There have been quite a few pieces on the relationship between value creation and ownership in the ‘new economy’ recently. Authors are rightly asking questions about how companies that are fundamentally reliant on the contributions of their users to generate profit should be structured, owned and governed.
These organisations tend to be technological platforms that connect users to each other and to assets and services. Middlemen, basically.
Middlemen have always had a bit of a bad rep but in many cases they provide a useful and often costly service – they store inventory or match users according to some hard won knowledge.
But these new intermediaries don’t have quite the same model and certainly they don't have the same cost structure. Their match-making is predicated on technology: they don't own a thing. For Airbnb and Uber, their principal costs are technological infrastructure and marketing. Consequently, these are incredibly profitable businesses that have scaled quickly and established strong brands as well as the networks required to make them valuable to their users.
Great, right? Except that there is a growing chorus of commentators who maintain that these middlemen are benefiting disproportionately. While users of these services are responsible for generating value, they are getting squeezed: Taxi drivers paying 20% to use the service, users of social networks exchanging their personal information (the information that underpins the business models of these networks) to use the network for ‘free’.
And when applied to real services (giving taxi rides, renting rooms) these models undermine traditional employment security.
So writers muse on Uber becoming Youber, AirBNB becoming ShareBNB and social networks of every stripe becoming co-operatives.
But if this dream of cutting the middleman down to size is so compelling, why isn’t it happening?
This comes down three things: ownership incentives and motivations, network dynamics and a lack of organizing power amongst users.
Most businesses are founded to make money. In many cases, following on from Friedman, firms have seen this as their sole social responsibility. Thankfully, there have alway been exceptions to this rule and business founded to deliver social and environmental impact in a financially sustainable way are today, growing in number.
But in order to scale a business you need money, typically more money than you have at the beginning of the journey. So you turn to an investor and that investor is looking for a return. In the traditional venture capital world, the more of that return that is ceded to someone else (labour, say), the worse off you and your investors are. Investors are less inclined to reward other participants creating value, especially when they can get away with it. And when users, despite being creators of that value, have no ownership stake, incentives are misaligned.
Even in the social investment space, we have a raft of funds importing the VC model wholesale from traditional finance and applying it to businesses that are social, placing the same expectations on entrepreneurs and aiming up to scale impact via the firm, making a mockery of any visionary talk of delivering systemic change: this is a systemic problem.
Whenever you’re talking about a middleman, intermediary or platform, you’re talking about a network. Networks work best, all things being equal, when they are highly populated. A social networking site with a couple of other people on it isn’t particularly interesting and neither is a taxi app that doesn’t have any taxis in your area.
This means that those networks that establish themselves, like large planets, tend to exert a gravitational pull on the masses strengthening the position of the incumbent and making it more difficult for upstarts to challenge their predominance.
There is currently a fight in the taxi world to establish dominance which has resulted in a squeeze on drivers. This has resulted in a drop in fare tariffs and an increase in the percentage paid to Uber for new drivers (up now to 25% for UberX). Once dominance is established, however, it doesn’t mean it will get better. But for the grace of consumer protection and anti-trust legislation, dominant firms tend to try to keep as much for themselves as possible: fares may well go up, but the chances of driver wages going up proportionately is limited.
A lack of organization
Ask any Uber driver what they think of Uber now and you’re bound to get some grumbling. Ask them about the prospects of a rival cooperative and, in my experience, you’re likely to hear a lot about how difficult it would be and how they wouldn’t even know where to start.
This seems to cut to the heart of the third dynamic that is making things difficult for those who would love to see the balance of these system redressed: it is still difficult to find good examples of effective organization in this space. To date, resistance to these models has been more likely to come from without rather than within: regulators are called upon to arbitrate between interests, think tanks attempt to raise awareness of the situation and workers who are under threat – Black cab drivers for example, have taken the sometimes self-undermining steps of protesting (and thereby raising awareness of a platform that despite certain inequities, has obvious, immediate and tangible benefits to users).
The same old ride?
So how to find balance? How to change these systems? There are already some promising signs and developments, examples and tools to help shift course. The first, and perhaps most obvious point, is that technology is cheap. Building these platforms isn’t rocket science (any more) and there are some solutions (Nation Builder) that are available off the shelf. The technological barrier to entry in these markets is low.
Secondly, the desire for companies to behave more responsibly in how they share value is real. When pollsters look at intention in purchasing, ethics and equity are climbing the list. It is easy to overstate this case however, as tried and tested drivers such as price and quality still play the key role. So any competitive product needs to win on these as well as deliver on the good stuff.
Different groups within the system are also starting to recognize their own power and make some adjustments. The Uber Drivers Network was formed in New York City in May 2014 and has helped lead protests and strikes.Other models are emerging as well, lead by entrepreneurs seeking to redress the balance: Gett, another taxi platform has focused on paying drivers more. Even Venture Capitalists are starting to meditate on how communities can be rewarded more effectively. Check this out from Fred Wilson at Union Square Ventures: “With more and more web and mobile applications deriving their value mostly or completely from their user base (Facebook, Twitter, eBay, Etsy, Reddit, Kickstarter, Uber, etc.) there is a growing sense that the community could or should have some real ownership in these businesses.”
The other great development on the finance side of things is crowd-funding and the ability to create distributed ownership structures from the outset under terms that work for the firms and the users. Companies that can raise capital directly and bypass more traditional financiers have the ability to create different time horizons and make different decisions when it comes to wealth creation and the distribution of profits. Even if they do turn to financiers later to help secure a big injection to grow, they would do so in a much different position, backed by users who have bought into a vision for that company. This means that the community dynamic that underpins the firm is much harder to dislodge without angering initial backers.
A 'new' new economy
So think about a new ride-sharing programme, started by an entrepreneur, not just concerned with helping drivers out but bringing drivers into the fold in a more meaningful way. An entrepreneur that recognizes that the technological platform is only a small component of the value actually created. Funds could be raised from the crowd (as well as from drivers themselves) to help with develop the platform. Early riders could even contribute by allocating their tip towards further platform improvement in return for some promise of ownership, a future discount, or a simply a sense of making a contribution. Because the platform is community owned there is better alignment between the platform and the community and so the latter doesn’t need to suck out outrageous profits and put them in the hands of a few shareholders.
These alternatives need work. The solutions aren’t as clearcut as they might seem. But the tools are within reach and the desire to see these new strategies realised is growing. Entrepreneurs take risks. These are risks worth taking.