Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: people have shared things for thousands of years, but technological advancements have revolutionised how sharing is done and enabled many to make money out of being more efficient with their time and resources. At least 200 businesses, nearly all of which did not exist five years ago, have emerged to exploit this trend. Estimates suggest that one-in-five people in the US have already participated in the sharing economy and that it could be worth some $15bn currently. Looking 10 years ahead, this latter figure could be at least 20 times bigger. Established companies in sectors ranging from transport and accommodation to banking and staffing could be at risk. While many of the potential beneficiaries remain private for now, large consumer-technology businesses such as Amazon and Google look currently well-placed.
Many readers of this piece will know, use, and rate services such as Uber for getting around town or Airbnb for staying in town. And, if your car or house can be shared, why shouldn’t other things, whether this be unused office space, party clothes or even farm equipment?1 All such activities (and more) can be considered to constitute the sharing economy. More broadly, the growth and popularity of such activities is indicative of part of the increasingly pervasive trend of digitalisation and disintermediation that we have been discussing in our Future Trends research for the last five years: software is changing how we conceive of economic activity; our access to information and how we tailor this to our needs has never been greater.
The term ‘sharing economy’ (sometimes also referred to as the ‘access economy’) first emerged in the mid-2000s and while there are several definitions, there seems to be little consensus on what the term precisely means. Recourse to basic economic theory perhaps provides the best answer: technology allows individuals and corporates to allocate (their) scarce resources efficiently, effectively monetising under-utilised assets.
Sharing has, of course, been around for thousands of years as a business model, but its growing prominence has been promoted and reinforced by falling technology costs, the ubiquity of mobile broadband and the power of social networks. First, scaled cloud solutions (such as Amazon Web Services) have made it cheaper and easier for entrepreneurs to launch and develop online businesses. Next, the widespread adoption of smartphones has allowed start-up businesses not only to compete more freely and innovatively than established incumbents with legacy infrastructure and assets, but also for users to transact in real-time. Finally, the emergence of Facebook, LinkedIn and other similar platforms within the past decade has created networks of similarly-minded users that are potentially willing to transact with their peers. The trust and safety of the online world (cyber-fraud notwithstanding) has undoubtedly helped spur the sharing economy.
Almost half (44%) of all US consumers are now familiar with the sharing economy and close to one-in-five (19%) say they have already participated in a sharing economy transaction, according to a comprehensive recent study conducted by consultants PWC. These are most likely to have occurred within the media and entertainment space, followed by automotive and transportation and then hospitality and dining. While PWC put a value of $15bn on the size of the sharing economy at the end of 2014, by 2025 it estimates that this figure could be as large as $335bn globally, equivalent to a compound annual growth rate of more than 25% for the next ten years.
Although this might sound like a large number, at $335bn the sharing economy would still account for less than 1% of global GDP. More importantly, there are good reasons to believe that such an assumption may end up being too conservative. Investors should not under-estimate the impact of compounding growth. Consider that in 2008, Airbnb made on average one booking every 24 hours; today, it makes one every 2 seconds. Some 425,000 guests are hosted by Airbnb every night, more than 20% higher than the comparable figure reported by Hilton. Similarly, Uber is now generating over 1m rides per day across the cities where it is present. As a result, the company is being forced to add around 50,000 new drivers to its service every month. The inability of Kodak to appreciate the potential impact for digital cameras is a salutary reminder of under-estimating the impact of change.
Crucially, almost every recent comprehensive study that has been compiled on the sharing economy (by the likes of AC Nielsen, Credit Suisse, McKinsey and PWC) suggests that it is a global phenomenon, cutting across all age groups with no specific gender bias. Beyond the economic arguments that support the growth of the sharing economy, there are also a growing number of social, behavioural and ethical factors spurring its development. When questioned, some 86% of respondents believe that the sharing economy makes life more affordable, 83% agree it makes life more convenient and efficient, 76% believe it is better for the environment and 68% believe it helps to create stronger communities (according to PWC). Consumers who previously could not afford to get access to goods and services, or who had no desire to own them permanently are now able to do so.
