Financial blogger Frances Coppola runs through how and why the “sharing economy” is grossly mis-representing itself to consumers by daring to suggest it’s anything but a traditional for-profit — or more pertinently rentier — enterprise.
Indeed the whole idea of the “sharing economy” seems to be based not on the idea of working together to produce something for mutual benefit (the cooperative principle) but on millions of people scraping a living by selling services and renting assets to each other. How does this add value to the economy over the longer term? There is no production. It is entirely consumption. Recycling is all very well – and we do need secondary markets – but we cannot build an economy solely on sweating existing assets. An economy that exists solely on consumption has no long-term future.
Which of course fits perfectly into the bigger productivity puzzle striking economies everywhere.
Except that this sort of efficiency isn’t costless. The hidden costs include potential data serfdom, the need to forecast one’s behaviours ever earlier to the “information system” so it can pre-emptively account for you in the style of an HFT algorithm, and/or increased dependency on marketing and reactance techniques to ensure you simply won’t want the stuff that the system can’t afford to give you.
But we digress.
The most under appreciated cost may in fact be the disappearance of professionals and highly-skilled labourers from the economy, and their replacement with shabby generalists.
As Coppola notes, such a loss inevitably leads to a “shabby economy”, where the frugal generalist “makes do and mends” and where no-one buys anything unless they absolutely have to and everyone is running down existing assets instead:
The sharing technology may be innovative, but the economic vision underlying it is stagnation, not prosperity.
We argued back in July for example that the way Airbnb actually differentiates itself in the hospitality market is largely by throwing amateurs at the professional hospitality market. Which is fine, if you don’t care much for professional hospitality. But it’s not so great if you do, because the service certainly doesn’t augment the availability of professional hospitality services.
That’s not to say that Airbnb doesn’t provide established hoteliers, short-term renters and B&B professionals with a competing advertising portal to market their services. That it certainly does. But that’s not the aspect of the business considered to be innovative or game changing — since online marketing hubs have existed for a long time and this, at best, is just another attempt to create a competing network effect.
No, the supposedly game-changing element of Airbnb’s model is providing amateur hospitality hosts with the impression they too can make steady profits from renting rooms like professionals. Hosts, who by and large, want to have their cake and eat it: namely, rent rooms at premium short-term let rates without any of the hospitality burden or hassle.
Except, as any professional holiday short-term lettings business will tell you, there’s more to short-term letting. than just handing over keys on changeover day. Profits don’t come easy. There are a lot of costs to be accounted for ranging from cleaning, laundry, maintenance, damage, supervision and insurance to personal touches like fresh flowers to the sharing of local knowledge. Location can also make a huge difference to profitability. And that’s without accounting for tax, licensing and other regulatory burdens. Hence why after a few months of ‘disrupting’ traditional hospitality, many* Airbnb hosts realise it can be much more economical to go for longer-term rentals with fewer turnaround costs (especially if their buildings or neighbours frown upon short-term rentals).
[*Yes, of course there will be hosts in over-subscribed markets like New York or Paris who can make passive rental cost-effective, or those in less popular areas with more free time at their disposal who can internalise many of those costs directly. But it's not a limitless market or one that's entirely substitutable for professional services.]
Which brings us to Uber. It is now established wisdom that Uber’s long-term agenda is probably to get rid of human drivers completely and replace them with self-driving cars.
Here’s a piece from Nautilus all about that (H/T Climateer). As they note:
First, as much as 50 percent of an Uber ride’s cost goes toward paying the human behind the wheel, Frazzoli says, and that’s money that could be going into Uber’s pocket. Replacing human operators has already begun in Singapore, a city that relies heavily on public transit. It’s not widely advertised, Frazzoli says, but the subway trains there “are completely automated. They are just horizontal elevators.”
The piece goes on to say that Uber’s urban saturation will make a lot of people rethink the idea of owning cars completely, something which may eventually lead to the elimination of private car ownership.
Except there’s a major problem with that utopian view. The vision totally underestimates the true value humans bring to the car market or the degree to which Uber’s “urban saturation” depends on a dedicated human element to absorb the bulk of the capital cost and risk of public vehicle ownership, with very little personal reward.
As Felix Oberholzer-Gee, a professor at Harvard, tells Nautilus, if Uber can’t outsource costs and market fluctuation risk to contractors, especially the cost of maintaining idle fleets during off-peak hours directly to Uber, it quickly swaps an asset-light business model for an asset-heavy low-margin model instead.
