Social media and emerging technologies are reshaping industries and the economy. Some of the newest companies to garner attention from investors and from the media are using innovative technology to change industries in potentially disruptive ways. As a result, there is increasing competition and push back from established players in those industries and from legal and regulatory authorities. Companies like Uber, Lyft and Flywheel are changing the taxi and livery business, while Airbnb and HomeAway (AWAY) are changing how people travel. Several companies allow you to rent your car at an airport's long-term parking lot to new arrivals rather than pay for parking, and the Monkey Parking app that allows you to buy somebody's street parking space.

Lauded as pioneers of the so-called “sharing economy,” these new companies are not out to share. Indeed, they are out to make a profit and take market share. They propose to add value for market participants (in the case of Airbnb, homeowners and travelers) by reducing transaction costs through the use of Internet-based technologies. But not everyone wins in this business model. There are losers here too who have a vested interest in maintaining the status quo and shutting down these technophile upstarts. (For more, see: Make Money Fast From The New 'Sharing Economy'.)

Technology and Value

Uber, the most well-known sharing-economy company, lets you easily summon a taxi or livery car from an app on your mobile device. The price per ride of an Uber car is generally less than the price of a city taxi cab or limousine service. The person hailing the Uber car can see directly from the app how far away the driver is, when the car will arrive, and what kind of car it is. At the same time, anybody with spare time and an adequate car can become an Uber driver. The drivers are hired as independent contractors who use their own version of the app to receive and respond to calls to get picked up and paid. Uber saves money by not investing capital in a fleet of cars; their capital investment is in software that connects drivers and passengers, which is highly scalable and has much higher a margin of return. Though Uber is a privately held company, some value it at $18 billion.

Airbnb takes a similar approach to lodging. Using its website or app, a traveler can find and rent a room or even an entire house from a homeowner who has listed with the site. The renter gets a much more affordable room than from a typical hotel for the same neighborhood and a one-of-a-kind place to stay. The homeowner gets paid to lease out their spare room or second home for a few days, weeks or even months, helping to defray the costs of owning those properties and generating supplemental income. Airbnb is currently commanding a private valuation close to $13 billion. (For more, see: Airbnb Brings The Sharing Economy To Hotels.)

What Uber, Airbnb, and all the rest of these companies actually do is quite clever, and it certainly has nothing to do with sharing.

First, they use technology to create a two-sided peer-to-peer market where it never existed before. Two-sided means that it allows somebody to be either a buyer or a seller, and peer-to-peer indicates that the buyer and seller are both private individuals and not affiliated directly with the company. For Uber, the person hailing the car is the buyer and the driver (who is not an employee) is the seller of his service and the use of his car. Uber itself extracts a transaction fee for creating the marketplace and bringing together the buyer and seller. For Air B&B the buyer is the renter and the seller is the homeowner. Again, the company takes a commission for bringing the two together.

Second, they re-allocate under-utilized resources towards more efficient use. This is where the real economic value lies and is the heart of the sharing economy. The unused spare room or second home is under-utilized; it might remain unused or empty for long periods of time and not generate any profit. Allowing for a guest to rent that unused space unlocks the value of the asset. It also allows the companies that create the marketplace for them to operate with huge margins because they don't actually own hotels or cars, and so do not need to hire maintenance staff or replace worn-out capital.

Nobody is re-inventing the wheel here; instead, they are making sure the wheel is rarely idle.

The Push Back

There are two potential losers in the sharing economy: owners of capital-intensive businesses and organized labor.

Because Uber does not have to maintain a fleet of cars or staff drivers it can charge prices that force those existing companies to operate at a loss. In addition to building and maintaining its places of business, hotels must pay special taxes on their services, perhaps because they are not seen as "peers" to the vacationers renting their rooms. 

On the other side of the coin, workers in the sharing economy are reclassified as "sellers" of a commodity and compete with each other by lowering prices. The organizing power of workers is also diminished because Uber is legally bound to treat them as employees, paying into a social safety net should they be fired. 

Industry groups as well as government regulators are taking a stand against companies like Airbnb and Uber. New York City recently questioned the legality of homeowners operating unlicensed and unregulated hotels or hostels, while cities like San Francisco have worked to ensure that hotel taxes that otherwise would go uncollected are paid. In Germany, Uber is engaged in a protracted and bitter court battle over the legality of its business model.

The Bottom Line

Regulation clearly has its place. Hotel rooms are obliged to have the proper sprinkler systems or smoke alarms, emergency exits and have minimum standards for cleanliness and safety. Taxi regulation makes sure that all drivers are properly trained, licensed and insured in case of a crash or accident. The argument on the other side is that much of the regulation is merely a barrier to entry preventing competition from outside. In time, regulation will catch up with the innovative use of technology as it is being put to use here, and while there will still be some losers, the great majority of society will be better off.

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