If you have been reading any technology-business interface discussions recently, you must have surely heard of these (and more) words…. Almost all platform businesses have been described using one or more of these labels. In this post, I analyse their meanings and differences.
As the name suggests, collaborative economy is when different parties collaborate and create new, unique value that would not have been possible individually. For instance, economic activities like crowdfunding or meetup groups qualify as parts of the collaborative economy. Platforms like Kickstarter or Innocentive help people collaborate and create new value. However, platforms like Uber or Airbnb do not qualify – drivers (on Uber) and hosts (on Airbnb) do not collaborate amongst themselves or with their riders (on Uber) and guests (on Airbnb) – they do business with the other side.
At best, Uber and Airbnb, in their purest forms qualify as sharing economy participants. In the sharing economy, participants share their surplus assets/ capacity with others (for a fee, of course); and there may be platforms facilitating this discovery and sharing (for a fee, surely). When this sharing is a capital asset like a house (in Airbnb) or a piece of high-value equipment (in Makerspaces), the economic argument is based on high fixed/ sunk costs and with low marginal costs, coupled with low capacity utilization/ spare capacity. This is when these economic transactions become sharing. For instance, when I am driving long distance alone, and want company for the distance (in the process, also sharing the cost), I could use Bla Bla Car, and that would be sharing economy, as the three conditions are met: (1) the asset shared (the car) is a capital asset; (2) the marginal cost of adding another passenger to the car is negligble; and (3) the car has space for the additional passenger. The value is created for both of us – I got company through the trip as well as reduced the cost; my co-passenger got to travel in a comfortable manner ‘with company’ at a much lower cost. I am not a professional driver, who is looking to make money by transporting passengers from city A to city B. That would make me a ‘gigzombie’.
The gig economy
Used almost in a derogatory manner, the gig economy refers to the idea of loosely connected people sharing their labor/ expertise for professional returns. These laborers are not employees, but are on real short-term jobs or ‘gigs’. These short-term gigs are provided by some platforms like Uber. What Uber has come to today is to create a marketplace for professional drivers. Uber does not employ them (with all the benefits and security of employment), but treats them so. Uber attracts professional driver-partners to serve their riders. The opportunity costs for these drivers are pretty high, unlike in the sharing economy. For instance, in the context of the Bla Bla Car, if I did not find a partner (or someone I liked), I would still drive that long distance, because I had work in that city. Co-passenger or not, I would still go. I am not dependent on Bla Bla Car for meeting my costs. What the a gig economy company like Uber does is to hire professional drivers (who would have otherwise been employed as drivers or in other roles) and give them business. This is fine as long as the ‘gig’ was a small proportion of your total work.
Take for instance a photographer, who has his own professional practice. He acquires his customers through direct sales, word-of-mouth, and search engine/ social media marketing. And when a gig economy platform like Urbanclap begins providing him business, it adds to his exisitng income. And he is willing to pay a commission to Urbanclap for getting him customers (which he would have otherwise found difficult to get). However, when Urbanclap provides him ‘all’ his business, the ‘gig’ economy kicks in, and the photographer is at the mercy of his one and only source of jobs. He is now a ‘gigzombie’, and the aggregator can steeply increase her commissions.
Point to note is that in the gig economy, there is no collaboration/ co-creation (no common value added), nor is there a shared-value creation (fixed assets, low marginal costs, and excess capacity).
Business models for collaborative, shared, and gig economies
Given that these three economies have different architectures of interaction amongst partners, we cannot have the same business models serving them. Collaborative economies require business models where the platform allows for parners to complement each others’ value creation efforts; sharing economies require business models to match excess capacity with demand; whereas gig economies require aggregation and improving efficiency of the overall system.
‘Bargaining’ power of gig economy platforms
Given that some of these gig economy platforms operate in winner-takes-all markets with high multi-homing costs, their barganing power (in the traditional sense of the term) increases significantly. Multi-homing costs refer to the bureaucratic (search and contracting) and transaction (including variable) costs incurred by a set of partners in maintaining affiliations with multiple platforms simultaneously (switching costs refer to the costs of abandoning one in favor of the other platform). For instance, given the high multi-homing costs for drivers on the Uber platform, it is nigh impossible for a driver-partner to fairly negotiate the terms of engagement with Uber. Combine this with the unorganized nature of the gigzombies, we have a potential for an organized exploitation.
Policy issues in gig economies
Gig economies typically attract ‘weak’ partners, at least on the one side. For instance, Uber drivers work like employees (full-time with Uber) with litle or no employment benefits. The imbalance is pretty stark when these platforms begin disrupting existing, established business models. Take the arguments against Airbnb around systematic reduction of supply of long-term housing in cities. When house-owners are faced with a choice of long-term rental contracts and short-term rentals with Airbnb, they may choose the more financially lucarative short-term Airbnb rentals; and when more and more home-owners do this in a city, the supply of housing reduces, driving up rental prices.
The impact of gig economy platforms on employment is further stark – especially when the labor is ‘online work’. In such cases, the worker in San Bernandino, California is competing with similarly trained workers in Berlin (Germany), Beijing (China), Bangalore (India), or Bangkok (Thailand). Obviously the labor costs are different, and lack of regulations favor significant displacement of work to cheaper options. Even in the case of physical labor like driving cars, developed countries have been dependent on countries with demographic dividend and lower costs of skilling (costs of education and vocational training) for immigration (some world leaders’ public stances notwithstanding).
Do not confuse the the three of them!
In summary, we are talking three different business models when we talk of collaborative, sharing and gig economies. And they need to be treated differently. Primarily, regulators and investors need to understand the differences and frame policies that are sensitive to these differences.
(c) 2018. R. Srinivasan