The limits of the sharing economy and on-demand services

AirBnB and Uber are great companies, and with only a few quibbles I hope that they will succeed for a long time. (My quibbles are mostly along the lines of them offering a service without the regulatory requirements and attendant overheads that the businesses they are disrupting face, i.e. hotels and taxi drivers are complaining that the playing field isn’t even.)

For a while now, I have had the opinion that many of these businesses, while a great idea, are sooner or later going to hit the wall of established human behaviour and existing business practices.

Let’s go through some of these.

1. People will go for the free option over the paid option most of the time. If they like your service but can work around it to get a similar result for free, then they will.
2. If they find a great service provider through your service then it makes economic sense for both them and the service provider to cut you out of the middle. Once you get rid of the middleman making 15% to 25% in the middle, then even if the agreed price is lower when they cut you out, both parties get a better deal.
3. Many of the services being tapped into already exist. They are the cash economy, which in case you don’t understand the attraction of it, is tax free.
4. Enthusiasm on all side decreases over time. It only takes a few average to bad experiences to go back to the mainstream provider. For example, I really like the cheap self-published sci-fi books on Amazon. But for every good author I find there are four average ones and a dozen more that are really, really bad. I have begun to really appreciate the role of publishing houses and editors – they select the best out of a huge range of average, humdrum and just crap. It is the same for music – as much as we all like to hate the ‘Labels’ once you are out of your teens to early twenties I think most of us are no longer interested in going through hundreds of indie songs (probably pirated from festivals like SXSW) to find one or two good new artists.
5. One of the major themes of the 1990’s was ‘disintermediation’. That is, the internet allowed many industries to get rid of all the intermediaries sticking the finger in the pie.  This is well recognised as one of great benefits of what the age of the internet has brought us. But, here we are celebrating putting more intermediaries in the market. Go figure.
6. Availability of services is no guarantee of good service. The team at TechCrunch.com recently published a great article on the demise of HomeJoy. To summarise the key point. HomeJoy offered on-demand cleaning services, kind of like Uber or AirBnB – book online, pay online, and all will be happy. The only problem is that the market sets what rate is acceptable for cleaning, so after HomeJoy took a 25% clip qualified cleaners weren’t greatly interested in the work and many so-so cleaners entered the market. The service offered a guarantee on time and price, but not quality of service.
7. Anarchism is good, anarchism is bad. Much has been made of the rise of the anarchic mindset in Silicon Valley in recent months. As a businessman I love anarchism in the sense that there should be no sacred cows, you should always have a tilt at the incumbent players, and anytime legislation is introduced to favour those in power it needs to be attacked with vigour. Where anarchism doesn’t work is where you rely solely on the good nature of the masses participating in your venture. If there is no consequence for bad behaviour (or conversely, reward for good behaviour) then your service will likely head towards the lowest common denominator. Uber and AirBnB figured this out early and rate both the service providers and the customers.
8. It works where it works, and it doesn’t work where it doesn’t. Not every opportunity is ripe for intermediation, especially B2B. I’ll share my painful personal experience on this. A couple of years ago I set up a little site called FreelanceHotDesk.com to allow business owners (like me) to list unused desk space available for rent. When I started it I had grand plans to go AirBnB style, offering an amazing service, customer ratings, all the bells and whistles and most importantly with a payment gateway allowing us to take a clip of the fees paid (If the money doesn’t flow through your bank account then the business model is dead). The dream didn’t last long. You see, business owners hate paying intermediaries, and I can’t put in writing the vitriolic responses I had from business owners when I said that I would be sitting in the middle. I am still blushing at some of the things I was told. Business owners don’t stay in business if they pay everyone in the middle, and if they can smell it, they will avoid you like the plague unless the convenience of service outweighs the costs. Now I run a simple listing service, and will put in a payment gateway one day for people to pay a small fee to list. I think a lot of opportunities exist for such services where the business owner may make a small amount of money, but the press and VCs aren’t interested because it isn’t likely to become a billion dollar publicly listed unicorn.
9. The disruptors will be disrupted. If you prove a new business model it will be copied. Some of the current Unicorn companies will be around for a long time because of first mover advantage and brand, however, I predict that their market share will shrink and many competitors will move into the same space. Given that you can accept payment by card on your phone, how much longer will people accept Uber’s pricing and service? An alternate site allowing customers to rate drivers, and for drivers to accept callouts will come soon – it’s inevitable. And, with all respect to the VCs and the tech companies, they are, as a retired old school entrepreneur friend of mine put it, ‘but novices in the ways and means of making money from people. For every method they are trying, there are twenty other proven strategies they haven't figured out yet.’  

Personally, I think of the sharing economy startup scene as being a bit like junior miner scene in Australia and Canada. They are out exploring new territory, and every now and then one of them will hit the jackpot, but the majority blow all their capital and end up with nothing of particular interest to anyone.

Speaking of which, isn’t it interesting that the latest trend for junior miners is to reinvent themselves as tech startups right now – that shows where the speculative money is going… and some of them will work, but most of them will remain ‘penny dreadfuls’. Caveat Emptor!