How the Sharing Economy Works

The sharing economy didn't appear out of thin air. Its technological and sociological foundations have been laid over the past 25 years:

1989: Tim Berners-Lee invents the World Wide Web, creating the language and architecture for sharing information over the Internet [source: World Wide Web Foundation].

1995: eBay introduces a user-generated feedback system of buyer and seller ratings to deter fraud. Every positive rating earns a buyer or seller a colored star. Even though eBay users go by anonymous names like CarJunkie3895, they earn trust through their ratings.

1999:Napster popularizes peer-to-peer file-sharing, technology that lets you share personal assets (MP3 files of music, in this case) with a connected "community" of anonymous Web users.

2000: Zipcar becomes America's first car-sharing company [source: Eha]. The idea catches on with city-dwellers who don't want the hassle and expense of owning a car, but want a quick and easy way to rent one by the hour.

2004: Facebook builds on the successful model of MySpace, enabling users to create personal profiles, make "friends" with other users, post text, photos and videos, and comment on each other's posts. Mark Zuckerberg's brainchild dominates what's called the "social Web," online communities that mirror our real-world social interactions.

2007: Apple's iPhone represents a significant leap in smartphone technology, putting unprecedented power and connectivity in the palm of your hand.

2007: Netflix brings streaming video to the mainstream, popularizing the idea of "borrowing" vs. downloading digital entertainment. Younger Americans are less likely to buy movies or music [source: Imam]. With always-connected mobile devices, they can stream songs from Spotify or Pandora for free, or watch TV and movies online wherever, whenever.

The sharing economy represents one more step in this evolution of innovation. On sharing economy websites, trust is established using Facebook profiles and user-generated rating systems like the one popularized by eBay. That trust is reinforced by face-to-face meetings. Airbnb hosts, for example, are required to physically hand over their keys to renters. On the renter's side, you're more likely to return an apartment or car in good condition if you've looked the owner in the eye and shaken her hand [source: Tanz].

Of course, trust in your fellow man can only take you so far. These sharing companies add an extra layer of protection in these peer-to-peer exchanges by collecting and paying out the money for the service and providing a formal system for complaints.

To get a better idea of the scope of the sharing economy, let's look at some of the major players in this emerging online marketplace.

For all of its homespun talk of neighborly generosity, there is big money at play in the sharing economy. In June 2014, the ride-sharing service Uber was valued at $17 billion, higher than both Hertz and Avis [source: De la Merced]. Airbnb, the apartment-sharing site, is valued at more than $10 billion — more than Hyatt or Wyndham Worldwide — and is the constant subject of IPO speculation [source: Lyster]. Market watchers are split over the true value of sharing economy companies, but they have caught the attention of big-name investors like Google Ventures [source: Rogowsky].

Here's a list of some of the major players in the sharing economy organized by sector:

Transportation

Home and Vacation Rentals

Tools and Household Items

Pet Sitting

Food

Next we'll dive into the controversies over the sharing economy and try to predict the future of this hot phenomenon.

The future of the sharing economy largely depends on upstart websites striking deals with federal, state and local regulators. Airbnb and Uber, the two biggest names in the sharing economy, have come under fire for flouting laws that regulate the hotel and taxi industries. Leading the charge are the hotels and taxi drivers themselves, who complain that "sharers" don't have to buy special licenses, undergo inspections and pay taxes that the professionals do, even as they provide the very same services.

In New York City, the state attorney general found that 30 percent of Airbnb property owners in New York City offered multiple listings, a sign that landlords were turning entire buildings into "illegal hotels" [source: The New York Times]. In cities like San Francisco and Portland, Airbnb has agreed to levy a hotel tax on every rental, but some are still blaming Airbnb property owners for shrinking the long-term rental market and driving up prices [source: Said].

Ride-sharing companies Uber and Lyft are in equally hot water with state regulators over what they see as companies profiting from fleets of unlicensed, uninsured taxi drivers. Municipalities from Brussels to Buffalo, New York, have banned ride-sharing services on their streets [source: Tuttle]. Ride-sharing supporters argue that America's cities are in the grip of outdated taxi "cartels" that profit greatly from limited competition [source: Chapman].

Something else that may impact the future of the sharing economy is the future of the regular economy. Some critics of the sharing economy argue that we're only interested in sharing because we don't have the money to buy anything. And when jobs are scarce, we're willing to drive around picking up strangers for money [source: Le Tellier]. If the economy picks up, people might opt for ownership again.

The strongholds of the sharing economy are cities with a high volume of young, tech-savvy, well-educated people. San Francisco is ground zero. It requires a certain critical mass of users for these sharing services to function, and it remains to be seen whether smaller cities or rural areas are even interested. In some places, after all, you can still borrow a weed whacker for free from a non-virtual neighbor.

For lots more information on Airbnb, car-sharing and more industry shattering ideas, check out the related HowStuffWorks links on the next page.