< Back

Share |

The collaborative economy or you scratch my back and I'll scratch yours

The collaborative economy, also known as the sharing economy, the P2P economy, the access economy and by various other terms, has as many definitions as it has names. Broadly though, we are talking about internet facilitated access to goods and services which allow access to, rather than ownership of, underused assets, often those belonging to individuals or very small businesses.

October 2015

While most popularly referred to as the sharing economy, sharing is only part of the story as the collaborative economy can be based as much on buy or rent and sell as on swap or exchange. Nonetheless many collaborative economy models depend on a trust element and a spirit of openness and enablement. eBay, arguably the pioneer of the collaborative economy, allows people to sell their unwanted stuff to those who want it. Its peer review system, emulated by many, is one of the primary ways of fostering trust in the sharing economy.

In recent years, the collaborative economy has expanded rapidly in a wide range of sectors. Key examples include:

  • Access to things – platforms like Airbnb which facilitates people renting out their spare rooms or properties to others; car services like Zipcar which give people access to cars when needed; Freecycle which helps people get rid of unwanted things to those in their neighbourhoods who can use them; fashion re-selling websites for 'pre-loved' clothing package(wedding dresses are a particular hit in this market for obvious reasons). These are just a handful of high profile operators in this space. Sometimes goods are bought, sometimes they are exchanged, rented or shared and sometimes they are given away to those who need or want them more but the range of businesses operating in this space continues to grow.
  • Access to each other – whether it's access to open source software (see our open source article for more], open patents or other work product, the collaborative economy truly earns its name when platforms enable users to access and share each other's ideas to develop new projects (see our article on Collaborative Creativity). Some platforms are more prosaic but every bit as helpful. Who hasn't wondered in desperation, where they can find an electrician prepared to come out for a couple of hours? Apps like Handy will (where they operate), link people to the service providers they need. From cleaning to setting up IKEA furniture, to house painting to picking out birthday gifts for your partner when you're stuck at work (yes, really), there will, if you live in a major city, increasingly, be someone to do it for you. Freelance office workers also benefit from this form of online matchmaking which can be a Godsend to parents with young children who don't want full time jobs and a cost effective way for businesses to find temps in highly specialised sectors.
  • Access to media and entertainment - Consumers are particularly excited about the ability to share music and movies. Some platforms allow people to do this with their own work product. Others have tried to do it with the work product owned by third parties with varying degrees of success. Spotify is a good example of a platform which has worked within the current legal framework but there are many which have floundered in a mire of intellectual property issues.
  • Access to learning - Collaborative learning platforms can give people access to education they might not otherwise have from their home screen, whether it's a mobile phone, a tablet or laptop. This is one of the largest growth areas of the collaborative economy although it comes with particular issues around copyright, ownership of product and quality control.
  • Access to financial services – there are a number of areas where the collaborative economy appears to be in the process of revolutionising traditional methods of raising finance. P2P lending and crowdfunding sites operate to help individuals and businesses invest and raise finance (see our article on Crowdfunding). Some of these have a corporate focus and others, like Kiva, have a more charitable lean, enabling 0% interest micro loans and gifts to individuals in an effort to alleviate poverty around the world.

What are the key advantages of the collaborative economy business models?

pay by card

Everyone likes a bargain and there can be no doubt that price is a leading contributor to the success of the sector. It can be cheaper to rent a room in someone's house than pay for a hotel room; Uber is notoriously cheaper than licensed taxis (except possibly during London Transport strikes); and why not pay half price for nearly new lego which your child desperately wants but will outgrow in a year or two? Price is seen as the most persuasive factor in driving consumers to sharing economy services and it's not hard to see the attraction of making a bit of money out of your used possessions or your spare room.

A less easily measureable factor is the appeal of the unique experience. Many people would rather rent someone's apartment on holiday than stay in a hotel because it gives them insight into local life and can lead to them meeting locals. Once the initial hurdle of trust is overcome, there is a benefit to arrangements made between individuals. Yes, there are scare stories of trashed apartments or people finding the apartment they thought they had rented doesn't actually exist. However, default rates on P2P lending sites are surprisingly low – Zopa, the P2P lending platform which facilitated lending of £240m last year, has a default rate of just 0.18% over the last five years. This is thought to be because people are more reluctant to 'let down' someone they have a personal relationship with – even if that relationship has been forged over the internet and not face to face. Even the traditionally reserved British often find it more fun to engage with individuals than with large, faceless companies and we seem to find it surprisingly easy to trust them based on nothing more than a recommendation or a peer review.

A huge benefit of many collaborative economy business models is that they are environmentally friendly. In an era of terrifying consumption, recycling and sharing of assets can be very appealing. Even disrupted businesses are adapting. Recognising that there is a growing trend for people to prefer not to have to spend on the extras involved in car ownership or come up with the capital to buy a car, carmakers and rental firms have invested heavily in their potential competitors. Avis bought Zipcar for US$500m in 2013 and BMW and Sixt have set up carsharing service DriveNow. Even the public sector is responding to potential economies of scale, saving money on office space and travel expenses.

