Crowd-Based Capitalism? Empowering Entrepreneurs in the Sharing Economy

In a recent blog in the Washington Post, Arun Sundararajan, professor at New York University’s Stern School of Business, explained why he is so gung-ho about the sharing economy. “One of the reasons why I have found the sharing economy a really appealing topic … is because I think that it creates this opportunity for people to be able to get stuff and experience stuff that they wouldn’t otherwise be able to afford.”

In a new interview, Sundararajan explains the challenges of ensuring the success of this alternative business model. He spoke with Gerald C. (Jerry) Kane, associate professor of information systems at the Carroll School of Management at Boston College and guest editor for MIT Sloan Management Review’s Digital Leadership Initiative.

The sharing economy has attracted a lot of attention in the last few years. Could you give us a quick primer on what it is, and what’s going on in this space today?

Sure. The sharing economy, which is sometimes called the collaborative economy or the on-demand economy, started out as a way for consumers to pay to temporarily access or share products and services rather than buying or owning them.

Today, it’s really a broad and emerging economic system with five characteristics. One is that it’s market-based, meaning that there is some sort of digitally enabled market that enables the exchange of goods and the emergence of new services. Uber and Airbnb are good examples. One is a peer-to-peer marketplace providing transportation, and the other is a marketplace for short-term accommodation.

A second characteristic associated with the sharing economy is that there is an increase in the impact of capital, which means that a range of things, from physical assets to people’s time to people’s money, begin to get used at levels close to their full capacity.

The emergence of crowd-based networks that compete with centralized institutions is another characteristic. These networks thrive when the supply of capital, the supply of assets, and the supply of labor originates from decentralized crowds of individuals rather than from aggregates assembled centrally by corporations or governments.

The sharing economy is also characterized by the blurring of lines between what used to be personal and what used to be professional. In scaling and commercializing peer-to-peer activities — giving someone a place to stay, lending someone money, giving someone a ride — many activities that used to be considered personal are now entering the commercial realm. Hosting an Airbnb part-time or driving a Lyft part-time or becoming a banker through funding circles are all examples of personal activities that are blurring these lines.

The fifth characteristic is the blurring of lines between a fully employed workforce and casual labor. What used to be a full-time job is now supplanted partially by contract work.

What factors have led to this shift in crowd-based capitalism and why is it happening now?

I think there’s a set of interrelated changes that have led to the emergence of crowd-based capitalism today. Why didn’t we see these changes at scale 10 years ago? It’s a great question, because if you put this into perspective, eBay commercialized peer-to-peer exchange at scale almost two decades ago, so the enabling technologies were in place back then. So why has it taken this much time to re-emerge? I think there’s one key enabling factor: consumerization of digital technology.

We have reached the point where technology companies are building products primarily for consumers rather than directed at business users and adapted for consumers as an afterthought. Now we have mass-market consumer products that are digital, like smartphones and social media, built for consumers and then adapted by business. When the adoption of digital technology, especially of mobile technology, reaches this scale, where hundreds of millions of people are now carrying around a platform-based computing device with GPS and high-speed Internet, we can reengineer how we provide goods and services.

Another factor that has led to the emergence of crowd-based capitalism today is a maturing of the trust infrastructure that facilitates peer-to-peer exchange. eBay always had its own trust infrastructure — a reputation system where you would learn from the experiences of others and therefore be able to trust an anonymous seller. And the nature of exchange on eBay was relatively low-stakes, because the kinds of things that could go wrong were relatively modest — you don’t get the product that you ordered, it’s damaged, or it’s not as advertised.

If you contrast that with the kinds of activities that we’re engaging in today — getting into a stranger’s car and asking to be driven to another city or letting someone you don’t know sleep in your spare bedroom — the stakes are a lot higher, so the level of trust also needs to be a lot higher in order to make this kind of activity viable at scale.

Most peer-to-peer exchanges still have intermediaries. Do you think those will stay in place or are we moving toward eliminating them?

I think we might move in the direction of eliminating some of them, but it will take time, and there will be lots of re-intermediation along the way. Technologies like the blockchain, which have facilitated decentralized peer-to-peer payment systems like Bitcoin, are going to expand and eventually facilitate some peer-to-peer exchange without an intermediary. But even as the blockchain-based marketplaces emerge and create the possibility of widespread decentralized peer-to-peer exchange, we’ll probably continue to see centralized providers for the near term.

What are some of the advantages of centralized intermediaries?

Google is a good example of why centralization works. Although we’re in a world of decentralized content creation, where in theory anybody could read something that was written by somebody else, Google provided the technology that allowed us to find the content we were looking for. They injected into a decentralized, peer-to-peer world some sort of centralized, value-added intermediation on the dimensions of search and discovery that directed our attention to the right place.

Amazon did something similar with trust and logistics. Although in theory, anybody could sell something to anybody else, the challenge was how to get it to them reliably. Amazon solved this problem.

My point is that there’s always a trust and logistics component that needs to be injected into any peer-to-peer activity, and right now it seems that centralized intermediaries have a huge advantage in facilitating this. Even as the blockchain-based marketplaces emerge and create the possibility of widespread decentralized peer-to-peer, we’ll probably still see centralized intermediaries inject themselves into the process naturally, re-aggregating some of the distributed value creation, much like Google did on the Web.

What should companies be thinking about as we shift toward a sharing economy?

I think the first thing that they should be thinking about is how the changes associated with a sharing economy are going to affect their business model. Although you’re always looking to see how digital technology will change your business model, it’s even more important to pay attention to this today. Why? Because the scope of digital disruption has moved well beyond the digital industries.