The benefits of the sharing economy can easily be seen through the following statistics. A typical Airbnb host in London earns around £3,000 annually through renting out his/her property for just 30 nights. Over 60% of hosts report that this allows them to pay bills that they would otherwise have struggled to pay. Meanwhile, JustPark reports that the 20,000 users of its service (UK property owners that rent out their driveways) make, on average £465 every year, or a much as £810 in London. Zipcar members who use this car sharing service save some £3,500 every year relative to the cost of owning car. More broadly, McKinsey estimates that the sharing economy may yield cost savings of over $1trillion p.a. on a global basis by 2025.
If consumers and businesses can make more efficient use of their resources, increase productivity, reduce their carbon footprints and foster communities, what is to stop the rampant growth of the sharing economy? Trust and regulation seem to be the two most commonly cited concerns. New technologies are inherently disruptive and so pose challenges for governments and regulators. Intervention is likely to intensify. It is valid to consider whether companies providing technology platforms should be liable for the actions of the suppliers within their network. Similarly, there is currently no clear consensus on the level of, tax compliance, health and safety adherence or employment benefits among others that might be appropriate for participants operating within the shared economy.
Ultimately, market forces, digitalisation and consumer preferences might play a more significant role in dictating the development of the shared economy. Nonetheless, a market with some degree of regulation might actually strengthen the more established sharing firms, especially if the costs of compliance prove too be a burden for smaller firms. Trust, credibility and reputation clearly matter. Over 70% of participants in the PWC survey reported that they did not feel their experiences of the sharing economy were consistent, while more than 60% said they would not participate in a transaction unless it had been recommended by someone with whom they were already familiar.
Against this background, early-mover and corresponding scale advantages clear matter. However, as previous figures attest, the sharing economy is still at a very early stage of its development. While at least 200 businesses are active in sharing across virtually all sectors and regions, nearly all are unlisted and over 80% were founded after 2011 (according to data from Credit Suisse). The potential is significant. Airbnb was founded in 2008 and was valued at around $25bn based on its last round of funding, while Uber (established a year later) was last valued at c$60bn on a similar basis.
Beyond participating via a venture capital/ privately-funded perspective, the most appropriate framework gaining exposure to the trend is via identifying listed businesses that will potentially benefit or suffer from the growth of the sharing economy. Based on current sharing trends, listed transport businesses, hotels, banks (exposed to the potential challenges of crowd-funding and peer-to-peer lending) and staffing companies may be at risk.
Many established companies ranging from BMW and Ford to Hyatt and Starbucks or Barclays and Citi have begun to recognise the potential impact to their businesses from more disruptive start-ups and some have even sought to form partnerships. BMW, for example, has launched a car sharing service called DriveNow in conjunction with Sixt, while the W Hotel chain (owned by Starwood) has partnered with start-up DeskNearMe to provide short-term work spaces for its guests. Meanwhile, US pharmacy chain Walgreens has teamed up with TaskRabbit to allow for the more efficient delivery of its medicines.
In terms of potential beneficiaries, many of the large consumer-technology businesses look well-placed. Amazon and eBay can be effectively thought of as the earliest pioneers of the shared economy, linking disparate buyers and sellers via a common platform and hence benefiting from networking effects. Both are now expanding into new areas. The Amazon Flex service, for example, allows for drivers signed up to their platform to earn $18-25/hour for delivering packages to Amazon Prime Now customers using their own cars and phones and working the hours they want.
Elsewhere, social media businesses such as Facebook and LinkedIn may benefit as their platforms can be used to provide information about and validation for shared economy participants. Meanwhile, it should not be forgotten that Google remains – at least for now – the dominant search engine for access to the Internet. Google has, however, rapidly developed beyond its original core skill set into areas as diverse as robotics and artificial intelligence; it is also one of the largest investors in Uber. All these businesses, and many others too, are likely to influence the increasingly important development of the shared economy.
Alexander Gunz, Fund Manager, Heptagon Capital
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