Sharing Economy Companies Becoming Commonplace

By | Jul 12, 2013

It wasn't that long ago that renting a spare room through an online lodging website was considered risky behavior. Today, all across the world it is becoming increasingly common.

But as leaders in emerging "sharing economy" companies are discovering, being assimilated into the mainstream introduces an entire new crop of legal and regulatory challenges.

Sharing companies allow individuals to share a variety of things from a vehicle to a place to stay or even an office. The Internet enables these companies to screen and connect people who have something with people who are searching for it.

Entrepreneurs in this new category of business say they are boosting the economy, because they encourage the use of assets that would otherwise be sitting empty or idle. And they can help people from all walks of life in a variety of situations to effectively start their own small business.

"We could create millions of entrepreneurs who don't fit into the market system," announced Airbnb co-founder and chief executive Brian Chesky at a Reuters Technology Summit roundtable in San Francisco in June.

An entrepreneurial marvel, Airbnb is valued at $2.5 billion by venture investors. Other new businesses built on sharing economy models include RelayRides (rent your vehicle), LiquidSpace (rent out extra workspace) and TaskRabbit (offer your free time to run errands).

"Certainly, this is becoming mainstream," according to analyst Jeremiah Owyang, of the research firm Altimeter Group. Renting items like toys and electronics between peers has already ballooned to a $26 billion industry, says Rachel Botsman, author of "What's Mine Is Yours: The Rise of Collaborative Consumption."

But the expansion of sharing companies from small groups of like-minded individuals in tech-savvy enclaves to a large-scale national or global market is complicated.

Airbnb has encountered roadblocks such as local regulations enforced in many cities restricting how rooms may be rented. For example, New York City Airbnb host Nigel Warren was fined $2,400 for offering part of his apartment for rent in September 2012.

In May a judge ruled that Warren was in violation of a law that forbids short-term rentals by residents. New York's Environmental Control Board has granted Warren an extension until July 15 to file an appeal. Many cities enforce similar by-laws.

However Airbnb's Chesky argues that educating officials on the benefits of his business could persuade the city to soften its position. He points to cities like Amsterdam, which was originally against Airbnb yet now allows it, according to Chesky.

One method of changing officials' minds is to convince them that Airbnb contributes to the local economy. In June, 2013, Airbnb revealed results of a study showing that guests and hosts in Paris brought $240 million to the local economy. According to the study, Airbnb guests visited Paris for an average of five nights, as opposed to just two nights for visitors who stayed in hotels.

Insurance companies are also struggling with how to address car-sharing businesses. In some instances this discourages their customers from even using them.

RelayRides, the largest company in the car sharing sector, gives vehicle owners $1 million of liability insurance during the rental. Therefore, the owner's current auto insurance would not be affected if the rental driver had an accident, says RelayRides Chief Executive Andre Haddad.

However the insurance industry is concerned about what happens in the case of disputes, such as a whether a dent to the car happened during the time it was rented or while it was being owner-driven. And according to a spokeswoman for the Insurance Information Institute, $1 million may not be enough in the case of a serious accident.

This was the case when a driver of a RelayRides car in Boston hit another car with four passengers and died in February 2012. The insurance companies are still negotiating who will pay what in this case.

While Haddad advises he cannot comment on that case, he did point out that the insurance RelayRides provides is several times greater than insurance carried by the average driver or the state minimums.

"You are better off being in an accident with a RelayRides car," he said.

Governments Get Involved

Some of the businesses in the new sector suggest enticing local governments into making use of their services in order to show them the law from their point of view.

"We have libraries and city halls and municipalities that are using our platform to make their space more accessible," said Mark Gilbreath, chief executive of office-rental service LiquidSpace. He points to the Palo Alto City Library and the County of Santa Cruz, both in the state of California, as examples. "Demystify it by bringing them into it."

Similar to most sharing businesses, TaskRabbit has worked hard to conduct background checks and carry out other methods of making sure that their service providers are trustworthy. According to TaskRabbit founder Leah Busque, approximately 12,000 people currently offer errand-running services via her site.

Sharing business executives say that growing numbers of participants now use social networking services like Facebook to build a relationship and become comfortable with people they don't know prior to carrying out business.

Customers of sharing economy businesses like the fact that they are often cheaper than comparable services. Sometimes services offered provide a nice change, like staying in a local residence instead of a hotel. Some customers enjoy feeling more socially or environmentally responsible by occasionally renting a car for a few hours instead of buying one.

One of the factors that attracted many customers into the new sector was a weak overall economy, which--if it strenghthens--could actually shrink the pool of service providers who want to earn extra cash by running errands or renting out their car. Yet sharing economy businesses don't sound worried.

"It's simply a more efficient model that will endure whether it's an upcycle of growth, or whether it's a downcycle," said Gilbreath.

Produced by IBM's Midsize Insider, based on Reuters reporting

REUTERS/Steven Lam

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