Why the collaborative economy is not like social media

Will the collaborative economy end up with only a few powerful players, just like with social media? Are we on the eve of a consolidation process? For all the people who hoped that the collaborative economy would result in a more egalitarian society, this is far from a desirable outcome. Good news: it doesn’t need to be that way.

OuiShare Fest 2015 was all about the future of the collaborative economy. Even though the general atmosphere was hopeful and optimistic, many concerns were also expressed. One of the grimmest pictures was painted by Jeremiah Owyang, the brand evangelist of the collaborative economy. In his keynote (see below), he stated that the collaborative economy is “owned by the 1%“, and reminded the crowd that the majority of all the biggest collaborative economy companies—like Airbnb and Uber—is in the hands of venture capitalists.

In our discussion at the Fest, Jeremiah said that he thinks the collaborative economy is just like social media. What he meant by that is that while there are lots of small players in the collaborative economy space right now, eventually most of them will die, and only a few giants will prevail. In the early days of social media there were thousands of social networking sites as well, but now most people only know about Facebook, Twitter and LinkedIn.

Prominent tech writer Sarah Lacy went even further in her recent article, where she claimed that this consolidation has already happened. She stated that Uber is the Facebook of the sharing economy, reaping most of the profits. Airbnb is the Twitter of sharing economy, and the rest don’t really matter.

This is not the future that most people want. The big promise of the collaborative economy is the creation of a more egalitarian society; one where value and wealth are distributed more equally. But is that just a utopian dream? A thought cherished by hippies who don’t understand how our capitalistic world really works?

Jeremiah and Sarah might be right in their predictions. But in this article I want to offer an alternative view. I believe that there are very good, pragmatic reasons for why the outcome might be completely different this time, and why we might eventually get the real revolution after all.

Cycle of bundling and unbundling

My favorite presentation at the Fest was one by Nick Grossman, the general manager of Union Square Ventures. USV is one of the most well-known venture capital firms in the world, and an early investor in social media and collaborative economy success stories like Twitter, Etsy and Kickstarter.

In his presentation (see below), Grossman presented the cycle of bundling and unbundling. The way USV sees it, new industries are often spearheaded by “thick platforms” – innovative startups that grow big and eventually try to build monopolies for themselves. However, what usually follows is that open standards and platforms rise to poke holes into these monopolies.

This happened in the 1980s when the hardware & networking monopolies of AT&T and IBM were contested by other computer providers and the rise of modem. In the 1990s, Microsoft and AOL had a monopoly on internet and software, but then came Linux and open protocols. In the 2000s, the openness of Android has challenged the closed monopoly of Apple.

Grossman noted that it hasn’t happened (yet) with social media. Platforms like Diaspora and Ello have tried, but are yet to prove themselves. Then he posed the question: what open platforms and standards will break the monopoly of the big collaborative companies? How will we get there?

First, it’s important to analyze why social media hasn’t been disrupted by open platforms. Let’s take a look at two key reasons—the network effect and a lack of financial incentives—and compare how they affect social media and the collaborative economy.

The network effect

Facebook is so useful because everyone is on it. The more people join it, the more useful it becomes. You can instantly connect with any other person from around the world. This is called the network effect.

As soon as this network is built, it’s a really painstaking process to move it to another platform. Nobody wants to move first because the new platform is only useful when the entire network has moved. When Google Plus came along, it was in many ways superior to Facebook with its features and usability. But that was not enough to overcome the pain of trying to get your network moved over.

While social networks need to reach the critical mass, marketplaces need to reach liquidity

To some extent, the network effect applies to the collaborative economy as well. While social networks need to reach the critical mass, marketplaces need to reach liquidity: a reasonable expectation of being able to sell what you list or find what you’re looking for. When marketplaces reach liquidity, they become more useful to their users, and can grow exponentially. Airbnb is a good example: they now have rooms available all around the world, meaning travellers can use Airbnb wherever they want to go. There’s little reason for them to switch over to alternatives.

TaskRabbit launched in 2008 and after 7 years of operation they’re still in only 18 US cities and one European city

However, in many cases, the network effect doesn’t apply on a global scale in the collaborative economy. Think of Uber or any other similar service marketplace out there. You don’t care at all about how many drivers Uber has in a city you don’t live in. All that matters is how much liquidity they have in your city. And if you are in a small city, the liquidity can actually be reached with a relatively small amount of supply. This is the challenge many collaborative economy marketplaces face when scaling: they need to go slowly, city by city, or sometimes even neighborhood by neighborhood. TaskRabbit launched in 2008 and after 7 years of operation they’re still in only 18 US cities and one European city.

