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Sharing economy

The sharing economy: The mature company’s dilemma

Nayeem Syed  Assistant General Counsel at Thomson Reuters

Nayeem Syed  Assistant General Counsel at Thomson Reuters

The key insight to emerge from the sharing economy is that there is usually nothing high tech or new being sold and consumed.

Renting out your home or moonlighting as a taxi driver has always been possible. What is transformational is that an algorithm can better help buyers and sellers find each other, bypassing expensive marketing and sales costs.

These peer-to peer developments restructure markets, often considered impervious to technology disruption, by removing search costs – enabling buyers to connect directly over a shared platform with a vast group of unconnected but undifferentiated sellers seeking to monetize spare capacity.

In this series, we explore how existing industry players (incumbents), regulators and disruptors can approach technology-driven disruption that does not neatly fit existing commercial, technological and regulatory frameworks. Our first article examines how existing players could respond.

Incumbents

Mature companies facing new entrants such as Uber or AirBnB understandably scrutinize and challenge innovation by citing compliance with laws as well as public safety concerns, to their competitive advantage. However this is often a short term delaying tactic not a long term business survival strategy. Where the laws are less helpful to incumbents, they have sought to slow crowdsourcing down by lobbying authorities to grant protective measures in order to defeat its ease of use.

Influencing the regulators

Incumbents often assert that new business models should be regulated exactly the same way as the status quo, as new technology for ordering a service does not in any way change the nature of the service provided. Indeed, hotel incumbent groups have been somewhat successful. New York recently prohibited entire apartments from being rented out for less than 30 days, threatening the crowdsourced model in one of the biggest short-term rental markets. San Francisco now requires platforms to verify individual hosts have short-term rental licenses, which through shifting of compliance oversight risk means higher costs, fewer listings and less price competition.

However, a litigious industry response alone to innovation risks threatening constructive industry development and ultimately, delays any constructive meeting of the parties that could find mutually acceptable solutions.

The only constant is constant change

Initially, those firms most at risk seem to be those which operate as intermediaries within a traditional corporate industry structure, and who must quickly find a new role in the ecosystem.

Every profession or trade must accept that change will always come from the relentless emergence of new technologies and that some jobs will go away and not come back, and those remaining will earn less than they used to. By only concentrating on defeating innovation by pleading laws to judges, city officials or public opinion is failing those you represent. As history has proved almost everywhere, it is unlikely to lead to an outcome that will preserve your group’s interests in the long term.  Uber has faced legal challenges brought by taxi associations in many jurisdictions. However, it has rarely resulted in both Uber being permanently or entirely shut out of a market or the preservation of the previous supply and pricing levels.  Indeed, in London, there are now 26 percent more private hire vehicles since 2013.  Incumbent industry groups should proactively seek to combine with their anti-crowdsourcing strategies, with coordinated attempts to develop better services, lower prices, and operational efficiencies, in order to persuade the public that they are superior.

Disruptive innovation guru Clayton Christensen has for years argued that incumbents often don’t pursue disruptive technologies and new models that are understandable: simpler and cheaper modes generally offer lower margins, require upfront investment that is difficult to secure internally as it offers low initial returns as they are hard to market to a customer base who likely may not themselves be able to use them. A decade ago, car manufacturers had little incentive to even experiment with producing electric vehicles. There were no subsidies to offset the considerable investment and no clear demand. Indeed, early offerings were considered by the broader public as slow, unattractive with unacceptably limited range.  Also, often several competing technologies emerge very quickly and it is very hard to respond in time not least in deciding which between several to invest in exploring. However, he says despite these good explanations, incumbents nonetheless suffer severe consequences if they don’t choose correctly.  The car industry initially dismissed the PayPal founder who established Tesla. However, it is now enjoying its halo status with investors having continuously improved to produce a series of highly desirable luxury cars that have very long-range and which can accelerate faster than any super car.  It leads the market it effectively created and existing manufacturers are trying to catch-up but Tesla has significant structural advantages in R&D talent and supply chain sourcing particularly in the all important area of battery production.

Incumbents therefore must monitor developments for signs of long term structural implications.  When the temporary rental of an asset is so good and so convenient we may see a permanent shift in consumers’ attitude toward not wanting to own the thing at all. Increasing the capacity utilization of existing assets is of course helpful but reduced aggregate ownership does mean less needs to be made by fewer workers and investment capital will be applied to other uses for returns. Incumbents must therefore respond comprehensively and creatively. Car manufacturers for example have now realized this and are moving fast with electric vehicles, experimenting with car sharing pilots or taking stakes in early stage peer-to-rental rental companies to position themselves for urban consumers who may no longer view car ownership as a status symbol but even undesirable and will instead seek out the best available on-demand option.

Incumbents should ask what impact will the collaborative economy have on their industry and how can they best adapt their business model to minimize their risks and hopefully maximize their prospects.


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Insights from Practical Law on legal challenges to AirBnB and Uber.

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