The Dark Side to the Collaborative Economy

Graffiti alley at night
As part of my ongoing coverage of the Collaborative Economy (read all the posts) it’s important we explore all facets of this disruptive trend to corporations, not just upsides, but the downsides as well.  I also see that “marketplace friction” is a sign of the disruption that occurs as power changes hands, which should make the seasoned web strategist want to look closer.

If you’re from the sharing movement and are offended by this post, my opposite of this post is The Three Drivers of the Collaborative Economy, where I documented over a dozen specific attributes that are driving this movement.  Please read it.  While the recently published Report on the Collaborative Economy lists the key challenges continues to obtaining traction, let’s focus in at a deeper level on what’s counter-acting this market, and look at both sides objectively.

Index of Challenges: The Dark Side of the Collaborative Economy

  1. It might be illegal.  In some cities, it’s against the law to act like a business if you’re not one.  Amsterdam ruled that unlicensed hotels (houses) were not legal.  We’ve seen similar rulings in cities like New York and Berkeley.  It’s difficult to move forward if sharing has been deemed a criminal behavior.
  2. New is better than used.  No more unwrapping new videos.  You’re getting nothing but hand-me-downs for the rest of your life, Johnny.  New products have their appeal.  They’re shiny, unbroken, and devoid of anyone else’s grimy fingerprints.  New cars, houses, clothes and even baby toys have intrinsic value over sweaty, beaten and ‘proven’ older products. Imagine an AirBnb, which provides value-added services of security, food, concierge, and of course, that coveted mini-bar, versus hotels.
  3. The sharing mindset challenges traditional values.  Call it hippy-dippy; call it radical liberalism; call it anti-consumerism; call it the anti-thesis of what a healthy society is built on; call it whatever you want.  Not only will society cause those who don’t share to feel selfish, the very core values of some Western societies are rooted in owning a three-bedroom house and white picket fence a sign of success of, reinforced by marketing to “live the dream.”  The mindset of sharing with others challenges the very values and principles that many consumers and business owners have been taught to fight against.
  4. Traditional business models are threatened as the crowd becomes empowered over institutions.  Undoubtedly, existing corporations are being disrupted by this burgeoning trend that enables the crowd to be their own company, bypassing corporations.  Corporations are left with a burning question that keeps them up at night: “What role do we play if people buy once and share many times with each other?”
  5. Governments balk in order to defend taxable revenues.  Across the world, we’re seeing governments at the local level, and sometimes federal, resist the sharing of homes or cars, as it radically disrupts business models, taxable revenues, security, transient guests, and existing institutions.  I assume that most lobbyists are gearing up, funded by corporate backers, in order to take these battles to court.  Even in San Francisco, new rulings will be unveiled next month.
  6. Service providers could be deemed a second-rate marketplace.  Second rate hacks now posing as professionals?   Professionals at hotels, restaurants, service firms and staffing agencies will tell you that their workforces are better than those found at on-demand marketplaces like oDesk or Taskrabbit.  They’ll claim that their workforces are full-time professionals, working full-time, not stay-at-home part-time workers.
  7. Concerns over public safety and quality control leave regulators reeling.  Berkeley showed concerns that transient migrations of guests to neighborhoods could be a public safety hazard.  Furthermore, as startups like Feastley arise that enable anyone with a kitchen to act like a restaurant, concerns over food safety arise.  In a morbid case study, accidents and deaths in car sharing led to great concerns over safety, as unlicensed drivers act like taxi drivers, putting those around them at risk.
  8. Legal liability is challenged as ownership and access models are diluted.  Who’s liable if a car is shared, rented, or borrowed and then crashed by a stranger?  That is an example of the questions posed by insurance companies that the legal sector and owners of assets will face.  While websites like RelayRide offer insurance policies up to $1 million for autos, will that cover a tragedy caused by users of this service?
  9. Lack of spending reduces the overall market, impacting jobs and the economy.  Forget your silly startup; the bigger issue is that sharing reduces taxable revenues, jobs, consumption and economic injections from consumers spending widely.  If no one ever bought anything again and, instead, just shared, fixed, and made their own products, capitalism as we know it could start to unravel.
  10. Lack of trust in two-sided marketplaces leaves owners at risk.  To quote contrarian, Milo Yiannopoulos, who presented a compelling speech at LeWeb, he “Works hard for his nice stuff and doesn’t want strangers touching it,” (paraphrased) strikes a chord with many. Furthermore, we’ve seen case studies of AirBnb properties being looted or damaged, or cars that were part of the sharing economy crashed.  It’s hard to trust strangers, despite Facebook connect systems.
  11. Collaboration in an economy ripe during recession, but not during a bull market.  Penny-pinching is great during financial struggles, but during times of boom, it creates an undesirable friction, as I can buy new with wild abandon.  Economic disparities aside, the developed nations will discard the silly notion of sharing when, instead, they can own more at will.
  12. Oligarchy is reinforced, as owners rent to the economically deprived.  The rich get richer as those who have the resources to build and fund startups, or the resources that will be used in these marketplaces or used on demand, will continue to generate the money.  In fact, traditional corporations, like car rental companies, have purchased car sharing startups in this space, securing their place in the market.  Venture capitalists and investors, who already stem from the 1%, seal their place in power positions by being owners of the movement.
  13. Excess venture capitalist funding inflates an artificial marketplace.  Those crafty venture capitalists continue to inject funding into startup clones, so their portfolio is also proven to have them covered in the car-sharing market, hotel-sharing market, services-shared market and office-sharing market.  This artificial injection casts traditional business models aside, as startups have one focus:  market adoption, rather than business models that will sustain, as they prepare for an IPO or an M&A exit.
  14. Startup saturation in every category confuses the market.  With over 20 car sharing/renting/on-demand car services available, how does one keep track of who does what?  Trying to invest in the right service leaves those who would consume confused, and creates marketplace churn.  With barriers to entry so low, what’s to stop this market from continual wasteful churn, as everyone tries to do the same thing?
  15. Socialistic values are at odds with free market capitalism.  Boom.  I swore to myself I wouldn’t bring it up in public, but it warrants a discussion.  The collaborative economy, like the internet and social media is a form of socialism where the crowd gains power over institutions.  History is rife with examples of variations of socialism being challenged, not working at all, or in a few cases, working just fine (see Northern Europe).  Nothing I learned in business school prepared me for these radical models where corporations, and capitalism as we knew it, are upended by this radical change.
  16. Lack of standardized reputation systems.  Currently, the startups don’t share reputation systems, and are generally siloed.  While over 50% have deployed Facebook Connect, the ratings and review data of the individual goods being offered, or the owners, are not being shared in a consistent way.  Solutions, like Trustcloud, have emerged, but lack broad market adoption.  (Added this a few hours after I posted
  17. A conduit for the underworld.  There is an emerging black-market in every category, unchecked by regulatory bodies.  Need I say more?

