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The Sharing Economy is now touching on nearly every aspect of everyday life. Besides the skyrocketing valuations, people also talk things like:

  • Uber, the world’s largest taxi company, owns no vehicles.
  • AirBnB, the world’s largest accommodation provider, owns no real estate.

It is true that AirBnB doesn’t own a single room. But most hotels don’t own real estate either! They lease.

In fact, hotels are creative too. Besides fixed fee, there are other leasing options such as “share of revenue” and “share of net operating income”. In case of share of revenue, the rent is calculated on the amount of sales generated. This is pretty much same as the Sharing Economy model. The model of share of net operating income gives hotels even more buffer. So what does really distinguish the sharing economy from the old business models? Outsourcing!!

Traditional hotels provide full services from reservations, reception, restaurant & bars, room service, business services, leisure services, laundry to billing. Apparently, these need a large number of employees, which is a huge cost. In fact, labor costs represented 32.3% of total U.S. hotel revenue in 2013 (it was as high as 34.8% in 2009). In contrast, AirBnB handles only reservations and billing. With an automated reservation and billing service and outsourcing all other services to individual service providers,  AirBnB reduces the labor cost as much as possible. This is the secret ingredient of Sharing Economy.

Like AirBnB, Uber is mostly for reservations and billing (and some insurance during the service). Drivers are responsible for almost everything else including vehicle, driving, maintenance and car insurance. Uber’s case is a little bit more tricky. Uber takes advantage of legal loopholes without paying the government for the very expensive medallions as traditional taxi companies do.

Overall we see the pattern of the Sharing Economy: be a platform/marketplace, not the service provider. The Sharing Economy platforms connect consumers to the service providers, handle the payments, and outsource all labor intensive tasks.

P.S. In the first wave of outsourcing, U.S. companies outsourced technical jobs and call centers. Unfortunately, people lost jobs while consumers got lower quality services. U.S. was the loser. Finally, U.S. figures out a better form of outsourcing.