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How the Sharing Economy Works

A Lyft car, with its trademark pink "mustache," drives along Powell Street in San Francisco, in June 2014. Lyft is a service where people use their own cars to transport strangers for pay.
A Lyft car, with its trademark pink "mustache," drives along Powell Street in San Francisco, in June 2014. Lyft is a service where people use their own cars to transport strangers for pay.
Justin Sullivan/Getty Images

From the first day of preschool, we're taught that sharing is a virtue. If little Billy wants the toy you're playing with, you (grudgingly) let him borrow it. On the playground, we're scolded by parents and teachers to "Take turns!" Sharing, we learn, is the glue that holds society together. It breeds trust, generosity and compassion among neighbors, cities and citizens. And now, in a brilliant Internet-inspired twist, sharing has launched an economic revolution.

The sharing economy is built on the idea of collaborative consumption. In the traditional capitalist economic model, goods are owned by individuals. If you want to be able to drive to the store or the airport, you need to buy a car. If you want to keep your lawn in control, you need to buy a weed whacker. That's called personal consumption.

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Collaborative consumption, on the other hand, is when only a few individuals own the goods, but other people can pay for the privilege to "borrow" them. Basically, it's a monetized form of sharing. If you own a car, that has value — both to you and the guy who wants to borrow it to drive to Buffalo this weekend. If your car sits idle, you are squandering its value. Why not earn some extra cash by "sharing" it?

Starting in 2009 with the launch of the apartment-sharing Web site Airbnb, there has been an explosion of online companies enabling complete strangers to pay each other for the short-term use of goods or services: homes, cars, boats, dog sitters, office space, tools, grocery shoppers, tour guides and more. The sharing economy is attracting billions of dollars of venture capital, and old economy stalwarts — hotels, car rental companies and taxi drivers to name a few — are starting to sweat.

The rise of the sharing economy raises some important questions, though:

  • Is a Facebook profile enough to trust someone with the keys to your apartment for the weekend?
  • What is the line between personal and professional — if you drive people around for money in your car, aren't you a taxi driver [source: Sundararajan]? And don't you need a special license for that?
  • What is the right balance between regulations that ensure public safety and the freedom to use your personal property as you want?
  • Is the sharing economy really about virtuous collaboration, or is it just another Silicon Valley Internet bubble waiting to pop?

Let's start by tracing the evolution of the sharing economy, from preschool crayon-swapping to Airbnb.

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].

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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.

This stately home in England is available for rent through Airbnb.
This stately home in England is available for rent through Airbnb.
Airbnb

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:

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Transportation

  • Uber began as a "black car" service for licensed, independent chauffeurs, but now anyone turn their own car into a taxi with UberX.
  • Lyft, which bills itself as "your friend with a car," is identical to UberX plus a cutesy pink mustache.
  • RelayRides is like Zipcar with your own car. Car owners post daily and weekly rates for renting out their own vehicles.
  • Boatbound lets you rent boats from locals, with or without a captain.
  • MonkeyParking lets you get paid for giving up your parking space; currently only available in San Francisco and Rome.

Home and Vacation Rentals

  • Airbnb is the largest home-sharing site, connecting property-owners in 190 countries — including a surprising number of treehouses and castles — with short-term vacation renters.
  • HomeAway and VRBO are more traditional vacation rental sites, also with hundreds of thousands of listings.
  • Vayable connects you with local tour guides who will give you an insider's view of their hometown.

Tools and Household Items

  • Zilok makes it easy to rent seldom-used tools (think drills and ladders) from local owners and also outdoor equipment like kayaks and tents.
  • Streetbank in the U.K. (and a few other countries) specializes in the free sharing of goods and services

Pet Sitting

  • DogVacay connects vacationing dog owners with local sitters who host the furry friends in their own homes
  • Rover lets you search for local dog sitters (in your home or theirs) and includes daily texts and photo updates

Food

  • Feastly is your connection to the underground supper club scene. Home cooks and moonlighting chefs host meals for strangers in their homes and apartments
  • Instacart is a grocery delivery company — not a true sharing site — with a twist. Instead of investing millions in warehouses like defunct Webvan, the company hires smartphone-toting 20-somethings who physically go to the store, buy your groceries and deliver them to your house

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

Black taxi drivers protesting against taxi service app Uber brought central London to a standstill in June 2014.  Ironically, the strike caused an eight-fold increase in the number of people using Uber that day.
Black taxi drivers protesting against taxi service app Uber brought central London to a standstill in June 2014. Ironically, the strike caused an eight-fold increase in the number of people using Uber that day.
© Mike Kemp/In Pictures/Corbis

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].

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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.

