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Where’s the client? – Keeping Sharing business models honest & sustainable

May 8, 2019

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Where’s the client? – Keeping Sharing business models honest & sustainable

 

 

Because end-users access our platform for free and we have no performance obligation to end-users, end-users are not our customers.”

Uber’s Security and Exchange Commission filing (Schilit, 2019)

 

According to the latest Uber’s SEC filing, riders are not this company’s primary clients: drivers are.

 

According to their statement’s logic, the fact that Uber and Lyft don’t charge riders for using their App directly would be enough to exempt them from client-vendor responsibility. 

 

Such a simple definition exposes a big problem with sharing business models, and the “shared economy[i]” in general (Sundaranajan, 2016): who’s responsible for the end results? Who’s the client and who’s the contractor?

 

If we follow the logic implicit in Uber’s mission statement, drivers are in charge and riders are their business: Uber just helps drivers find riders and get paid safely. But if we look at Uber’s marketing, riders become their primary clients: they are the ones that benefit from the App that helps them get a cheaper ride in a rainy day.

 

Things get even more complicated if we add Uber’s vaunted driverless ride projects to the mix: in that next step of Uber’s and Lyft’s evolution, drivers become clearly the next middlemen to be eliminated in the search of efficiency for the benefit of riders and stakeholders. If drivers were Uber’s primary client, even customer, developing driverless car services would amount to committing suicide.

 

If drivers are to be sacrificed for riders’ and shareholders’ sake -or just to make the companies break a profit-, it’s clear that the latter two are the primary, strategic clients.

 

The kind of accounting that Uber uses conveniently keeps riders out of the picture in order to show shareholders -Uber’s third and most coveted client- a rosier P&L report.

 

These kind of accounting tactics are quite the swift movements of a shell game: clients appear and disappear depending on the customers that the con men want to woo.

 

Such deceptive accounting tactics have given Uber and the sharing economy in general a black eye and a bad name.

 

This is unfortunate, because it distracts from the obvious benefits sharing models can provide under more realistic returns’ assumptions.

 

Business models that only can make a profit by subtracting value to their clients are what economists Acemoglu and Robinson call “extractive” models[ii]. (Acemoglu & Robinson, 2012). Performance expert Dale Brethower warns that: “if a business doesn’t add value to all its stakeholders, it probably subtracts it”.

 

The power of the sharing economy[i] cannot be understated.   The combined market capitalization of Uber, Lyft and AirBnb only amounted in 2017 to 107 billion dollars, which is the equivalent to Morocco’s annual GDP.   (Craggs, 2017).  

 

According to McKinsey’s estimates, 160 million people in US and EU -an estimated 30 to 40 percent of the total workforce- works in the sharing economy[ii], earning income from independent work, selling goods or leasing assets – or a mix of all of the above-.

 

Sharing models not only are powerful job creators and market-makers; they actually can curb costs to consumers -from rentals and vacations to rides or shopping- and slay inflation[i].

 

Economist Tod Buchholz illustrates some of sharing models positive impacts:

 

“Every economics student learns about the “production function,” a simple formula showing that output is a function of land, labor, capital and technology. The more inputs, the more stuff people can create. The internet and globalization are increasing the magnitude of these factors.

Wait—how can we have more land?

Thanks to companies like Airbnb, which take idle real estate and make it available in the market. This effectively increases the supply of land and curbs the price of vacations.

Airbnb has increased the number of available rooms by more than 25% in U.S. cities. With that massive influx, the hotel industry’s favorite measures, average daily rates and revenue per available room, have lagged economic growth.

How can physical capital grow? Upstarts like Dozr and Yard Club have boosted the supply of equipment by creating a kind of Uber for earthmovers and dump trucks. Caterpillartrucks used to sit idle at construction sites awaiting the next task. Now they’re available to work elsewhere during off-hours. Steamrollers don’t complain to the union foreman if they work more than 14 hours. There’s more capital because existing capital is used more intensively.The internet, through fintech and software firms like Square, PayPal , Salesforce and Zuora, fosters a freer flow of funds and faster connection of buyers to sellers. Former Fed Chairman Ben Bernanke has described a gush of global savings across borders.”  (Buchholz, 2019)

 

But when the power of market-making innovation -the kind of innovation that links supply and demand (Christensen, Ojomo, & Dillon, 2019) -  is guided by a zero-sum game logic (Von Neumann & Morgerstern, 1944), it can harness significant harm because it exposes customers and suppliers -and even stakeholders- to predatory deals that actually might subtract value.

 

Uber has been the “poster child” for such kind of business behavior (Bernardez, 2017). Regardless of the indisputable merits of the case against a particular company, this problem tarnishes by association the reputation of a business model that could be extremely beneficial for all stakeholders if guided by different strategic parameters -those of societal performance-.

 

Uber not only faces the pushback from competitors such as cab drivers, but more frequently from drivers:

 

 

AirBnb has raised havoc in Barcelona, making the city increasingly unaffordable and unlivable for the residents, in what a recent article in The New Yorker  called The Tourist Invasion of Barcelona":

 

"Nearly half the Airbnb properties in Barcelona are entire houses or apartments. The conceit of friendly locals renting out spare rooms has been supplanted by a more mercenary model, in which centuries-old apartment buildings are hollowed out with ersatz hotel rooms. Many properties have been bought specifically as short-term-rental investments, managed by agencies that have dozens of such properties. Especially in coveted areas, Airbnb can drive up rents, as longtime residents sell their apartments to people eager to use them as profit engines. In some places, the transformation has been extreme: in the Gothic Quarter, the resident population has declined by forty-five per cent in the past dozen years.

 

Lately, owners and agencies have been exploiting a loophole in rental regulations that allows a homeowner to rent out a spare room only occasionally. The loophole is being used to justify a single apartment being divided up into three or four rooms, each with its own lock on the door. These rooms are advertised on Airbnb as separate rentals. A traveler who signs up for one will find himself sharing a bathroom, a kitchen, and a living space with perhaps half a dozen other renters from around the globe, in a de-facto hostel without a host. Reviews on one such apartment, minutes from Park Güell, indicate that some visitors are delighted by its international vibe: “Met people from Japan, China, Hungary and Argentina, all within four days!” Others are less comfortable with the arrangement: “We were concerned when the host told us to pretend to her neighbors that we were her friends visiting and not that we were using Airbnb.”

 

Creating pressure for stronger anti-sharing regulation and conflicts between visitors, residents, landlords and renters, exacerbated by the "Wild West" created by Apps and companies that have a one-sided focus on price and use optimization.

 How can those companies and stakeholders engaged in sharing economy business make sure they are in a non-zero sum, mutually beneficial and value-adding model? Our Neighbors(TM) App is a practical example:

 

 

Here are some guidelines and principles that can help keep sharing models honest and productive:

  1. Adopt a systemic view, identify all the clients in the value chain

  2. Set social impact, value-added goals and metrics

  3. Build a double-bottom line business case

  4. Align rewards with three levels of results (Mega, Macro and Micro)

  5. Design a “choice architecture” to “nudge” stakeholders towards non-zero sum, value-adding behavior.

  6.  

Learn more about them in our last research article.

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