Ten years ago, we saw significant disruption in a few areas like print journalism, advertising, music and movies, and information products. However, disruption today is in every business sector — travel, commercial real estate, transportation and soon health care and energy. Companies need to get past the mindset that because their business serves a physical world, it won’t be digitized. Even if the product itself can’t be digitized, the manner in which it is found, marketed, and distributed can change significantly. The very model of consumption could change. For example, if people start calling Ubers and Lyfts rather than buying cars, this will be hugely disruptive to the auto industry.

What else should large companies be thinking about?

They should be thinking about the mindset of consumers, both in terms of the immediacy of demand and their preferred delivery channels. In today’s consumer base, there are heightened expectations about how rapidly something will be delivered and how much interaction can be done through a smartphone. This is the generation of Uber and Tinder, of instant gratification through an app. People seem to have this almost irrational attachment to their mobile devices and to initiating interactions through them, so companies should be actively monitoring and reacting to this new set of consumer expectations.

Something else to consider is the fact that the economics of last-mile logistics is changing quite dramatically because of the sharing economy. The fundamental economics of delivering things a short distance has changed because you no longer have to equip people with dedicated devices or employ them full time. We now have an on-demand distributed workforce that is flexible and is equipped with smartphones connecting them as labor sources to platforms. Any company should be asking, “How will the affordability of local on-demand logistics impact my business?”

Instacart, which lets you order groceries on demand and have them delivered to you within an hour, is an example of how on-demand logistics can affect your business. It’s sort of on-demand grocery but not centrally provided, so it’s quite possible that it will become a dominant interface for local retail in the same way the Amazon platform has become a dominant channel for long-distance retail. The merchandising and customer-relationship aspect of your local business could be taken over by a digital mobile platform that then captures the customer relationship with efficient local logistics. Like Amazon did with long-distance retail.

This shift to on-demand services must be affecting the labor market. What’s the impact there?

This transition could lead to a widespread change in the way work is organized. A large company should be thinking about how the nature of its labor supply is going to change over the next decade from a workforce of full-time employees to an increasingly on-demand workforce.

Airbnb now has the scale of a large hotel chain. They have over 2 million listings today. I think by the end of this year, they will be booking more stays per night and accommodating more people every night than the world’s largest hotel chain, which has about 700,000 rooms. They’re providing labor by tapping into someone’s spare time, someone who’s thinking, I have a full-time job, but on the side I’m going to be an Airbnb host. The labor used to provide this new service is fragmented.

There are other examples. Universal Avenue provides an on-demand sales forces. HourlyNerd finds you an MBA with the expertise that you need. These companies are on the fringes today, but they represent a fundamentally new way of supplying talent.

What skills do you think are necessary to manage an on-demand workforce?

I think the single most important skill that tomorrow’s workforce will need is the ability to run a small business, to be a sort of micro-entrepreneur. A typical job for more and more employees is going to be some form of entrepreneurship, involving managing projects, managing relationships with clients, setting prices — basic skills needed to run a small business. It will also require that employees be less specialized and learn to become generalists. And like entrepreneurs, the success of tomorrow’s workforce will also be contingent on generating some of their own demand. To facilitate the shift toward this kind of workforce, we’re going to have to deliver a much higher quality level of entrepreneurship education and design thinking than we do today.

You talked earlier about the threat of crowd-based capitalism. Are companies responding to that threat — and if so, how?

They are. Car manufacturers, for example, realize the threat posed by Uber and Lyft. They know that these companies are going after car ownership, not the taxi business. Both companies are trying to disrupt the industry by getting people to think of transportation as a service-on-demand rather than an asset to own.

The industry’s response to this threat has been varied. Some car manufacturers, like BMW and Daimler, have created their own car-on-demand services. Others have responded by taking equity positions in the leading providers of the new mobile services. GM was an early investor in a company called Turo, which is the largest peer-to-peer, long-term car rental service in the United States. They have also made a $500 million investment in Lyft, which is one of the two big providers of short-term chauffeured service. And Ford has an interest in Getaround, the leading on-demand, peer-to-peer car rental service in the US. So, taking equity positions in emerging companies and aggressively piloting new services are two primary responses to disruption in the automotive sector that I see today.

Before we end, I’d like to hear your thoughts about the role of culture in the sharing economy. How is it different and how do those differences manifest?

I think there are two different forms of culture here: an organizational culture and a platform culture. Organizational culture is familiar. But there’s a much broader platform culture among the distributed group of people who are your suppliers of labor and capital, analogous to organizational culture, but more fluid. Uber has over 1 million drivers and Airbnb has more than 1.5 million hosts who are an integral part of delivering a consistent, high-quality experience — the crux of a brand — but who aren’t under an organizational umbrella in the same way full-time employees are. I think establishing a platform culture is hugely important for a distributed workforce because the options for managing a distributed workforce are more limited.

Culture is such a complex issue. What are the main takeaways for our readers?

Two thoughts here. One is that it’s too early to generalize about how culture develops in a generic platform. In the two cases I’ve talked about, I think the culture at Airbnb was a designed culture. The prescription I would give is don’t let culture emerge organically, but think of it the way Brian Chesky, the CEO of Airbnb does: As a design problem that needs to be solved right because if you don’t design it in a particular way, it may evolve in a way you don’t like.

The other takeaway is that I think a platform should make a conscious effort to create a particular platform culture among its providers just as a large organization might create a particular culture among its employees. I think it’s easier for a large corporation to figure out how to extend its culture to a distributed, on-demand workforce because it’s already aware of the importance of establishing the right one, but it’s certainly something new that a smart manager of an on-demand workforce should pay very careful attention to.