, and that he’ll do it for them. But of course Uber and Airbnb have a tremendous conflict of interest when it comes to safety features on their own platforms. Just as the Enron and Worldcom scandals showed us that it’s a recipe for disaster to have the accountants also act as auditors, so I fear we will find out that it’s a terrible idea to let Uber and Airbnb act without external auditors to look at their systems and to monitor their compliance with labour standards, safety standards, environmental standards, and the other kinds of standards that civilized societies have democratically seen fit to introduce.

EDIT Updated to correctly quote VP Ansip’s tweet

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  1. […] Inside the sharing economy, Per Strömbäck, Netopia, 3 Feb 2016 […]

  2. […] companies deal with is a gigantic cost-saving. But perhaps more importantly, as author Tom Slee has shown, with its generous supply of risk-capital, Uber can operate at a loss. That’s right, what is the […]

  3. […] Netopia – 25% Tech, 75% Marketing, 100% Hype – Inside the #SharingEconomy […]

  4. Terrific article – hits many salient points. Thank you.

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