Many collaborative economy startups still rely on the network effect, but on a local level. That means that it’s a lot less painful to move the network to another platform (if there’s an incentive to do so).

The lack of financial incentive

There’s another reason why the social media monopolies haven’t been broken: there’s no big incentive for people to move. For a regular person, Facebook is just a communication tool and a source of entertainment. It’s free to use. Sure, some people say that if you’re not paying for something, you become the product yourself. And in a way that’s true. But the thing is, most people don’t really care. As long as they can keep using these free services, they don’t see any problem with becoming a product. Ello’s manifesto attracted early adopters, but the service hasn’t been able to rise into the mainstream.

With a platform like Uber, Airbnb or Etsy, it’s a whole other story. The livelihood of many people depend on these platforms. If Uber decides to slash prices, the drivers are in big trouble. If Airbnb suddenly terminates the account of a superhost, it’s a personal catastrophe for the host. If Etsy shuts down your shop after you quit your day job, you may find it difficult to make the ends meet. If an alternative to these platforms provides better pay or more job security, the providers are willing to go through enormous pain to make the switch.

What about if you’re not a provider, but simply hail an Uber ride or book an Airbnb flat every now and then? The financial incentive is still there. According to a large study by Crowd Companies and Vision Critical, the three main reasons people use collaborative economy marketplaces are price, convenience and quality. If you can offer a lower price than your competitor, you’ve got yourself a deal.

Removing the middleman – this time for real

It seems that while the social media monopolies might not be broken any time soon, the collaborative economy seems more poised for disruption. We just need platforms that can offer the same network effect on a local scale, and with better financial incentives. How do we get there?

When people talk about the sharing economy, they often talk about how it’s “removing the middleman”. However, in reality, it has really only replaced old middlemen with new ones: the marketplace companies. They extract value from the transactions in the marketplace to pay the salaries of their employees, but to also make a profit for their shareholders.

In reality, the collaborative economy has really only replaced old middlemen with new ones

Nick Grossman points to the classic Jeff Bezos quote: “Your margin is my opportunity.” USV general partner Brad Burnham talks about skinny platforms. This is what he says about platforms like Uber and Airbnb: “They’re extracting too much value, and I think another generation that will compete with them will be thinner, and it’d take less out of that. It’s the natural creative destruction of capitalism. As we move to the next generation, my hope would be that we see a broader distribution of wealth, and a greater level of agency and empowerment for the people who are participating in the economy.”

It sounds like the best way to offer better financial incentives for people participating in the collaborative economy is to cut out the new middlemen. And there’s a way to do just that. It’s called distributed collaborative organizations.

Introducing the distributed collaborative organization

We already have an organizational model that has worked well in cutting out the middlemen: the cooperatives. Co-ops are organizations that are owned by their employees. The decision-making process is democratic: everyone who provides value has a say in the decisions.

However, in many occasions, the old cooperative models have proven to be unscalable or otherwise unfit for the new collaborative models that have lots of different types of providers. An Airbnb host might only rent out their flat two weeks a year, making a dollar here and there, while an Uber driver might work around the clock. How much say should these providers have on the governance of the organization? Co-ops have also suffered from the lack of agility in decision-making, which has hampered their growth.

The old cooperative models have proven to be unscalable or otherwise unfit for the new collaborative models that have lots of different types of providers

The distributed collaborative organization is a new organizational model designed to solve this problem. DCOs use the blockchain technology, which provides a decentralized way to store any information. DCOs are designed to handle the democratic governance and value distribution of organizations where everyone that provides value has a stake. Imagine Uber owned by drivers, TaskRabbit owned by taskers, or Airbnb owned by the hosts.

These platforms do not need to distribute wealth to anyone but the providers themselves. For this reason, the providers are able to offer cheaper pricing to consumers while still getting more revenue for themselves than with a centralized monopoly platform. The financial incentive is there, and it’s easily strong enough to make the local networks move.

And there’s more. DCOs are poised to not only compete with price, but with quality as well. Since the providers have a stake in the organization, they are in control of their own destiny. This will likely make them a lot more motivated, which results in better quality of the services they provide. At the same time, buyers will likely want to support local businesses instead of multinational ones.

The unbundling: what open platforms and standards are needed

What does it take to make this decentralized future happen? Quite a few building blocks—open platforms and standards, as Nick Grossman said—are needed.