Author's Note: How the Sharing Economy Works

One of the most fascinating things about the sharing economy is the issue of trust. Promoters of the sharing economy argue that the face-to-face interactions of a service like Airbnb (owners meet renters to hand off the keys) or Uber (riders are encouraged to sit in the passenger seat, not the back) promote a greater sense of trust in the transaction. And I tend to agree. I'm much more likely to trust an individual over a corporation, even when that corporation is heavily regulated by the government. But is that trust misplaced? Airbnb is quick to note that of the millions of stays it has sponsored, only a handful have resulted in burglary or serious damage. Still, the company carries a $1 million insurance policy on all properties. I believe — and hope — that the sharing economy is here to stay. It puts a premium on entrepreneurship and innovation that our economy sorely needs. But I, for one, am going to stick with the sellers with five stars.

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Sources

  • Botsman, Rachel. "The Case for Collaborative Consumption." TEDxSydney. May 2010. (June 13, 2014) http://www.ted.com/talks/rachel_botsman_the_case_for_collaborative_consumption
  • Chapman, Steve. "Ride-sharing vs. the taxi industry." Chicago Tribune. Feb. 20, 2014. (June 13, 2014) http://articles.chicagotribune.com/2014-02-20/news/ct-uber-taxis-cabs-chapman-oped-0220-20140220_1_taxi-companies-ride-sharing-taxi-industry
  • De la Merced, Michael J. "Uber Attains Eye-Popping New Levels of Funding." The New York Times. June 6, 2014. (June 13, 2014) http://dealbook.nytimes.com/2014/06/06/uber-raises-new-funds-at-17-billion-valuation
  • The Economist. "The Rise of the Sharing Economy." May 9, 2013. (June 13, 2014) http://www.economist.com/news/leaders/21573104-internet-everything-hire-rise-sharing-economy
  • Eha, Brian Patrick. "Zipcar Timeline: From Business Idea to IPO to $500 Million Buyout." Entrepreneur. Jan. 2, 2013. (June 13, 2014) http://www.entrepreneur.com/blog/225399
  • Imam, Jareen. "Young listeners opting to stream, not own music." CNN. June 16, 2012. (June 13, 2014) http://www.cnn.com/2012/06/15/tech/web/music-streaming/
  • Johnson, Carolyn. "Online Marketplaces May Encourage Bias." Boston Globe. Jan. 20, 2014. (June 13, 2014) http://www.bostonglobe.com/metro/2014/01/20/study-airbnb-com-rental-site-suggests-online-marketplaces-may-encourage-discrimination/fMelyoLMVr1tthDVx8DUAK/story.html
  • Le Tellier, Alexandra. "The sharing economy isn't 'collaborative consumption,' it's 'disaster capitalism.'" Los Angeles Times. June 5, 2014. (June 13, 2014) http://www.latimes.com/opinion/opinion-la/la-ol-sharing-economy-collaborative-consumption-disaster-capitalism-20140604-story.html
  • Lyster, Lauren. "Airbnb co-founder on deterring prostitutes and why they won't IPO this year." Yahoo! Finance. April 30, 2014. (June 13, 2014) https://finance.yahoo.com/blogs/daily-ticker/airbnb-cto---co-founder-on-deterring-prostitutes-and-why-they-aren-t-considering-an-ipo-this-year-120001765.html
  • The New York Times. "The Dark Side of the Sharing Economy." April 30, 2014. (June 13, 2014) http://www.nytimes.com/2014/05/01/opinion/the-dark-side-of-the-sharing-economy.html
  • Rogowsky, Mike. "Uber's Breathtaking Valuation: Google Takes a Quarter-Billion-Dollar Cab Ride." Forbes. Aug. 23, 2013. (June 13, 2014) http://www.forbes.com/sites/markrogowsky/2013/08/23/ubers-breathtaking-valuation-is-it-really-different-this-time/
  • Said, Carolyn. "Arbnb to collect hotel taxes on San Francisco rentals." The San Francisco Chronicle. April 1, 2014. (June 13, 2014) http://www.sfgate.com/news/article/Airbnb-to-collect-hotel-taxes-for-San-Francisco-5365352.php
  • Sundararajan, Arun. "Time to Adapt to a New Economy." The New York Times. May 6, 2014. (June 13, 2014) http://www.nytimes.com/roomfordebate/2014/05/06/regulating-the-sharing-economy/services-like-airbnb-mean-we-need-to-adapt-to-a-new-economy
  • Tanz, Jason. "How Airbnb and Lyft Finally Got Americans to Trust Each Other." Wired. April 23, 2014. (June 13, 2014) http://www.wired.com/2014/04/trust-in-the-share-economy/
  • Tuttle, Brad. "7 Cities Where the Sharing Economy is Freshly Under Attack." Time. June 9, 2014. (June 13, 2014) http://time.com/money/2800742/uber-lyft-airbnb-sharing-economy-city-regulation/
  • World Wide Web Foundation. "History of the Web" (June 13, 2014) http://webfoundation.org/about/vision/history-of-the-web/

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