Opinion
Computing Applications Technology strategy and management

How Traditional Firms Must Compete in the Sharing Economy

Considering the evolving relationship between established companies and their sharing-economy counterparts.
Posted
  1. Article
  2. References
  3. Author
  4. Footnotes
How Traditional Firms Must Compete in the Sharing Economy, illustration

Traditional companies now have another set of competitors to worry about—Internet startups in the "sharing economy." These new companies are actually Web platforms that bring together individuals who have underutilized assets with people who would like to rent those assets short-term. The assets targeted by these startups range from spare time for everyday tasks (TaskRabbit, Fiverr) and spare time and automobiles to drive people around (Uber, Lyft) to extra rooms (Airbnb, Flipkey, Roomba) and occasionally used tools and other household items (Streetbank, Snap-Goods/Simplist).9,12

Sharing-economy startups are in many ways a logical outgrowth of social media platforms such as Facebook, Pinterist, and Trip Advisor, which bring together people with common interests to share ideas, information, or personal observations. They threaten established companies to the extent that peer-to-peer networks can grow exponentially through the power of platform dynamics and network effects (see my previous Communications columns "The Evolution of Platform Thinking," January 2010, and "Platform Wars Come to Social Media," April 2011).

Sharing-economy startups also reflect the broader "servitization" trend. Here, instead of selling products outright, companies can expand their potential markets by renting access to products that people used to buy. Examples include everything from Salesforce.com selling software as a service instead of as a product to automakers like Daimler and BMW, following the lead of Zipcar (now owned by Avis Rental Cars) and offering transportation as a service instead of selling automobiles.2,4

Not all has been smooth sailing in the sharing economy, however. Some startups have already run into legal and regulatory hurdles from city governments, courts, and traditional unions or lobbies that want to restrict them or shut them down. Airbnb has faced problems in New York, San Francisco, and other cities because of regulations regarding private hosting and subletting. New York City officials are still grappling with the issue of who should pay hotel taxes. But the big question is really how should traditional companies compete with startups in the sharing economy?

Let’s take the hotel business as an example. Airbnb started in 2007 in San Francisco when the founders had an extra room to rent and decided to offer a low-cost "air mattress" and "bed and breakfast experience" to attendees at a local conference.6 They set up a website, targeted cities with conferences, and signed up other people with spare rooms. Progress was slow until 2009, when the company entered the Y-Combinator accelerator and then got venture funding. As of September 2014, Airbnb had expanded to 800,000 room listings in 190 countries and claimed that 17 million people had used its services.a The firm has also raised $826 million in venture capital, with a most recent valuation of $10 billion, about 40 times 2013 estimated revenues of $250 million.8,13

By comparison, the largest hotel chains had fewer rooms, much slower growth rates, and much lower valuations compared to their revenues. Marriott (which includes Ritz-Carlton, Bulgari, and Fairfield Inn) had 675,000 rooms in 74 countries, with 2013 revenues of $12.7 billion (not including franchisee revenues) and a September 2014 market value of $20 billion (1.6 times prior year revenues). Hilton (which includes the Waldorf-Astoria, Embassy Suites, and Hampton Inns) had 679,000 rooms in 91 countries, 2013 revenues of $9.7 billion, and a market value of $25 billion (about 2.5x). InterContinential Hotels Group (which includes Crown Plaza and Holiday Inn) in 2014 had 674,000 rooms in 100 countries, 2013 revenues of $1.9 billion, and a market value of $9 billion (about 5x).b

For hotel chains to add rooms, they have three options. They can seek relationships with investors who want to construct new hotels and turn them over to their management, get existing hotels to switch their management companies (such as from Hilton to Marriott or vice versa), or build new hotels themselves. Most hotel chains do not own the vast majority of properties they manage, so they do not need a lot of their own capital to expand. Nonetheless, building new hotels is financially risky for the investors, and getting existing property owners to switch allegiances and brand names can be difficult and risky as well.

By contrast, to grow its portfolio, which ranges from cheap spare bedrooms to luxury homes for vacation rentals, Airbnb relies mostly on the power of network effects. It needed some inventory to get started and lure the first customers. But, as word-of-mouth has increased, and as the company has advertised more widely (for example, you can now find Airbnb ads on Expedia.com), network effects took over. More people have offered their rooms and more people have used the service, which has led to more available rooms, more users, more rooms, and so forth. Will Airbnb someday be as dominant in the lodging business as Amazon now is in books and electronics retailing? Probably not, but the potential for growth is limited only by the power of the Internet as a network—and that is pretty big—as well as by how competitors respond.

So how do you compete with Airbnb if you are a conventional hotel chain? The first thing you do is go to your local government officials and make sure that Airbnb is not violating the rules for subletting, hotel taxes, insurance, and other regulations. The playing field should be level. In the long run, though, traditional hotels can compete by providing a type and level of service that Airbnb cannot match at any price. For example, hotel rooms, reservations, and other services can be much more standardized and reliable as well as localized in taste and design. Hotel chains can cater to individuals or businesses of different sizes and types. They can host major events and small gatherings. They can connect customers to a broad variety of vendors for tourism, transportation, and other personal or business services, tailored to the locality and the occasion. They can leverage long histories of relationships with their customers and offer extensive loyalty programs and discounts.

