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Disruptive innovation and the 'shared-economy'

Updated Feb 18, 2014 04:47pm
AirBnb is one of the most prominent examples of the shared-economy model. — Reuters Photo
AirBnb is one of the most prominent examples of the shared-economy model. — Reuters Photo

A cursory look at history will indicate to even the most unassuming of consumers how advancements in technology have vastly improved peoples’ lives and the ease with which they can now carry out their day-to-day tasks.

From the Industrial Revolution to the Information Technology revolution, mankind’s rapid gains in science means that the human race has found it increasingly easier to carry out even the most rudimentary of tasks.

However, with our lives increasingly immersed and dictated by the spread and use of technology, a fast and emerging ‘shared-economy’ model is gradually gaining traction amongst consumers that are hyper-connected and predisposed to experiences that are unique, authentic and not packaged to suit all palates.

To give you some perspective, let’s examine a startling fact. Every night approximately 45,000 people rent accommodation from a service that offers around 275,000 rooms in 32,000 cities across 192 countries. All these people chose their rooms and paid via online payment systems. Sounds like one of the largest hotel chains in the world? Hardly. All this space was provided by private individuals, who advertised the availability of spare rooms in their houses/apartments via AirBnb, a firm based in San Francisco which has grown to be ranked higher than the Hilton chain of hotels, in terms of worldwide outreach and number of rooms advertised.

AirBnb is one of the most prominent examples of the shared-economy model referred to earlier. In this model people rent beds, cars, boats and even share meals with each other, all facilitated by the Internet and social networks. To guarantee against unpleasant experiences, websites like AirBnb offer its users an insurance policy, which can go up to a staggering figure of one million dollars. This is done to ensure that users trust the website completely and are not hesitant about using the service and/or referring it to their friends. In fact, since it started operations in 2008, AirBnb has only received one serious complaint of mismanagement where it had to exercise its insurance policy, not a bad track record given that almost three and a half million people used its service in 2013 alone.

One might argue that the shared-economy model is not vastly different from activities like participating in a car pool or owning a bed-and-breakfast. However, in this case the dual effect of technology and social networks has really put the field of disruptive innovation at the forefront. Traditional economic models are in danger of serious ‘disruption’ as the availability of data, linking owners to potential renters is more and more prevalent, thereby reducing transaction costs and eliminating the need for expensive middlemen.

Even the ubiquitous rise of the smartphone is an example of disruptive technology at its finest; prior to the launch of the iPhone, smartphones were limited to business users, who needed quick access to email and instant messaging services. The BlackBerry was positioned primarily for corporate customers and no one really hypothesized how such services could be expanded to the vast majority of users, who would use such phones for access to games, music, instant messaging and other applications, rather than limiting it to email and other business requirements.

Traditional giants in the technology ecosphere like RIM and Microsoft were quick to write off Apple’s foray into the smartphone market, retrospectively at their own peril. Today RIM is a company on the verge of bankruptcy, while Microsoft trails far behind industry leaders Google and Apple and has now finally accepted the pressing need to cater for a market that hitherto they found negligible.

The explosion of Internet and social media also disrupted many business functions like communications, marketing and customer care as consumers were now free to interact with each other and share opinions on the products and services that they were currently using. Rapid dissemination of information meant that marketers had to cater to a medium that was previously unexplored; traditional models of outreach like print media and television were becoming increasingly irrelevant and consumers demanded a more efficient way to interact with businesses. As the price of outreach via online marketing became substantially cheaper than traditional models, the startup culture was founded.

Startups thrived on the notion that cheap, efficient and well-managed organisations could outdo and outperform large conglomerates that had millions of dollars in their marketing budgets and had streamlined processes pertaining to production and efficiency. The explosion in smartphone usage helped facilitate this notion; now when an app or service went viral, it could reach even the farthest corners of the globe. Companies with no current revenue stream and staffed by a half-dozen employees were valued in billions of dollars (read: Instagram), and provided major disruptions to even the most basic of actions like taking and sharing photographs.

However, in the shared-economy ecosphere, startups have started to seriously threaten traditional businesses to the point that some industries are striking back viciously. Uber, a startup that started off as a private luxury car service in San Francisco, has now expanded to 60 cities across six continents and employs 400 people. The taxi and limousine industry in North America was so threatened by the company that the San Francisco transportation agency sent Travis Kalanick, CEO and co-founder of Uber, a cease-and-desist letter, saying it was an “unlicensed taxi service”.

Kalanick hit back, saying they merely made the technology that connects taxis to clients, and followed it up with a massive public relations campaign designed to project Uber as hip, trendy and efficient. While it worked in San Francisco, where legislation was enacted to allow for startups like Uber, government and industries in cities like New York, Boston, Chicago and Washington DC have started to investigate more closely.

Similarly, AirBnB has faced the wrath of the New York city council, which argued that since it was part of the hotel and tourism industry, it should face similar monitoring, oversight and tax brackets. After immense amounts of scrutiny and an element of bad publicity, AirBnb was allowed to resume its operations.

The shared-economy model has now firmly taken root in the economies of North America and Europe and is gradually working its way to the Far Eastern economies, after which it is likely that emerging and frontier economies will also embrace its benefits. Many analysts believe that societal factors have a large role to play in its unprecedented rise as well. As there is increasing population density, there is conversely a growing acceptance of the need for sustainability and community-living. People realise that it is simply unsustainable for each and every single person to own and drive their own car, or invest in their own boat.

At the same time, the recession in the global economy from 2007-2011 meant that people were forced to look at creative methods of generating business. Idle inventory in homes, from cars, to rooms to even bikes and parking spots meant an economic opportunity, as they could be rented out, even for time durations as short as a few hours.

In 2013, the shared-economy was estimated to be worth approximately 26 billion dollars and is the latest example of how the Internet in particular and technology in general is providing value to consumers. This is a sign of immense potential and could very well lead to even further disruptions in the future.