A sign of market disruption is heat from friction as power changes hands.
Friction comes from disruption, which gives us pause to look more closely at market drivers and market resistors.  This growing list illustrates the challenges this market will have to contend with, take head on and overcome in order to become a mainstay in society.  I’ve provided some additional resources that aided me in compiling this list, to which I hope you will add your comments.  The market will fight these challenges for years to come.  We’re just at the very beginning.

Related Resources: Marketplace Friction

Update June 27th: Respected Shareable magazine has joined me in the debate, and posts a worthy response to my critique, please read.

  • Robin

    It is no longer an argument about which system we use, or whether or not the sharing economy is similiar in any way to one ‘ism’ or another, it is just abundantly clear that the capitalist model we currently use is mathematically, economically and environmentally un-sustainable. It’s over. Some people saw this predicament 40 years ago, based on resources being finite rather than due to global warming. Well we all have no excuse but to recognise it now, and whether you agree with human generated climate change or not, it is not open for discussion whether or not we have endless resources.
    Endless resources are what all previous ‘isms’ (capitalism, socialism, communism) are based on. They are all obsolete, but expect to hear the words socialism or communism used on a scale previously un-heard of as the sharing economy gathers pace.
    To debate the sharing concept alongside any monetary system is to base it around it being merely a lifestyle choice as opposed to what it actually is, an initial solution to a pending catastrophy. We will need far bigger solutions than this in the future, but this is a good start.
    Thanks for your post however, I wanted to hear opposing views to it as I do on everything that I am interested in.
    One thing we can agree on is the concerns that I too share in who gets to own this new space. I don’t care in one sense, as in I knew a long time ago that any ideas that will help save the planet will only work initially if it also makes huge profits. The sooner we start changing and realising future possibilities, the sooner the money that the 1% use to invest will become obsolete, just like the systems that their money will help us leave behind.
    There are only so many generations that will allow themselves to be confronted with the crippling, non-sensical dilemna of only being able to adopt planet saving initiatives if it makes profit.
    I am growing in optimism and enthusiasm to the notion that generation might already be here.

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  • Joel Hruska

    Not to be contrarian, but I loathe the “sharing economy.” Not its values or its grass roots concepts (I’m thoroughly in favor of less consumption, less waste, neighborly action, and better allocation of resources).

    No, what I loathe about sharing is that it’s being rapidly turned into a VC-driven method of socializing risk. Uber isn’t interested in actually providing a service — it found a way to operate a taxi service without any of the overhead, guarantees, stability, or many of the costs *of* a taxi service, thanks to the magic of claiming “Well we do it with an app!” After an initially great period, the company has clamped down on driver pay and been caught red-handed talking about spying on and attacking journalists who dare to question it.

    That’s not a “sharing economy” as the advocates of such an approach use the term, but that’s what we’re *getting* in its place. Uber, Airbnb, and a host of other services exist to further destroy the employer/employee relationship. Instead of working for a company that provides insurance, bond, and a guarantee of hours or rates, the hapless schmuck stuck providing these services gets no guarantees in exchange for serving as perpetually on-call hired help to rich Silicon Valley dwellers and their ilk.

    TLDR: I don’t hate what the sharing economy aspires to be, but I can’t stand what it’s transforming into.

  • jonburg

    As I read this, I can’t help but think about the power of the “invisible hand” in correcting market “darkness”. For example, the collaborative economy is also becoming increasingly a self-aware organism, where people appreciate value (buying a known entity) over hype (funding a “magical” tech product on kickstarter) as well as value of trust (such as third party certifications and renter’s protection on AirBNB).

    In the interim, big business will keep many of the most dramatic changes at bay while the market matures – learning to appreciate the dangers and damages of a fully “open” ecosystem, and implementing the checks and balances where they are needed.

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