This is problematic because Uber’s already low-margin business model depends heavily on being able to overstep regulation, licensing and — most importantly — transfer maintenance, cleaning, insurance and market-risk exposure to drivers. It also benefits from drivers’ ability to draw value from vehicles in personal time.
So who exactly would fund and manage a driverless fleet on behalf of Uber? Oberholzer-Gee suggests it would mostly be us. Cars would no longer be personal utility vehicles but — because of their capacity to be rented out when not in use — double-up as positive yielding investment assets in their spare time.
It’s an exceedingly grand rentier vision wherein society becomes split between vehicle (capital) owners and vehicle (capital) renters.
Except, of course, this sort of thinking fundamentally miss-assesses the economics of the car market.
Here, for example, are just a few of the problems we might easily undermine that vision:
- Depreciation. Cars don’t hold their value well for a plethora of reasons. For example, there’s mechanical and aesthetic wear and tear. There’s the fact they’re constantly being outdated by newer models and fashions. There’s essentialist contamination (would you want to own Jimmy Savile’s car?) which includes risk of exposure to internal spillage, food accidents, dog hairs, smoking habits, bad personal hygiene and all sorts. Renting vehicles out to strangers only increases these depreciation costs meaning the rental costs would have to more than compensate for depreciation and cleaning costs to make it worth anyone’s while.
- Maintenance. Cars — even self-driving ones — are not costless assets to maintain. Some amount of money has to be regularly reinvested in them to mitigate depreciation. Cars also have to be regularly cleaned and serviced. There are insurance costs to consider (even for self-driving cars, because of risk of vandalism, broken windows or such the like) and of course they have to be housed somewhere when idle or not in use.
- Forever surge-pricing. Given the depreciation and maintenance costs, the only way to ensure economic return for capital owners would be to artificially constrain supply. But this would defy the grand vision of an on-demand service which delivers in any circumstance. We may consequently end up in a situation where supply is purposefully withheld from the market in anything but surge-pricing moments (a.k.a we’d experience a permanently backwardated market). That’s pretty exploitative.
- Bespoke scenarios. A fleet of self-driving cars won’t be able to cater for every personal situation. People with small children need car-seats, those with dogs need animal facilities, those with wheelchairs need disabled access, those with back-problems need customised seats and so on. There are only three ways to deal with the customisation problem: ensure every car accounts for every eventuality (like a bus) increasing the utilitarian feel of the vehicles and its cost. Alternatively, double-up on supply to ensure there are just as many dog and kid cars in circulation to account bespoke needs, or finally to offer discounts to people who are prepared to travel in cars muddied by puppy paws or splattered with kiddy sick.
- Security risk. The key reason we regulate and license the taxi market is to ensure someone can be held accountable when things go wrong. A core part of that accountability involves knowing who taxi drivers are, that they have the necessary skills to get customers from A to B safely and that their vehicles are road worthy and insured. Yes, self-driving cars may do away with the risk of being taken for a ride by a human driver, but they may increase the chances of being taken hostage by a totally anonymous hacker who you don’t have a hope in hell of identifying.
- Privacy. How much information are you really prepared to share with a single intermediary like Uber? The only way we foresee an organisation like Uber transitioning to a self-driving fleet economically is by a) increasing surveillance to enable black-listing of problem customers b) penalty costs for accident or damages, c) discounting for customers who offer to clean-up after themselves d) highly personalised advertising to captured audiences with no ad-blocking option e) data-mining and resale of extremely sensitive information relating to what establishments you frequent, who you see, what time you leave your house and so forth (all potentially hackable to boot).
- Tragedy of the commons. If neither Uber or private individuals feel inclined to take responsibility over the physical cost of self-driving cars, the burden must fall upon local authorities or states instead, either through direct or indirect subsidisation — perhaps in a cap and collar franchise manner. This is problematic for two reasons. First, the fleet would be even more exposed to the tragedy of the commons issue increasing the cost of maintenance. Second, revenues from parking tickets, speeding fines and bad driving behaviours heavily subsidise local taxes, meaning the overall local tax rate might increase instead.
In the case of taxis and taxi drivers, it’s worth asking what really have we been paying for all this time? The driver’s driving skills? Or perhaps his willingness to supervise, maintain, care for and fund a quasi-public asset which most people only have infrequent use for? And more pertinently still, to do so in a trusted framework which doesn’t take advantage of people in vulnerable states (e.g. when inebriated, in unfamiliar territory, alone or in a rush).
If we simply end up substituting the cost of drivers for the cumulative cost of cleaners, cyber security experts, higher taxes, our own data serfdom and the banality of a world where all cars look the same…
… well one has to wonder: is it really worth it?