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Market Oracle FREE Newsletter


The New "Sharing Economy" May Not Be the Profit Bonanza Everyone's Expecting

Companies / Internet Jun 29, 2015 - 05:21 PM GMT

By: ...

Companies Shah Gilani writes: Plenty of analysts, market-watchers, and thought leaders are excited about Uber, Airbnb, and the advent of the so-called "sharing economy."

Here's the thing: The sharing economy isn't for everybody.

Why not? Because, as we learned in the sandbox, not everyone wants to share.

I'm not talking about the people who want to share what belongs to others. Such as to ride in someone's car, rent a room in an apartment, or share a meal at a stranger's table. They are actually more akin to borrowers, or purchasers, in a traditional sense.

Although they are certainly part of the equation, the question is whether the real sharers and their financial backers are willing to back the notion of a vast array of industries whose regulatory landscape is just taking shape…

Entrenched Industries Are On the Offensive

Interestingly, those who are not necessarily fond of sharing are driving this segment of the economy. They're what I'll call the "what's mine is yours… for a fee" sharers. Translated to business terms, it's those companies who control access to sharing who will primarily decide its success.

Let's take an obvious example.

Uber, the $50 billion valuation ride-sharing service (for a fee) is at the forefront in disrupting the taxi industry, one with roots extending well past the century mark.

From the perspective of users of the service, Uber is genius. I use it and I love it. Uber cars are better and bigger than most taxi cabs. They're cleaner. The drivers are nicer; they're being rated by their passengers, which makes a difference. They get you to your location quickly. They're cheaper than regular cabs. There's no money exchanged, although I always give drivers a cash tip, which isn't required.

What's playing out in the courtrooms concerning Uber is decidedly less comfortable.

Most of the San Francisco-based company's drivers consider themselves akin to freelance contractors, and Uber gladly considers them the same.

That simple relationship is about to change. Barbara Ann Berwick, a contractor for Uber in its home state, sued the company for expenses. After paying her own expenses and calculating how many hours she worked and what she got paid, Berwick determined she was clearing less than minimum wage.

For the minimum wage to come into play, Berwick sued Uber, claiming she was an employee. Under California law, as an employee, Berwick would be entitled to reimbursement of the $4,152 in expenses she laid out.

She won. The California Labor Commissioner's Office effectively labeled Uber an employer. There are other cases pending against Uber in California, including a case seeking class-action status. Uber is being sued in many other states.

Wired's Julia Greenberg stated in her March 2015 article, There Are Good Reasons People Love to Sue Uber, that, "Earlier this month, a Memphis transportation company sued Uber and Lyft for operating without proper licensing and insurance. Similar suits have been filed in Miami, Philadelphia, Atlanta, and Houston." The number has since grown.

Uber is appealing the Berwick decision – it has to – and for it to continue to amass venture capital at its current prolific rate, it probably has to win.

The decision will have a massive impact on its income model and prove a bellwether for other companies predicated on similar models.

Airbnb, which dubs itself a worldwide accommodations leader, is coming under litigious pressure from hotel and apartment owners alike. Although not strictly an apples-to-apples analogy, it is an apt enough proxy for what Uber is experiencing.

What if Airbnb must consider all within its network who rent space their employees or if its spaces are subject to the same safety requirements as, say, Marriott?

Regulatory Pressures Are Following Suit

Uber works and is hugely profitable because it facilitates ride-sharing between its contractors and service users. Uber's profitability depends on the company not having to pay wages, withhold taxes, pay unemployment insurance, or offer healthcare, benefits, or any kind of retirement.

All of those costs don't apply in a 1099 economy. A 1099 form is sent to contract workers by paying entities. The compensation earned for the calendar tax year is indicated, and the contractor uses it to calculate taxes. Many freelance business models are structured this way.

On the so-called contractor end, costs are another issue. Contractors, whether they are Uber drivers or house or apartment owners or renters (see again, Airbnb) who offer properties into the sharing economy, want to be considered simply private, individual entities at best – contractors at worst – and entitled to offer their services for fee payment.

Their ability to unseat entrenched industries hinges upon their ability to operate in the narrow netherworld of online business not subject to collecting and paying taxes, licensing requirements, regulations, and costs associated with sharing what's rightfully (mostly) theirs to share as they see fit.

The licensing bureaus, and the local, city, state, and federal taxing authorities, all want their piece and see themselves as being increasingly bypassed in the sharing economy.

The Bottom Line

Ultimately, if the sharing economy is going to move ahead, it's going to have to address all the same societal issues typical employer-employee businesses face. If it can't, its time in the sun may be nearing twilight.

Issues like:

Who pays into workers' compensation pools and who's entitled to protection under what safety nets?

How are labor laws going to be applied, and to whom?

Who will be responsible for healthcare and retirement plans?

How and where will anti-discrimination laws be applied and enforced?

Who will or won't have to pay taxes?

And a host of others.

From the service users' perspective, questions abound as well. Who will monitor how services are rendered? How will they be regulated? How will users be protected from bad contract actors? How will service issues be resolved, and by whom?

These are just a few questions on a very significant list that will have to be answered appropriately if the sharing economy is going to continue to spread globally. Venture capitalists, take note.

It's not unreasonable to expect reasonable people to share what they have for fees that other reasonable people are willing to pay to not have to own assets they may not want or can't afford.

But it is unreasonable to believe that all or even most people will be "reasonable" when it comes to making money or paying out money for services, protection, safety, their health and retirement prospects, or to the taxman.

Source :

Money Morning/The Money Map Report

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