Too big (not) to fail?

Published at May 6, 2016, in Features

Is there a point at which the ‘sharing economy’ will collapse under its own weight?

Earlier this week it emerged that authorities in Berlin had banned Airbnb from renting entire flats, with the service’s effect on the city’s rental property market the reason.

In a move which has been foreshadowed by other European cities notably Barcelona, Berliners have keenly felt the inflationary effect of so-called ‘Airbnb moguls’, who have bought real estate in the city, prettied it up, and then booked their properties out to travellers who pay well above the odds to live in an entire flat for the better part of a year.

This trend has put inflationary pressure on the Berlin property market and raised the concerns of urban planners.

The accusation (not substantiated) levelled at Airbnb is that it has turned a blind eye to the activity as it continues to book its cut from individual transactions.

Airbnb has effectively added a demand lever to the real estate balance in many cities, and when the equation turns to demand at higher prices, the laws of economics suggest that prices will invariably jump higher.

Renting one room doesn’t add too much to the inflationary pressure, but renting out entire flats does.

The inability of the building and construction sector to keep up with demand in and around the city hasn’t helped inflationary pressures, but how much of that extra demand would have been filled by moguls anyhow?

The most interesting and broader question at play here is what happens when sharing economy ideas become too big.

As outlined, Airbnb’s effect on property prices has caused consternation around the world – particularly in big cities where real estate is tight but tourist demand is high.

Two to three years ago, this wouldn’t have even been a debate.

Renting out an Airbnb was read as a way to supplement income – a neat little side income for the spare room that was just sitting there.

Now, it’s big business.

We’ve written about this in the past – with a focus on the fintech revolution, but as it turns out the new economy isn’t exactly covered by analogue regulations, and therefore sharing economy companies can gain a huge market share before regulators know what to do.

This makes people, and therefore regulators and politicians – very nervous.

Uber stoush

Recently, there has been a legal set-to over the exact legal status of Uber’s drivers.

In the US, specifically in the states of California and Massachusetts, Uber had a suit brought against it on behalf of 385,000 Uber drivers indicating that they should actually be employees of Uber rather than just contractors.

They were angry, among other things, that Uber could simply disconnect a driver from the service without a word of warning; they were also claiming entitlement to the benefits of being an actual salaried employee – including health benefits and tax arrangements.

Uber wanted them to remain contractors.

The company’s argument, as it has been in most cases brought against it, is that Uber is just a platform and not a direct employee.

Paying out entitlements and treating drivers on its platform as employees is incompatible with its model...and probably costly.

It recently settled a suit for US$100 million (A$134 million), but the battle is far from over.

Both sides make valid points.

For Uber drivers, it’s now a full-time job rather than just an opportunity to make money on the side, whilst Uber has been set up as a platform to connect drivers with people wanting a ride rather than being a direct employer.

By a function of its growth, however, Uber has become a major employer.

The problem is that from a legal standpoint, and though it may not claim to be an employer, the legal and political system is now looking at ways to deal with the company – albeit in confusing ways. It could be why Uber Australia just hired ex-ACCC chairman Allan Fels to the business.

The sharing economy is a new type of economy, and it is threatening the old way of doing things.

Yet in building new systems and ‘employing’ thousands of people, it is pushing existing industries to the brink.

And things are about to get worse.

Hungry for change

If you’re in Melbourne, you would have noticed that UberEATS launched recently.

It’s a separate service to Uber and is set up the way Uber is, by bringing on ‘UberEATS couriers’.

Existing rivals include Deliveroo, Menulog, and Foodora among others.

According to StartUp Smart, Deliveroo Australian country manager Levi Aron said the service’s drivers were earning about $20 per hour – the minimum wage.

He also said, however, that the service was trialling a new model in busy areas where drivers would earn $10 per delivery.

There’s a new sensitivity around what these drivers could be paid, thanks to the 7/11 scandal.

Where UberEats and its brethren differ from ‘sharing economy’ apps such as Uber or Airbnb is over who exactly the drivers are working for – themselves, Uber, or the actual restaurants?

It opens an interesting discussion for legal eagles around how exactly should these drivers be treated? Are they contractors? Casual employees? Full-time employees?

It could very well be that a new form of employment status may be needed – as it’s clear these new services are blurring existing lines.

Again, it’s only as a function of the growth of these services that the legal and political system is taking notice.

So, to the original question – is the sharing economy at risk of collapsing under its own weight?

One could make the argument that the cat is out of the bag and if one collapses another will pop up in its place – but the risk of regulatory change is very real for these services.

The models under which they have planned, scaled up, and attained billion dollar valuations did not account for any theoretical regulation – so a lot depends on how the legal and political systems regulate.

Do they take a caution-first approach or use a lassaiz-faire approach? Or, is the legal framework now completely irrelevant to the real world?

The answers to those questions may come to shape the type of impact ‘sharing economy’ businesses have into the future.

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