In focus: Share wars

By  Vero Insurance

Is the sharing economy over before it even started?

The emergence of the sharing economy has been one of the most fascinating economic stories of the 21st century. But, with increasing regulation and legislation, are the business benefits starting to diminish?

In 2015, a keen observation about the global economy started gaining attention through social networks and blogs, particularly in tech-savvy circles. It talked about the ‘sharing economy’, and its main message was this: transformative businesses are no longer relying on physical assets to demonstrate value. Uber, as a taxi company, doesn’t own cars. Airbnb, as an accommodation provider, doesn’t own a single room.

Although these businesses hold little to no physical assets beyond office space and IT infrastructure, their astronomical valuations reflect the environments they thrive in: transient marketplaces where assets are often rented and shared rather than owned. But is the sharing economy itself already changing?

The tightening grip of regulation

Little by little, legislation is addressing how businesses in the sharing economy do business. In the United Kingdom (UK), an October ruling found that Uber drivers should be classed as employees not contractors – dramatically impacting the taxi service’s business model.

Similarly, a recent ruling in the UK for Airbnb found that leaseholders could be breaking the law by offering their homes for rent. This came just before the holiday rental company sued the city of New York over the imposition of new restrictions, and the business is fighting ongoing battles in San Francisco, Berlin and Barcelona.

Lawmakers are reining in these often unregulated businesses. And while larger businesses may be able to withstand legislative pressure, what do these changes mean for small businesses new to the market, and SMEs looking to get their foot in the door?

Dr Jim Minifie, economist and Productivity Growth Program Director at the Grattan Institute, has studied the sharing economy extensively. He suggests we’re experiencing the largest legislative crackdown in the history of the industry, and is concerned this will have a dire impact on the productivity and growth of an emerging economy. He also expects small businesses to be disproportionately affected.

“I would hope that all of the productivity and consumer service, and labour flexibility upsides, can be preserved,” says Dr Minifie. “I think it would be a huge missed opportunity, and a great victory for the forces of reaction, if you saw these peer-to-peer platforms heavily circumscribed.”

Minifie points to research that already demonstrates a huge skew in favour of larger businesses in the sharing economy. “I’m concerned about it. You have the larger firms like Airbnb and Uber at the top, then there is a huge jump down in valuations to some of the peer-to-peer finance firms,” he explains. “If you look at a platform like Airtasker, overall it appears to be sufficient for paying about 2000 people on a minimum wage. These are not big platforms.”

Could these smaller platforms also be at the mercy of sudden legislative change? Perhaps, Minifie says. But he also points out positive changes. Firstly, more governments are attempting to navigate the challenges of legislating the sharing economy. In October 2016, Tasmanian Planning Minister Peter Gutwein said he hoped new rules for rentals would “strike the right balance” for both operators and legislative oversight.

However, it’s important to keep any talk of decline in perspective. Larger businesses like Airbnb and Uber are moving into uncharted territory, while some SMEs, like peer-to-peer finance businesses, exist under well-established legislation and are unlikely to experience radical change.

“I would suggest there are still a lot of opportunities for firms to operate in an unfettered way, but the ones in a business of transacting large amounts of labour or using property, they’re likely to run into more regulatory constraints. In some cases, rightly so,” Minifie says.

Small businesses struggle to compete

Could increasing regulation in the sharing economy benefit small businesses and new entrants? It seems unlikely.

An Australian Competition and Consumer Commission (ACCC) report says that it needs to seek “regulatory neutrality” between businesses in the sharing economy. That doesn’t mean they need to operate by the same rules, it says, but right now smaller businesses hoping to enter the sharing economy may not be able to compete.

“The scale and speed of the roll-out of sharing economy platforms, as well as differences in the way they operate compared to regular businesses, have overwhelmed regulators’ ability to enforce regulations applying to platforms,” the report says. “This means that platforms may be able to side-step complying with regulations that already apply to them.”

The result? Smaller businesses hoping to enter the sharing economy may simply not have the same opportunities to succeed. Or, worse, they may gain an incentive to “engage in anti-competitive conduct in order to maintain market share”.

Was the sharing economy ever big enough for everyone?

But there is another perspective to consider: the decline of the sharing economy can’t occur because it was never big enough to begin with.

Phil Lewis, Professor of Economics at the University of Canberra, argues that while the sharing economy has produced significant value in Australia – over AU$500 million to the New South Wales economy alone in 2015 – the high regulatory burden in Australia means it will be harder for sharing businesses to start up.

“The actual income rewards here are not as great as they are in the United States,” says Lewis. “Which is why you have seen more supply there in different businesses.”

Lewis suggests that Australia’s low population and urban density means peer-to-peer businesses, offering car or bike sharing for example, may not have the success here that they would like. Small businesses considering entering the sharing economy should be first concerned with supply and demand rather than regulatory struggles.

However, Lewis does note that in areas where there’s a definite demand for sharing services – like babysitting or child care – regulation may impede growth. “You could see growth in that type of area, but then, there are so many rules and regulations that might make it impossible,” he says.

A final hope for sharing businesses

It appears, then, that the sharing economy is operating at two speeds. At the high end, where major players such as Uber and Airbnb operate, legislative restrictions are cramping some ability to grow. However, this is having little impact on smaller entrants, like peer-to-peer lenders, who continue to thrive.

In Australia, smaller businesses operating on the side of the sharing economy may find it more difficult to enter the market – not due to legislative restrictions in the future, but to the highly developed regulatory market that already exists.

Is this the end for them? Minifie thinks not. “Did a lot of founders over-estimate the size of the opportunity? Perhaps,” he says. “But there is still a lot of opportunity to trade. And there are plenty of sharing economy areas that look very viable to me.”