Sharing a Little about the Sharing Economy

In the last week, I’ve had first hand experience with the sharing economy, using both Uber and Air BnB. I – not surprisingly – am a sucker for disruption and will gladly adopt new technologies. I appreciate the rational logic of a well thought out platform that promises to be a game changer. I push my wife’s comfort level to the breaking point, trying mightily to maintain the balance between delightful discovery and that cold stare that means I’ve completely messed up this time. It is in that spirit – and with the admitted bias of being a sample of one – that I share some of my macro-level observations.

Creating an Opening for Innovation

To me, using the term the “sharing economy” doesn’t quite cut it. That only explains one aspect of this disruption – the supply side. What is really happening here is the democratization and fragmentation of a previously verticalized market, where the platform creates a new type of one-to-one market connection. That spreads the market horizontally, which in turn opens a wide door for participation at all levels. And that, inevitably, spurs innovation. When you allow everyone to be creative – rather than just a few within a vertically integrated chain who have it in their job description – the pace of innovation can’t help but accelerate.

Disruptive Platforms and Network Effects

Innovation is a good thing, but there is another side to this. If you allow for rampant innovation and facilitate one-to-one connections at all levels of the market, you are going to have network effects. Markets become more chaotic and less predictable. The rising tide of innovation will eventually raise all boats, but it also means the waters can get a little choppy on the way. Disruptive platforms strip away traditional control systems – corporate oversight, traditional forms of consumer protection and legislative regulation. All faith – on both sides of the market – is placed on the design of the platform to ensure self-correcting regulation. There’s just one problem with that…

Compression of Pendulum Markets

When you depend on self-correction in a dynamic market, you forego stability that typically comes from vertical oversight. Not only do you remove the oversight but you also remove predictability. There are new players entering and exiting the market all the time. And even if the players stabilize, experience has limited value in a marketplace that may not do tomorrow what it did yesterday.

All sharing platforms – Uber and AirBnB included – depend on market feedback to ensure self correction. In these two cases, they have well thought out market control mechanisms but feedback is – by necessity – a reactive rather than a proactive device. You can anticipate with reasonable confidence in a stable, controlled market but you can’t in a dynamic, networked market. All you can do is respond. This creates a pendulum effect. Constant connection to the platform means that feedback is fast, but the physics of a pendulum mean that the volatility of the swings back and forth are greatest at the beginning and stabilize over time.

This creates what I would call the Bubbles and Backlash phenomenon. As markets open up, new suppliers jump on the bandwagon. Some are great, some are horrible, some are mediocre. But it will take the platform and it’s self-correcting mechanisms some time to sort them out. Also, we have to hope the mechanisms are reasonably robust against suppliers who want to game the system. I think both Uber and AirBnB are working their way through this particular pain point right now. I find ratings artificially high on many suppliers which whom I’ve had personal experience. There could be a number of reasons for this, including the psychological bias of reciprocity, but I think most platforms have some tweaking to do before the user ratings provide a reasonable frame of expectations.

Inevitable Gaps in the User Experience

Finally, because the travel market is moving from a vertical orientation to a horizontal one, it leaves it up to the user to navigate her way through the various horizontal layers that stack together to create her individual user journey. When you’re in a layer – taking Uber to the airport for example – you’re probably okay. But it’s moving from layer to layer that places a little extra demand on the user. The previous players who inhabited the niches within the vertical ecosystem are understandably reluctant to share their niches with new, disruptive players. Where, for example, do you catch the Uber at the airport?

But All’s Well that Ends Well

In the end, it comes down to a matter of taste. I am an early adopter, so I will always choose disruption over the status quo. For those of a different bent, the vertically integrated path is still open to them. But for all of us, I believe disruption has created a travel marketplace that is more diverse, authentic and rewarding than ever before.

 

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