Buying, selling and exchanging goods and services in the digital marketplace through collaborative consumption.
My house is your house. It’s a friendly invitation for guests to make themselves at home. And perhaps—if you subscribe to the growing global economic model of collaborative consumption—my car, my clothes even the companionship of my dog… those are yours too. For a price.
Collaborative Consumption (CC), the umbrella concept behind what has come to be known as the sharing economy or access economy, describes the shift in consumer values from ownership to access. It describes a complex and still-evolving marketplace of networking technologies that often, although not always, combines business with the social ideals of reduce, reuse and repurpose. While AirBnB and Uber grab the majority of the headlines related to this model, it’s far from just our homes and cars we’re providing access to and putting on the market. A quick visit to collaborativeconsumption.com shows the broad spectrum of sectors already embracing the model, from babysitting and gardens to art, personal finance and pets.
Sharing, bartering, gifting, peer-to-peer renting and you-scratch-my-back-I’ll-scratch-yours arrangements are not new concepts. They have been used by societies for thousands of years as a means of providing a group of individuals with an asset without requiring each member to purchase it individually and for individuals to have or access things more affordably and easily. Libraries offering the same book to multiple users, laundromats enabling people to wash their clothes without having to buy their own washer and dryer—these are examples of collaborative consumption. What’s new is our ability to use technology to find what we want more quickly, cheaply, and even ethically, than ever before. Today, instead of scouring classified ads, we assemble in digital marketplaces like eBay, Kijiji and industry specific forums to cast our buying, selling and trading nets as far as necessary to find marketplace matches.
As people become more comfortable with the idea of “sharing” their spaces, services and stuff with strangers for money or a quid pro quo, it raises interesting questions about the kind of consumers and owners we’ve become. While many consumers don’t mind that their property often sits unused or underutilized, a growing number of people see value in the CC model, particularly those looking to save money, avoid clutter, and participate in a productive exchange of goods and services that might otherwise remain inaccessible or underutilized. Many new parents, for example, would rather go online to find a gently used baby stroller that they know they’ll only use for a while than spend hundreds of dollars for a new one that will inevitably take up storage space.
By upsetting the applecart of traditional business models, collaborative consumption presents implications for both industry and the economy as we all try to figure out what we’re willing to “share” and what we’re not. Critics argue that the sharing/access economy hurts traditional businesses that have set infrastructure, such as the hotel and auto industry. Without owning a single room, privately held AirBnB has a valuation of over $10 billion, exceeding those of well-established hotel chains like Hyatt. As reported in the New York Times, Uber’s valuation was recently put at $62.5 billion, making it the world’s most valuable private start-up. Success stories like this for CC high achievers are bound to create more friction amongst the old guard.
One source of contention surrounding the CC model is regulation, or lack thereof, as we’ve already seen in several urban centers dealing with clashes between taxi companies and car/ride sharing companies. Taxis are crying foul, citing unfair competition due to the high licensing costs they pay compared to the relatively paltry fees required of Uber drivers. Some cities have scrambled to draft processes and regulations to accommodate both parties, whereas others have shut them out entirely. Levelling the field to make room for all players is a challenge and we can expect similar clashes between CC businesses and traditional businesses as our marketplace continues to evolve.
As investors, we need to be aware of additional risk and change introduced by collaborative consumption models. Businesses that used to enjoy high barriers to entry and competitive advantages could be at risk, especially those with infrastructure that could be disrupted by the sharing economy. The auto industry, in particular, is on everyone’s radar.
Automobile and auto parts manufacturers typically rely on large production volumes in order to cover their high fixed costs and generate a return on their hefty investments in capacity and R&D. If fewer cars are needed due to ride sharing programs, it becomes even more difficult for existing auto manufacturers to make money. As a result, automakers may either need to raise their prices or the industry needs to consolidate. However, because the pricing power of many automotive companies is already very weak, it is more likely that a decline in car demand would lead to increased bankruptcies and consolidation in the industry.
But one thing that might limit the decline in car volumes due to collaborative consumption is increased utilization. Before car sharing, cars were often underutilized. If cars now become more utilized, their life cycles will shorten and they’ll likely need to be replaced more frequently. These are the types of disruptors our team analyzes on a regular basis. In the long term it would not be surprising to see consolidation occur in the auto industry, where certain companies either cease to exist or get purchased by other car companies to combine production in order to become more profitable and adjust to the overall car demand.
Pros and Cons to the Sharing Economy
On the positive side, the collaborative consumption model means we’ll be able to do more things more efficiently, and both consumers and CC-friendly businesses will get better utilization of the assets they own and produce, with less impact on the environment. More people will gain access to things they didn’t or couldn’t before: if you can’t afford a car, now you can share one, if you need startup cash for that better mousetrap you invented, try crowdfunding, etc.
On the negative side, it could indeed be disruptive to manufacturing and volume/scale driven industries with established supply chains. Because these types of industries are typically big employers, any negative impact could translate into unemployment and many people needing to be retrained. Furthermore, with the efficiency of peer-to-peer platforms enabling them to manage numerous transactions with just a few staff, this could also pose a challenge to the traditional labour market.
How do we measure the effects of sharing?
The economic benefits of user-based collaborative consumption might not be as easily observable in our traditional metrics of measuring wealth and economic growth. Consider the example of tools. You buy a drill for a specific purpose—because you need to drill a hole into a wall, not because you necessarily want to own a drill. As the consumer, you get the benefit you need by using the drill but GDP doesn’t measure the number of holes you drilled. If more people start sharing or renting the same drill instead of buying, they accomplish what they needed to do in a more efficient way, increasing productivity, but the nominal GDP may initially go down as a result because sales go down and we are unlikely to capture the productivity benefits (i.e., the holes in the wall). However, the additional capital that is freed up by not spending money on assets that will sit underutilized can now be invested in some other wealth-creating asset.
Despite the popularity of the CC movement, so far there is little empirical evidence available to evaluate its true impact on society, the economy and the environment. However, a comprehensive study by the EU Consumers Associations on the effects of CC on consumers and society offers a generally positive outlook with some key insights. The consumers’ survey indicated that awareness of CC is high amongst the general population, with 70% of respondents indicating that they had participated in at least one CC activity, and that these activities do add value for individual consumers. The two most cited reasons for participating in CC are economic (to save or earn money) and practical (easier, better meets needs, flexible hours, etc.).
Many questions still remain around the effects of collaborative consumption. To what extent are people willing to share and collaborate in peer-to-peer platforms? How far can this model be pushed in a world where many people still take pride in ownership? How are companies going to monetize and capitalize goods and services in this new business model? Are regulators going to encourage or prohibit? How are industries going to respond? Are they going to fight it (as the music industry did in response to digital file sharing) or are they going to embrace it, as H&M has done by buying back second hand clothing from its customers or as Hyundai has done by setting up a participative funding platform to help young people purchase a car?
Rules, regulations and economic structures will all have to change in order to accommodate both traditional and collaborative consumption models. Many businesses will have to reinvent themselves in order to compete effectively and there will inevitably be winners and losers. While it is difficult to predict which companies will come out on top, from an investment point of view, we can identify and avoid those whose valuation is at risk once potential impacts from a sharing economy are factored in.
In the meantime, as the marketplace adapts, it would appear that ultimately the biggest winner may be the end consumer.