Sunday, January 18, 2015

Unfair Competition? Is the sharing economy based on an alternative business model or just operating outside a legal structure?

In 1999 Napster started a revolution, sharing music not only turned out to be cool and cheaper than buying CDs but also allowed more choice.  Even though Napster turned out to be operating in a legal grey zone, the sharing model started a revolution which seems to have gained considerable traction in the past 5 years.

The traditional business model where a company employs staff directly and utilizes it’s own vehicles or buildings to deliver a particular service is quickly fading and is being replaced by a “sharing” mentality where resources are shared.  Sharing goods or services has long been a tradition between family and friends and in fact most of the companies operating under this business model started out between a group of friends who shared their resources and eventually evolved in huge social networks operating internationally.

Today, apps or websites exist that allows a service provider to connect directly with a potential client to find practically any service or freelancer.  Uber and AirBNB are probably the two most recognizable brands operating under this ‘sharing’ business model.

AirBnB  started out in San Francisco, in 2008, when the co-founders of this company could not afford to pay the rent for their apartment and decided to rent out one of their rooms to anyone visiting their city.  This social networking site continued to grow and today, just after 5 years, has offices in 12 different countries and has more than a million listings worldwide varying from rentals of one room to entire castles in Ireland and even small islands in the Caribbean being rented out.
Uber receives ride requests via smart phones and matches these with freelance drivers. 

 Coincidentally, this company also started out in San Francisco and to date expanded to 200 cities in 53 different countries.  This service offers extremely competitive rates when compared to Taxis and is appealing mostly to the younger generation who grew up wary of the taxi services in some countries due to negative connotations associated with high fees and angry reactions by burnt out drivers.  On the other hand most Uber drivers are courteous and go out of their way to ensure a smooth trip since they are operating as self-employed contractors and depend on the feedback they receive from their passengers for future business.

Both companies have had their fair share of controversy tough, aggressive protests from taxi drivers and companies have led Uber to cease operations in Madrid, a Spanish high court ruled that “Uber lacks the administrative authorisation to carry out the job, and the activity they carry out constitutes unfair competitionwhilst the United States government is struggling to regulate this business practice and ensure that passenger safety remains a top priority.   

The New York Attorney General is trying to build a case showing that AirBnB’s business model is illegal since it is encouraging citizens, mostly youngsters, who are already renting their household to sub-let which technically is illegal, nevertheless analysts expect this court battle to take more than 2 years, during which time another race against time is being fought by AirBnB’s lobbyists trying to convince the United States senate to change it’s archaic renting laws to allow sub letting and therefore ensure that the New York court case against AirBnB be dropped.

Another interesting concept being introduced is wi-fi sharing, whereby anyone with an internet connection may opt to share his home wifi signal with others.  The company is already gaining traction in Europe as well.  To become a Fonero, as members of this community are called, one must either install a piece of software or buy a Fon-router.  This allows members to share a portion of their Wi-Fi bandwidth, and in turn get the right to use others' Fon Spots.

The website allows peer-to-peer cash lending and is completely regulated under US and European legislation.  It allows borrowers to receive loans from investors willing to risk their savings in exchange for favorable interest rates.  To reduce defaulting risk the Lending Club allows only credit worthy individuals to request loans whilst assigning elevated interest rates to high risk borrowers.  Basically this business model is emulating what banks do, nevertheless banks do not directly allow investors to invest in a particular loan and instead collectively invests the money it receives, whilst the is using a model where a particular investor is paired with one borrower directly, the company reports that such a social model puts more pressure on the borrower to pay back his loan on time as there is a direct human contact between borrower and investor rather than just having to deal directly with the bank.  In fact the LendingClub states that defaulting rates, people who fail to pay back their loan and interest, is actually considerably less when compared to the traditional banking sector.

Just as eBay allows individuals to become sellers, sharing sites allows individuals to become taxi drivers and mini-hotels .  It seems that the sharing business model works best for expensive items such as houses and cars and allows their owners to make some money when these assets are not being utilized.  Unfortunately most of the services outlined above have not yet been introduced in Malta most probably due to the fact that most Maltese own cars and houses and therefore such social networks might not become popular anytime soon in Malta.  Nevertheless  it seems that some Maltese profiles can be found on smaller niche-oriented sites such as DogVacay which allow hosts to take care of dogs when their owner is on vacation.  There are also around 1,000 local listings on AirBnB however the majority are advertising entire properties for rent and not just a room to be shared with a guest as most other hosts in European countries offer.

Article published on the 18th January 2015 on the TechSunday supplement, distributed with the Sunday Times of Malta.

Original print article scan:

Copyright notice : This article was written by Ian Vella and published on the TechSunday supplement distributed with The Sunday Times of Malta.  Copyright may be shared between the mentioned author and entities.  Please do not republish without permission.   

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