Consider the taxi business as another example. Here, Uber poses a bigger threat to existing companies than Airbnb does to hotel chains, except perhaps for their lower-end properties. Taxis are highly regulated and restricted as well as not universally available, such as in small or rural communities, whereas individually owned cars and potential drivers are everywhere. Uber got its start in 2009, also in San Francisco, as a private luxury car service. It then began raising venture capital and launched a mobile smartphone app in 2010 that enables potential customers to call for a ride, get a price quote, and then accept or reject it. The company expanded to UberX in 2012, enabling customers to arrange for rides in smaller, less expensive cars. Uber also now helps individual drivers get loans to buy new cars.10 In June 2014, Uber raised an impressive $1.2 billion at a valuation that, with the new money, totals $18.2 billion.7 As of September 2014, Uber had accumulated over $1.5 billion in venture capital and operates in more than 70 cities in 45 countries.c

So how do you compete with Uber if you are a local taxi company? Again, the first thing you do is see if Uber is violating regulations for transportation services—insurance, training of drivers, and licenses. In some cases, such as in Germany, you may file a claim in court and win a nationwide ban.11 But most people like the concept of the sharing economy because it means greater access to goods and services at lower prices. In Boston, for example, the number of taxi cab licenses ("medallions") was established in 1934 at 1,525 and has increased only by 300 in subsequent decades.1 The system has created an artificial shortage of cabs, even though drivers generally work in shifts of three per medallion. It took pressure from average citizens and intervention by state government officials and the courts to overcome temporary legal actions that restricted Uber’s operations.3,5

What options other than regulation are there? Like hotel chains, taxi companies can offer a standardized level of service and price that Uber will not always be able to match. True, the challenge for differentiation is tougher in the taxi market, since a car ride is a car ride, and does not require the same level of discretion as choosing a hotel. Nonetheless, traditional enterprises should be able to provide more reliable, consistent, broader, and safer services than sharing-economy competitors.


The sharing economy has ushered in a new age where underutilized assets become peer-to-peer services for hire.


There is also nothing to stop traditional companies from becoming more like their sharing-economy counterparts. Marriott, for example, is partnering with boutique hotels around the world. It offers access to these "Autograph Collection" properties through its reservation system and loyalty program, which customers can access through the Web on PCs or mobile devices.d Maybe this part of its business should grow—a lot. In another case, MetroCab Boston has introduced a smartphone app that enables potential customers to order taxis and pay via credit card.e Taxi companies can also work with local governments to ease regulations, expand the number of licenses, and hire more drivers.

Sharing-economy startups also have weaknesses. For example, there can be lags in confirming reservations on Airbnb that make it difficult to make definite travel plans. And Uber, like airlines and some hotels, relies on "dynamic pricing." This means prices go up when demand is high, such as during rush hours or rainstorms. Uber drivers can also decline to provide service, such as when they do not like the requested destination or the rating of the customer (yes, both customers and drivers are rated on Uber). These are features of the Uber service that taxi companies can exploit since they are obligated to offer standardized prices and provide service to anyone who calls.

In short, the sharing economy has ushered in a new age where underutilized assets become peer-to-peer services for hire, enabled by the Internet and smartphones. But there are still many uncertainties. Web startups are easy to launch but many will not survive once their funding runs out. Moreover, network effects lead to positive feedback loops, increasing returns to scale, and winner-take-all shakeouts that favor the bigger platforms—much like Amazon and Google have come to dominate Internet retailing and search. Airbnb and Uber are already big and probably here to stay. They are likely to become bigger, better, and more varied in the services they offer. Traditional companies in these markets are not likely to go out of business, but they cannot stand still. They must adapt and compete based on their own unique advantages—or they will become much diminished versions of what they used to be.

Back to Top

Back to Top

Back to Top

    1. Boston Globe Spotlight Team. For Boston cabbies, a losing battle against the numbers. Boston Globe (Apr. 1, 2013).

    2. Cusumano, M.A. Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Uncertain World. Oxford University Press, 2010), 68–113.

    3. Farrell, M. Uber battle goes to heart of Cambridge. Boston Globe (June 21, 2014).

    4. Gardiner, B. Big European players embrace the car-sharing trend. The New York Times (Nov. 19, 2013).

    5. Herman, C. Court rules state can give OK to Uber. Boston Globe (June 26, 2013).

    6. Kessler, A. Brian Chesky: The 'sharing economy' and its enemies. The Wall Street Journal (Jan. 17, 2014).

    7. Kovach, S. Uber raises $1.2 billion at $17 billion valuation. Business Insider (June 6, 2014); http://www.businessinsider.com.

    8. Luden, I. Airbnb has closed its $500M round of funding at a $10B valuation. TechCrunch (Apr. 18, 2014).

    9. Malhotra, A. and Van Alstyne, M. The dark side of the sharing economy...and how to lighten it. Commun. ACM 57, 11 (Nov. 2014), 24–27.

    10. Roose, K. Uber might be more valuable than Facebook someday. Here's why. New York Magazine (Dec. 6, 2013).

    11. Scott, M. and Eddy, M. German court bans Uber service nationwide. The New York Times (Sept. 3, 2014), B3.

    12. Singer, N. In the sharing economy, workers find both freedom and uncertainty. The New York Times (Aug. 16, 2014).

    13. Spector, M., MacMillan, D., and Rusli, E. TPG-led group closes $450 million investment in Airbnb. The Wall Street Journal (Apr. 18, 2014).

Join the Discussion (0)

Become a Member or Sign In to Post a Comment

The Latest from CACM

Shape the Future of Computing

ACM encourages its members to take a direct hand in shaping the future of the association. There are more ways than ever to get involved.

Get Involved

Communications of the ACM (CACM) is now a fully Open Access publication.

By opening CACM to the world, we hope to increase engagement among the broader computer science community and encourage non-members to discover the rich resources ACM has to offer.

Learn More