Collaborative economy - a disruptive revolution or another freshly dressed emperor?

Updated: Aug 20, 2019


29TH APRIL 2015

People like doing things together. Or at least, they tend to be more successful when they combine, much though we admire rugged individuality in theory.

The internet was created to help us share. Originally it helped universities share research papers between faculties and institutions, then it helped share news, information and entertainment that went beyond academic interest. Well, arguably anyway. Then it reached out to the real world of things, helping us buy them more easily, sell them to each other, even give them away more efficiently if that was our wont.

Now two trends are coming together - one from increasingly constrained resources and the need to make more from less – ‘why buy two when we can share one? The other from digital and the desire to share everything with everyone – ‘nothing has value until it’s posted on Facebook’.

The combination has created a business revolution. ‘We’ can replace ‘Them’. We can solve problems ourselves, raise money ourselves, make, distribute and consume ourselves, enabled by digital-everywhere technology. Is the role for big business over? It’s not as if crowds are going to demonstrate on businesses’ behalf.

Often hype goes ahead of substance. We want to take the temperature and get a better grip of where things really are. So we arranged for some help with three points of view that have direct but complementary experience:

One, James Alexander, who left a big bank, albeit an innovative bit of one – Egg which was owned by Prudential – to create the world’s first peer-to-peer lender, Zopa, now flying highOne,

Mike Fairman, who stayed in a big telecoms business – O2 as part of Telefonica – but still created the world’s first self-service phone company, giffgaff.

And Charles Vallance, who through VCCP the advertising agency he co-founded back in 2002, advises many organisations by understanding human behaviour, and who on this subject sees recurrence and familiarity where others see only the new

So what was the result of our collaboration on the night?

The ‘collaborative’, sometimes called ‘sharing’ economy, is taking off. Uber, with AirBnb one of the granddaddies of the movement, turned over $10bn last year and has been valued at $40bn. UK revenues from the five most significant sectors – peer-to-peer lending, online staffing, car rides, accommodation rental and music/video streaming – will hit £9bn by 2025, says consultancy PwC, up from £500m today. Dog-walking, tools, washing machines and  almost any jobs you can think of besides – online platforms that allow buyers and sellers of such things to transact at almost no cost are sprouting like seeds in a spring heatwave.

Ignoring the hype, however, is this really new or just the old in fashionable digital guise? Have we really, as some suggest, unleashed the power of ‘we’? Is this the end of the road for big business? Is it, in the words of our invitation, a disruptive revolution or just another freshly dressed emperor to dazzle the gullible?

It may take a couple more Foundation forums to settle this one. But participants heard enough at a thought-provoking session on 29 April to be sure that the mega-trends that have enabled the new configurations – broadly, resource constraints, pervasive digital connectivity and network effects – will not go away. And while it is possible to argue that some of the new digital enterprises are more collaborative than others, there are plenty that do represent something new and different.

The mega-trends that have enabled the new configurations – broadly, resource constraints, pervasive digital connectivity and network effects – will not go away.

Exhibit 1: giffgaff, as described at the forum by CEO Mike Fairman, is a five-year-old mobile virtual network operator (MVNO) that uses its customers as the first port of call for customer service. ‘An online only, direct-selling only, mobile phone company that expected its members to help with customer service and grow the business – if it sounds bonkers now, imagine what it sounded like in 2009,’ he says today.

The preceding ‘age of oil’ is now being undermined by compelling new propositions taking advantage of collaborative consumption and shared resources enabled by pervasive low-cost.

Zopa had a record month in April, and UK P2P lending is set to break £1bn in 2015. But the significance of platforms like Zopa goes wider than the financial sector. Alexander sees it is part of a tsunami of creative destruction that is breaking over the economy as a result of the accelerating digital revolution that began with the invention of the transistor and microchip half a century ago. The logic of hierarchy, economies of scale and scope, mass retailing and market power that characterised the preceding ‘age of oil’ is now being undermined by compelling new propositions taking advantage of collaborative consumption and shared resources enabled by pervasive low-cost IT. As with Zopa, these are premised on a fundamental customer need (or a failure of an existing business model to meet it), a sense of community that feeds growth and belonging, leading to a virtuous circle in which the offer becomes more attractive as growth pays off in lower costs and greater profits. Of course, that doesn’t mean that big companies will die out tomorrow – ‘but a real openness and a willing to embrace and take risk with a new common sense, a new business model, is probably required to succeed in the next era’.

