The Sharing Economy

“The best ideas are the ones that have been around for a long time,” says Babson Professor of Information Technology Management Bala Iyer. “We are still solving problems that were important to us a hundred years ago because technology allows us to solve them in a new way.”

Iyer’s observation is the starting point for the growing entrepreneurial movement to exploit the notion of collective consumption putting a technology-powered new spin on sharing, renting, or bartering goods and services.

The concept of shared use is as old as the town commons on which villagers grazed their livestock in medieval times. What’s new is the Internet’s ability to bring huge numbers of suppliers and users together, in flexible economic arrangements with just-in-time transactions. The Web’s efficiencies make collaborative consumption apply to a vastly increased range of goods and services.

Collective consumption disrupts the details of transactions. For example, Zipcar disrupted the car rental model (a long-established version of sharing) at several points:

Zipcar’s model drove labor-intensive tasks to the Web, and targeted a small car-rental customer segment. In the past, the choice of a city dweller who occasionally needed a car was limited to the hassles of rentals (used much more often by business travelers) or the wasteful expense of owning a car. Zipcar solved both those problems.

Zipcar owns or leases vehicles, like traditional car rental firms. The next phase of collective consumption changes the game with distributed ownership and peer-to-peer transactions. Airbnb, a Web market for owners to rent rooms or homes to travelers, owns nothing but its Web service; its revenue is a small percentage of the transaction.

Scores of Web intermediary services have appeared online offering peer-to-peer consumption/use of apartments, bicycles, household goods … you name it. They share four qualities:

Connecting Via Technology – If you put a room for rent sign in the window, you limit the potential renters to those who walk by. If you make your room available for booking on the Web, anyone can find it with a browser or smartphone via an intermediary.

Exploiting Excess Capacity – Someone’s car is available (Getaround) or house (Airbnb) or has spare time to provide a service (TaskRabbit). This is called excess capacity. Nearby, someone else temporarily needs a car or house or the dog walked. Collaboration technologies match demand to excess capacity in peer-to-peer transactions. Owner/vendors convert unused time to income.

Creating Trust – Collaborative consumption requires mutual trust; both sides must believe in advance that they will honor the terms of the bargain. Mediators achieve this either through certification or through crowdsourcing reviews (similar to eBay’s star rankings). Professor Iyer believes this verification will grow beyond individual services, as individuals create a commercial identity. “Today, on Airbnb, I might not know if a renter is credible. But, combine that with social media, and you can get information [their peers] provide.” As this commercial online identity becomes individual and portable, trust grows.

Easy Transactions – Online payment systems such as PayPal are established and as commerce becomes ever easier with systems such as Square, collaborative consumption can include even micro-transactions; for example paying $5 to rent a local lawn mower for an hour.

New Questions

Collaborative consumption seems to be on the ascendant curve of Gartner’s Hype Cycle for new businesses, a time of fast experimentation combined with high hopes for profits. Before the shakeout, this modern/ancient hybrid of commerce will spark some questions for entrepreneurs and sociologists alike:

What does maximizing capacity of every networked item or service mean for economic growth and employment? Zipcar boasts that every shared car takes 20 cars off the road; does that mean we will need fewer cars?

The current drivers of collaborative consumption are mostly economic; will the motivation to consume less gain relative importance, or stay a luxury reason to collaborate?

Does the future of collective consumption belong to intermediaries who facilitate transactions among users of goods and services that have collective ownership? Or will it be driven to the outmost edge of the wheel, a kind of Wiki-consumption with no central payment or inventory intelligence?

What objects of consumption can be dismantled to component parts? IKEA models 400-square-foot apartments as part of an urban lifestyle that implies a home is just a place to sleep, shower, and hold a few possessions. Will the future apartment dweller simply rent or collaborate on larger places for the few times she uses them?

What role will national cultures and personal habits play?

When is collaborative consumption unacceptable? What will people always own but never want to share?

Finally: Is it possible that Americans will soon rent their clothes? (Hint: That’s another old idea. Ask anyone who needs a $1,000 tuxedo for one night.)

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Tagged Commentary, Startups

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