A few weeks ago, NY Times columnist David Brooks posted an OpEd on The Evolution of Trust. The OpEd is focused on Airbnb, the online platform where people list and book accommodations all over the world, which now has over 600,000 listings in more than 34,000 cities and 190 countries. Brooks thought that people would never rent rooms in their homes to total strangers. “But I was clearly wrong,” he writes. “And Airbnb is only a piece of the peer-to-peer economy. People are renting out their cars to people they don’t know, dropping off their pets with people they don’t know, renting power tools to people they don’t know.”
He attributes the growth of this peer-to-peer economy to 3 main trends. First is middle-class stagnation. Technology and globalizations have significantly reduced the employment opportunities and earning of middle-skill, middle-wage jobs. Many have thus had to invent their jobs and sources of income, including renting out rooms, cars and other possessions, and offering child care, pet boarding and a variety of other services.
Second, quite a number of people find the less expensive, one-of-a-kind goods and services now being offered by unique individuals more appealing than the mass-produced goods and services offered by companies. People with time to travel but little money prefer to stay in someone’s moderately priced spare room rather that in a more expensive standard hotel chain.
And, adds Brooks, “the big thing I underestimated was the transformation of social trust. In primitive economies, people traded mostly with members of their village and community. Trust was face to face. Then, in the mass economy we’ve been used to, people bought from large and stable corporate brands, whose behavior was made more reliable by government regulation. But now there is a new trust calculus, powered by both social and economic forces.”
Rooms for rent in boarding houses and child care services are nothing new. What is new is the impact of the Internet on this growing peer-to-peer economy. The Collaborative Economy, a 2013 report by Jeremiah Owyang, nicely explains the evolution of this Internet-based economy, and the associated shift of economic power from institutions to individuals. He identifies three main phases.
In the first phase, the Web offered lots of information to individuals, but control remained in the hands of institutions. Web 1.0 is a one-to-many model, where companies speak at their customers through their websites. “The power lies with a few, though many are impacted.”
Then came Web 2.0, a many-to-many model where new social media platforms and tools empowered individuals to publish information, and to easily share content and opinions with each other. The institutions are now required to listen to and speak with customers. “Customers and companies share power.”
The collaborative economy represents the evolution of the social media era. Continuing advances in social, mobile and payment tools now make it possible for individuals to share goods and services. Companies are being disrupted as consumers are now able to deal with each other bypassing traditional institutions. “Power shifts to the consumer.”
“An entire economy is emerging around the exchange of goods and services between individuals instead of from business to consumer,” writes Owyang. “This is redefining market relationships between traditional sellers and buyers, expanding models of transaction and consumption, and impacting business models and ecosystems.” All kinds of new products and services, like Airbnb, are now coming to market.
This emerging economy is a result of our digital economy. It would not be possible without the social networks that enable peer-to-peer transactions matching supply with demand; the mobile devices and platforms that enable individuals to conduct such transactions any time and place; and the digital payment systems that reliably and securely broker the transactions between buyers and sellers. Social reputation systems, where people rank buyers and sellers, are critical to the smooth functioning of collaborative markets like Airbnb. In the digital economy, our online reputations follow us everywhere, whether we are the renters or the ones renting, the service providers or the service consumers.
Beyond the enabling technologies, major social and economic forces are behind what Brooks calls a new trust calculus. Large numbers of people are living more unstructured lives; freelancing and consulting rather than having a full-time job; working from home-offices rather than going to a classic office. “They become very fast and fluid in how they make social connections. . . They have traded dependence on big organizational systems for dependence on people they can talk to and negotiate arrangements with directly. They become accustomed to flexible ad-hoc arrangements.”
“The result is a personalistic culture in which people have actively lost trust in big institutions. Strangers don’t seem especially risky by comparison. This is fertile ground for peer-to-peer commerce.”
Mass production was a defining hallmark of the 20th century industrial economy, bringing high productivity and low costs to a wide variety of offerings, - from household appliances to hotel chains. But, digital technologies and lots of information have been eroding the power of large-scale mass production. Existing companies risk becoming disintermediated by their customers now transacting directly with each other. They need to figure out how to leverage these new models for their own competitive advantage.
Airbnb is expected to become the world’s largest hotelier some time this year. It’s hard to tell how big a competitive threat this might represent to the major hotel chains, especially to those primarily catering to business customers. However, the chains are paying attention, and have been busy developing a variety of boutique hotels, each targeted at a different customer segment. Instead of the vanilla sameness of the industrial-age hotel chains, they are trying to offer their customers a more unique, personalized experience.
In a recent Newsweek column, Mass Individualism Makes Life Tough for Consumer Product Giants, technology author and columnist Kevin Maney writes that “Today’s technology gives the advantage to companies that have deep relationships with consumers, and there are two key ways to get those relationships. One is to gather so much data about your customers that you come to know them in a borderline-creepy automated way—that is the M.O. of platforms like Amazon or Google.”
“The other is to be small and intimate enough to connect with your customers on a personal level, like craft brands on Etsy or apartment owners who rent their places through Airbnb.”
“In fact, in this new age of consumer information and relationships, a big brand can be a negative,” he adds. “A brand conveys consistency and safety; it says a can of Coke will taste the same whether you’re in Syracuse or Saskatoon. As we get better information about small-scale competing products, we feel safe seeking out the unique, the undiscovered, the unbrands. Hilton becomes vulnerable to Airbnb’s one-of-a-kind dwellings. Tiffany becomes vulnerable to jewelry makers on Etsy.”
“The one thing the peer-to-peer economy has not relied on much so far is government regulation,” writes Brooks in his OpEd. “The people who use these companies may be mostly political progressives, but they are operating in a lightly regulated economic space. They vote left, but click right.”
“As this sector matures, government is getting more involved. City officials have clashed with Airbnb and Uber on a range of issues. But most city governments don’t seem inclined to demand tight regulations and oversight. Centralized agencies don’t know what to make of decentralized trust networks. Moreover, in most cities people seem to understand this is a less formal economy and caveat emptor rules to a greater degree.”
We don’t know where jobs will come from in the coming years. We have no choice but to become a more entrepreneurial society, with many now having to invent their own jobs. Peer-to-peer, collaborative economies may well be the invisible hand’s answer to this critical job challenge. It may well turn out to be one of the most important innovations in our 21st century digital economy.