The sharing economy: How economic activity is shifting to, and being enhanced by digital platforms

By Andrea Silvello

The term sharing economy is widely perceived as a synonym of “collaborative economy” or “on demand economy”, but it actually represents a very wide concept which lacks a common definition.

Rachel Botsman defines the collaborative economy as ‘a system that activates the untapped value of all kinds of assets through models and marketplaces that enable greater efficiency and access”¹.

The concept behind it is very simple: anything that is not being used can be rented out. This framework includes services such as renting, bartering, loaning, gifting, and swapping of underutilized material or immaterial possessions. These idle resources are useful to create an efficient circular system by reallocating or trading them with people who want or need them. Recycling, upcycling and sharing the lifecycle of products are common features of the sharing economy. ‘Waste’ is the result of a misallocation of resources, and technology today often allows us to easily correct that misallocation, by redistributing or trading a great variety of ‘sleeping’ assets and resources (table 1). For instance, Uber and AirBnb platforms allow customers to share cars and homes, while TaskRabbit connects people who have free time with people who need someone to perform small tasks.

Technology is an important driver. Almost all sharing economy services use online platforms, keeping low fixed costs while providing access to a huge base of customers. The central role of smartphones in modern consumerism makes on-demand sharing economy services even easier to access, such as through the creation of two-sided market platforms, thus enabling local and global peer-to-peer communication. Furthermore, big data analytics and advanced algorithms are now used to match supply and demand and to set prices: for example, Uber takes advantage of its vast database to predict where and at what time a customer will need a ride.

Collaborative consumption contemplates a variety of forms of exchange, incentives and value creation, not only in a purely financial perspective but also from an environmental and social responsibility point of view. Sharing economy fosters a more efficient use of resources, relying both on material and nonmaterial (or social) rewards while inevitably raising accountability, security and trust issues – frequent weaknesses of any digital platform dealing with sensitive data. Accountability issues are more relevant for those businesses that act as intermediaries in two-party transactions: AirBnB, for instance, has often failed to take full responsibility for any material damage caused to apartments rented by their users. Since companies will want to stay clear of such unexpected events, issues about insurance coverage will also emerge. Sharing economy users might as well expect problems with calculating their taxes correctly: for example, low income taxpayers entitled to benefits or tax credits might even lose them, when reporting revenues from “task-sharing” services.

The sharing economy is currently the talk of the town.

According to compareandshare.com², it is growing faster than Facebook, Google and Yahoo combined: PWC³ estimates that the sharing economy sector generated $15 billion in global revenues in its first seven years, compared to the combined growth of the three giants, $11 billion in the same range of time. PWC again, estimates that the sharing economy has a potential revenue opportunity worth $335 billion by 2025.

During that period, the collaborative economy sectors are likely to grow much more quickly than traditional rental sectors. For instance, peer to peer accommodation, car sharing and music and video streaming should grow at a two digit rate from 2013 to 2025, contrary to B&B, hostels, car rental and DVD rental, which will grow at a very low rate over the same period. The least developed sectors today, peer-to-peer finance and online staffing, could grow at the fastest rate out of all the other traditional or sharing economy sectors.

Given the growth expectancy of the sharing economy, investments in it are booming with $28 million a day invested in startups⁴, where 37% of them are VC funded. With the new means of raising money, such as crowdfunding, finance became more democratic.

In fact, 80% of sharing economy startups sees crowdfunding as the best way to raise capital. Sharing economy startups primarily base their business on apps and try to reach their customers online; consumers tend to automatically check the app store by searching for a company’s name, product or service type. In 2013, on-demand mobile startups raised $670 million and just a year later, funding ballooned to more than $4 billion in 2014. The funding explosion has continued through 2015 as giant funding rounds, including Uber and Lyft, have raised funding in the first four months of 2015 to $3.8 billion. Excluding Uber’s juggernaut funding rounds, on-demand startups have raised $3.9 billion since the start of 2010⁵.

Everyone can participate in the sharing economy: individuals, communities, companies, organizations and associations. All these actors can be embedded in a highly efficient sharing system where they all contribute and benefit. The fact is that people will always consume, and what is changing is the value they assign to the ‘act of possession’ and the role they wish to play within this system. This role is already an established habit in the native digital generations. Millennials are guiding the other generations towards embracing and experimenting new sharing formats, but members of every generation are starting to have a more active and mindful approach to consumption⁶. A study from Havas Worldwide reveals that 28% of population shares globally, and 68% of adults in the world are willing to share or rent goods for money – a participation rate that is estimated to double in the next year⁷.

It is important to remember that many of the transactions that take place in a sharing economy framework are actually not captured by official statistics due to the nature of the exchanged goods and services. Furthermore, it is hard to determine if the surge of sharing economy businesses is caused by the overwhelming importance that digital platforms are gaining in the current global landscape, or vice versa. What we know for sure is that sharing economy has permanently changed our approach to services consumption. In the years to come, further technological advancements will shape new revolutionary business models, just as digital platforms are allowing us to efficiently reallocate our resources.

Mr. Andrea Silvello is founder and managing director of Business Support Spa, a strategy consulting & financial advisory boutique which focuses on SMEs in Italy.