Above all though, access is the element which holds the collaborative economy together – whether it's access to markets for individuals and small traders on marketplace sites like Etsy and Amazon, access to open source software or patents, access to learning or to work, the collaborative economy has stood on the shoulders of technological development and opened up the world. There is every indication that it will continue on its upward trajectory as people try to ride the wave. Even governments are thinking how best to exploit the potential. The UK government commissioned a report on Unlocking the Sharing Economy (published in November 2014) and is already starting to act on its recommendations.

What are the key challenges to the growth of the collaborative economy?

Of course, before we get carried away by the possibilities in the collaborative economy, there are some potential barriers to growth which need to be considered.

taxi rank

Many collaborative economy businesses operate in what are traditionally highly regulated sectors. Uber is currently the focus of a CJEU reference from Spain (as well as the legal actions) asking whether it is right to treat it as a platform or information service provider rather than the provider of taxi services and has been the target of protest by licensed taxi drivers around the world who resent the fact that Uber drivers are not required to have licences. The Telegraph recently reported that London Transport is proposing introducing new regulations which would prevent Uber from operating its current business model. There are similar issues in the lettings sector. In the USA, for example, many cities have laws preventing owners from renting out their properties for less than 30 days without a licence and many leases contain provisions which prevent subletting. Various jurisdictions have laws which require safety standards and inspections before properties can be rented out or which have stringent zoning laws which do not allow for short term rentals (see our article on Legal Challenges in Germany).

Insurance is another problem. People need to know they are covered by insurance if something goes wrong in order to participate in the collaborative economy but insurers and brokers have been slow to respond to the new needs this creates. Sharing economy platforms have made progress in persuading insurers to come up with suitable products and, you've guessed it, there are even sharing insurance platforms like Bought By Many which brings together people with similar insurance needs in order to negotiate a discounted premium.

The internet giants have been at the forefront of tax issues in recent times but collaborative platforms, whether small or large, are also drawing scrutiny. In the UK, for example, HMRC has launched a consultation on extending its data gathering powers to tackle what it terms the 'Hidden Economy' businesses which fail to register for tax and individuals who fail to declare their income which, it estimates, costs the UK exchequer some £5.9 billion in lost revenues. While it is unfair to characterise 'sharers' as tax avoiders, certain business models could be under threat if they are seen to facilitate tax avoidance and, conversely, if the tax situation becomes too complex for participants to handle.

While collaborative economy platforms can facilitate freelancers, there are concerns that workers are ripe for exploitation by unscrupulous companies. A wider social issue is that we are moving away from a traditional employment model to one where more people will be freelance or self-employed without the benefits which come with employment like a pension. Without proper protection for these types of workers, there is a risk that they may only feel the lack of employment benefits in the later stages of their lives in certain countries where there is no state pension or healthcare. Interestingly, Jeremy Corbyn announced at the Labour Party conference, a policy to extend maternity and paternity leave to freelancers should the Labour Party win the next election.

Ownership is a particular issue in certain sectors of the collaborative economy whether it's transfer, licence or apportioning. Who owns work product and how that work product can be shared are fundamental in terms of sharing media and entertainment and creating work or study groups as well as using a freelance workforce. (See our article on Collaborative Creativity).

While over-regulation or inappropriate regulation is a challenge, lack of regulation can make things just as difficult. One of the concerns consumers have with, say, using a service like Uber is the fact that nobody but Uber is vetting the drivers. A lack of an 'official stamp' can also be problematic in Ed Tech where many of the courses on offer do not have accreditation from a reliable educational institution. Inspiring consumer trust is one of the biggest challenges for collaborative economy businesses. The peer review system can help set minds at rest but as we all know, reviews have to be read as judiciously as online dating profiles. Platforms have an ongoing and much publicised issue with fake reviews and a lack of transparency about paid for reviews. Some websites try to get reviewers to supply authentication or considerable amounts of personal information in an effort to make sure reviews are genuine but users can be reluctant to supply that level of personal data. Trusted identity verification is going to become increasingly important.

Competition may also become an issue. At the moment the market is very buoyant with seemingly endless new players entering the collaborative economy but if they consolidate too heavily, we may well see the creation of new internet giants and potential problems for startups.

So what's next?

While the collaborative economy can be a challenge to established business models, it also represents enticing opportunity. The UK government-commissioned report, makes four key recommendations seen as essential to growth:

  • the government should use the sharing economy to make its own operations more efficient and make better use of public resources;
  • regulations need to be fit for purpose and meet people's expectations;
  • sharing economy startups need to be supported through encouragement of experimentation, innovation and knowledge sharing; and
  • the sharing economy needs to come together as a body and set common benchmarks and service standards in order to foster consumer trust.

In response to this, Sharing Economy UK was set up by leading stakeholders including Airbnb, Zipcar and Nesta. Members sign up to a code of conduct and aim to champion the sector, ensure best practice and act as a single voice. Whether this will gain traction or not, everyone from individuals to all levels of business and even the public sector, is aware of the potential of the collaborative economy and there is likely to be a great deal of will to overcome any current legal and regulatory barriers to its growth.

If you have any questions on this article please contact us.

Debbie Heywood

Debbie looks at the rise of the collaborative economy and some of its biggest challenges.

"Access is the element which holds the collaborative economy together..., the collaborative economy is standing on the shoulders of technological development and opening up the world."