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Tuesday, October 20, 2015

Is the Sharing Economy hurting traditional businesses?

The late 2000s saw the introduction of the term “sharing economy” as social media started allowing clusters of self-minded people to discuss how they can better utilize resources. 


Car pooling was the first such idea to gain traction, it allowed people to save on fuel, maintenance and minimize parking problems.  It was just a great idea to save money and help the environment but then someone noticed a potential for money making as well and the Uber service, whereby anyone can become a taxi driver offering his own car to give rides to people for a fee of course, started being offered in San Francisco in late 2009.  Uber expanded internationally within 5 years and disrupted the entire small vehicles transportation business model.  
Coincidentally at around the same time and also in San Francisco, two friends started another app to allow them to share vacant rooms in their apartments to be able to travel, this evolved into Airbnb and now allows anyone to advertise any free space, whether it’s just a room or an entire villa for rent.  Both companies have billion dollar valuations today.

Needless to say controversy follows these business models wherever they go.  Protests erupted in Spain, Portugal and Brasil when Uber tried to introduce their business model in these countries, court decisions stated that such activities constitute unfair competition.  However it seems that these business models are here to stay as it seems that people prefer utilizing such services rather than the traditional ones when given an option.  Uber drivers have been described as more courteous, more efficient and they keep their cars cleaner when compared to other taxi companies.  Mostly because Uber drivers are self employed and not just company employees, most are younger and more efficient.  Uber contractors acknowledge that competition exists and they can only beat it by offering a better service, unlike taxi drivers in some countries, including Malta, who are accustomed to operate in a monopolistic and sheltered business sector.

Uber has not reached our shores yet, but Airbnb did, and it seems it is already disrupting Malta’s accommodation business and is gaining a significant grip on the market.  According to the National Statistics Office 25% of the bed stock utilized by tourists are private accommodations.  At the moment on Airbnb there are over 1,000 residences in Malta and Gozo being offered, ranging from a small space in an unused room to villas and farmhouses.  Most are probably unlicensed, whilst only a few know that if caught renting out property without the necessary permits they are liable to a fine of up to €23,000
The MHRA, a local association protecting Hotel’s interests, recently was quoted in the media saying that Airbnb is not playing by the rules and it is obvious that Malta’s hoteliers are threatened by Airbnb’s growth locally, especially when one considers that laws regulating hotels are strict whilst taxes and utility bills wear down profits.
MHRA has warned the Government about the proliferation on non-licensed accommodation for the past years and it is saying that this is resulting in a substantial loss of revenue both to the state and competing licensed accommodations that it is representing.
It is evident that it would be problematic for the Government to enforce all these unlicensed dwellings and therefore the Hoteliers association is gearing up pressure on the Government to intervene and try to stop Airbnb from operating unrestrictedly in Malta.   However it seems that the MHRA is underestimating one very important principle, the fact that Airbnb itself is not renting out properties as a company.  It is merely a platform where people who are offering accommodation can advertise their service to interested parties.  The onus for registering with the authorities and to pay taxes is solely on the individuals once they agree to the terms of service, thus regulating it as a company might be difficult.
When you have more than 1,000 such offerings available locally, the Government might not be properly equipped, both due to human resources required and also due to lack of expertise, to enforce.  It would make more sense if instead the local authorities would embrace Airbnb and use it to collect tax revenue, just as many other countries are doing already.  Airbnb could collect VAT itself on behalf of the Government, this would be a win-win situation for all those involved, small individuals might be happy to pay taxes but might be afraid of bureaucracy involved in applying for permits and filling out complicated forms.  The Malta Tourism Authority could also assist people offering accommodation on Airbnb to regulate themselves and abide to all legislation involved.  This model being proposed is nothing new and has been already tried and tested successfully in many other countries.
The next revolution already brewing up in the USA is the complete revamp of the lucrative business of money lending.  Traditionally people go to banks to get loans to buy a house or in the case of businesses to get cash to fund their initial part of their trading plan. 


 This is no longer the case though, as people are looking to get their projects funded on websites like the lendingclub.com, where prospective borrowers list their story and others with extra cash might agree to fund their projects.  By eliminating banks, borrowers typically get lower interest rates and lenders a better return on their investment.  This business model started gaining traction during the financial collapse of 2008 when trust in banks was at an all time low.  Believe it or not at the moment there are more people offering to lend money than there are to borrow it, this is happening because the default rate on such loans is very low, even lower than the banks themselves experience.
This trend, known as p2p lending (peer to peer) hasn’t yet gained popularity in Europe, but crowdfunding, which eliminates the need for banks, for projects and startups is already being utilized even in Malta.
It seems that the sharing economy is here to stay and traditional firms have to get accustomed to this type of competition.  Conventional enterprises need to stop criticizing companies like Airbnb or Uber which would make them look like dinosaurs and out of touch with today’s reality and instead focus on taking their business online as well, whilst thriving to provide a better service at a lower cost just as their younger competitive entrepreneurs are doing.

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This article was published on the Sunday Times, 18th October 2015 Business & Finance Supplement.  Please do not reproduce without permission.  Copyright may be shared between newspaper and author.






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