First of all, open source tools and protocols are needed for easily setting up distributed collaborative organizations, and offering them tools for governance and value distribution. As Nick stressed, the process needs to be convenient enough, otherwise people will not do it. This is what Swarm and Backfeed are doing. They’re building easy ways for people to create and manage DCOs without understanding anything about the blockchain. Loomio is helping with collaborative decision-making.

The monopolies will surely prevail for a while, but it seems quite likely that we’re currently living in an intermediary period

Second, most of the collaborative economy organizations are dependent on marketplace technology (web and mobile applications) to handle the communications and transactions between buyers and providers. Developing this technology is a major drain on resources, and a big reason why marketplace companies often need to resort to outside funding, which is often incompatible with the DCO model. This is the issue we’re trying to solve at Sharetribe: by building an open source marketplace platform and a service layer on top of it, we’re removing the need for DCOs to have their own engineering staff. Furthermore, the marketplace platform infrastructure can be decentralized and distributed too, letting people own their data. That’s what OpenBazaar is doing, with the help of a recent investment from USV. They’re building a decentralized marketplace network that is completely open source. By utilizing Bitcoin, they are also able to avoid transaction costs.

This is still very nascent development, and these things will take time. The monopolies will surely prevail for a while. But it seems quite likely that, like USV’s Brad Burnham sees it, we’re currently living in an intermediary period, and we’re going to see a lot more distribution of value and wealth in the future. It just makes sense. In 10 years, the world will probably look very different from now.

  • Jaime Arredondo

    Great article Juho!

    I agree with you that DCOs will take over eventually, the hurdle they still have to jump is convenience. This is still not here, but I am sure it will happen sooner than later.

  • alextacy

    I work in the mutual finance sector, that is member owned banking. Very interested how these types of new sharing systems can be facilitated through a shared, member owned finance system. I see that this could raise opportunities to lower the costs of transactions, facilitate peer-to-peer lending for local business networks, support local initiatives with funding, and help people to assess and manage risk, for a much lower cost than at present.
    Local alternative currencies could be supported by local finance institutions so that money circulates in the local economy more times before it leaves.
    There may well be opportunity to partner with mutual & cooperative banking institutions globally to raise funds to lower the cost and timeline for these emerging collaborative technologies.
    The faster the control of money is taken away from big banks and put back in the hands of the people, the more stable the world will be.

    • Indeed, finance systems are one important area that should be decentralized!

  • Excellent text Juho! Two comments / additions

    a) Important to also talk about the need for users to have portability of their profiles or at least their reputation among the various alternatives, otherwise the lock-in is quite real. That might be guaranteed by anti monopoly laws at EU level for example. Traity might have a say on this 🙂

    b) In the interim period I think we will see “meta seach” sites growing ( In the same way that hardly ever you buy a plane ticket with the airline nowadays you might not directly go to Airbnb is there is real plethora of competitors (supranational and locals) to search from

    • An important point, thanks Albert! OpenBazaar is trying to solve the reputation issue I think: in their system, people are in control of their own data, since it’s a fully decentralized system.

  • Great article Juho !

    – Don’t you think we may see some consolidation inside verticals (Uber + BlaBlaCar sounds pretty logic) ?
    – The main issue around bundling/unbundling is data ownership. And I don’t see these large players handling over user data/reputation easily… Unless political institutions get involved as Albert said (which I doubt, they are lobbying and political monsters).
    – I go to Airbnb because there’s a high probability to find/acheive what i’m looking for, in one central place, without spending too much time on the internet. Will DCOs and other nascent structures provide the same value & convenience to users ?
    – @albertcanigueral:disqus : given the nature of these platforms, where network effects often lead to monopolistic positions, meta search sites may not be as useful as in other industries.

    • Hello Yniim,

      1) There will likely be consolidation inside verticals. But in the case of the sharing economy verticals might still beat horizontals:

      2) Indeed, the large platforms will not do that. But they don’t have to, if people move to the smaller decentralized platforms – which are a lot more likely to share the data.

      3) As I mentioned in the article, Airbnb is a special case. It needs to have flats available everywhere to work. But instead Getaround or TaskRabbit do not serve me in Helsinki, because they are only open in some specific cities. Instead, if there would be a local alternatively, I would certainly use that. This is what I meant with this paragraph: “However, in many cases, the network effect doesn’t apply on a global scale in the collaborative economy. Think of Uber or any other similar service marketplace out there. You don’t care at all about how many drivers Uber has in a city you don’t live in. All that matters is how much liquidity they have in your city. And if you are in a small city, the liquidity can actually be reached with a relatively small amount of supply”