Yet even this may not be the full extent of the change now under way, believes Charles Vallance. From his vantage point as the founding ‘V’ in ad agency VCCP, he views the collaborative economy as part of a back-to-the-future moment in which capitalism wakes up to its better self. In his view, it is the 1960s to the 1980s that will come to look like an aberration, with vast companies and cartels running too many industries as much for their own benefit as for that of customers. He argues that technology is enabling a switch from supply-led to demand-led consumption and a more ‘democratic’ form of capitalism in which the effects of both good and bad behaviour are more visible – ‘I think we can hold very big companies such as Tesco and McDonald’s to account much more readily than our government’. Upstarts such as First Direct, Egg, and EasyJet were the outriders of this movement, whose essence was encapsulated in O2’s decision ‘to do something really extraordinary, which was that we weren't going to screw our customers any longer’.

That led to a switch from an ‘acquisition’ to a ‘retention’ business model, and an overnight change in management philosophy. Subsequently the running was taken up by ‘shared-value’ plays such as Vitality, originally Pru Health, which is ‘cleaning up by saying, you’ll pay less if you’re healthier. We’ll give you gym membership, trainers, and personal dieting advice, and if you take it up and use it your premiums will go down. So we’re going to reward you for being healthy rather than insuring you against illness, and it’s phenomenally successful’. Good business is good business again, Vallance concludes – although he would like to see more of it originating in Camden than California.

Good business is good business again, Vallance concludes – although he would like to see more of it originating in Camden than California.

This leads to an important qualifier. Even in California, where the ideas and technology originated, some aspects of the new economy are controversial. While as customers we recognise a bargain when we see it, in many cases community, researchers suggest, is far less important to success than cheap access. Meanwhile to workers (and jobs are arguably the most important issue of our time) the gains are much less clear. For some, the valuations of firms such as Uber and AirBnb has been built on their ability to chew up full-time employment and spit it out as micro-jobs, making them more the manifestation of a winner-takesall than a sharing economy. Giffgaff pays for the personal information it gathers – that’s the deal – but not so the big established internet firms, and also many of the newer wave, which in this respect seem to have as much in common with the old supply-led, advertising-push than the brave new demand-led economy. Shareholder value still rules. It may be, as Alexander, Fairman and Vallance variously suggest, that over time good business will outlast bad, shared value will trump shareholder value and virtuous circles will outperform vicious ones – let’s hope. On the other hand, anyone contemplating the ruins of the UK election predictions will probably not want to bet on this particular first-past-the-post outcome just yet. Watch this space.

The Foundation's view

Three ideas really stood out for us:

Collaborative businesses are succeeding because they bring at least three useful characteristics together in a way that reinforce each other. Any new and better business model tends to do this, creating a virtuous circle that is different enough to the incumbents’ for it to be impossible to copy with a simple adjustment.

First: they locate a fundamental customer need - or a failure in the existing business model – and identify  vulnerabilities or advantages with underutilised assets (e.g. rooms in homes, people’s savings, cars in a city).

Second: they build a human community, enabled digitally, where mutual benefit is realised and a sense of belonging created (e.g. the willingness to help each other with giffgaff, the sense of commitment to repaying another individual that comes with Zopa).

Third: they create and grow a real operating advantage - that delivers more value - a better offer - to the customer e.g. Uber, a good fare now for the driver; a fairly priced ride home for the customer; e.g. Zopa’s structural and operating advantage delivering a cost advantage to lender and borrower; or giffgaff’s low cost of service).

Fourth: scaling up works more easily as a platform than a producer – increasing scale improves the offer to customers on both sides of the collaboration because of the way networks improve their effectiveness. For example the more users on giffgaff, the faster and more accurate the service response, the better the advocacy, the more people join. Or for Zopa, the more lenders participate the better the rate, the faster they get their loan, the better the market for savers, and the more lenders and savers are attracted. Or for Uber, the more drivers are attracted, the faster and cheaper I get a ride. But not only does the offer get better with scale, also, in a producer business the organisation has to invest ahead of demand taking a risk that they can sell their capacity and match demand. Collaborative businesses create a platform which needs a much lower order of magnitude of investment to deal with scale, most obviously seen with AirBnB versus the wholly-owned rooms of Starwood or IHG.

Collaborative businesses are the tip of an arrow, demonstrating a shift in emphasis from shareholder value to shared value in unusually tangible terms. The growing resentment in the inequality of benefit resulting from business in the last few decades doesn’t lead to revolution in the streets, for the most part anyway. But customers still have the ability to vote by moving their custom to organisations that have a better balance, and we see this increasingly across sectors. As one of our guests put it, this may just be a remedy for ‘overshaft’, the point at which you become too fed up with being done to and seek redress in an enlightened business model

Disruptive collaborative businesses are often highly inconvenient for large incumbents as they challenge long-held beliefs and assumptions about what customers really value and how their business model works. But rather than just continuing to compete against them, some businesses are experimenting with the new models too, for example O2 creating giffgaff, Avis acquiring Zipcar; Metro Bank lending through Zopa and Marriott opening up its unused communal space by the hour with Liquid Space.

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