O’Reilly sheds light on “WTF Economy” of Uber, AirBnB
Media and conference mogul Tim O’Reilly has been shedding some fascinating light on the future of work and our economy, via a series of essays dubbed The WTF Economy on Medium, in preparation for a November conference billed as Next:Economy (What’s The Future of Work?). That parenthetical clues you into the tamer version of the WTF double-entendre he’s playing with—one very much in keeping with resilient investing’s core principle of keeping a close eye on the full range of plausible futures.
So far, the richest piece in the series is the second, Networks and the Nature of the Firm; this is a powerful rejoinder to the growing roar that’s pushing back on rise of the peer-to-peer economy, citing concerns about worker rights, fluctuating incomes, and other pitfalls of the new online marketplaces. O’Reilly doesn’t quite gloss over these issues, but he puts the the old models into a broader context that was new to me. In particular, he stresses the ways that the new economy is but a variation on the old franchising model, but one that replaces lots of middlemen with nimble technological platforms:
In many ways, Uber and Airbnb represent a 21st century update of the franchising model. In franchising, the parent company brands and markets the product, sets standards for producing it, and charges a licensing fee and receives a percentage of revenue from each of its franchisees.
The difference is that technology radically lowers the barriers to being a franchisee. In many ways, you can call the modern trend “the franchise of one.” The smallest unit of franchising in the past was a small business, with all the overhead that implies: real estate, equipment, uniforms, employees (including managers), and so on. Today, the franchise can be a single individual, and that individual can work only part time, so it’s really “the franchise of one or even less!”
O’Reilly reminds us that taxi service today is far from an old-fashioned company at which drivers have good old fashioned job security. 85% of taxi and limo drivers are independent contractors, renting the cabs from a small local company that is usually one of several similar outfits in a city that, in turn, pay the branded taxi-name companies for dispatch services.
Technology is leading to a fundamental restructuring of the taxi and limousine industry from one of a network of small firms to a network of individuals, replacing many middlemen in the taxi business with software, using the freed up resources to put more drivers on the road. . . .Uber and Lyft provide dispatch and branding services much like existing taxi companies, only more efficiently. And like the existing taxi industry, they essentially subcontract the job of transport — except in this case, they subcontract to individuals rather than to smaller businesses, and take a percentage of the revenue rather than charging a daily rental fee for the use of a branded taxicab.
These firms use technology to eliminate the jobs of what used to be an enormous hierarchy of managers (or a hierarchy of individual firms acting as suppliers), replacing them with a relatively flat network managed by algorithms, network-based reputation systems, and marketplace dynamics. These firms also rely on their network of customers to police the quality of their service. Lyft even uses its network of top-rated drivers to onboard new drivers, outsourcing what once was a crucial function of management.
The Networks and the Nature of the Firm essay fleshes out several important themes about where we came from and where all this is headed; this really is one of those pieces that anyone with an inquiring mind should take the time to read. Among the more provocative thoughts is that management itself is being out-sourced to the technology, in the form of recommendation algorithms and other feedback that helps the best of the mass of offerings rise to the top:
Years ago, Clay Shirky described the move from “filter, then publish” to “publish, then filter” as one of the key advantages brought by the Internet to publishing, but the lesson applies to virtually every Internet marketplace. It is fundamentally an open-ended network in which filtering and curation (otherwise known as “management”) happens largely after the fact.
O’Reilly acknowledges that the (r)evolution being promulgated by these next economy pioneers does, at times, blow past the bounds of old regulatory regimes, noting, ”there’s been plenty of backlash! Just like there was backlash about Google, YouTube, and the web from media companies. It isn’t ‘can do no wrong’; takes a while to work out kinks.” (The casual syntax is your clue that this is from a comment thread, on the intro essay for the WTF series; the comments on both articles are generally very thoughtful, with O’Reilly chiming in as well.) But he definitely sees the benefits far outweighing the costs; here’s one example:
Like Uber and Lyft, Airbnb uses technology to make excess capacity available in locations that were otherwise extremely poorly served. Even in great cities, hotels are available only in some neighborhoods, and completely unavailable in others. By contrast, Airbnbs can be found anywhere that there is demand.
A small personal anecdote: I recently got married in Fort Tryon Park in New York City, near the Cloisters. The nearest hotel is 1.5 miles away, and the closest “nice” hotel 3.8 miles, yet my fiance and I were able to walk to our wedding site from a beautiful, comfortable Airbnb facing the park and just 5 minutes away. Many of our guests stayed locally as well.
Still, the future is not likely to look like today’s decentralized, individual “franchise of one.”
There are some interesting lessons, though, about the evolution of the supply network. While Airbnb began as a network of properties offered solely by individuals, already 40% of Airbnb properties are now offered by hosts who own more than one property. There are also anecdotal reports that small companies owning multiple cars are starting to be part of the Uber network. …
The evolution of Airbnb’s network echoes the evolution of the World Wide Web and the media platform businesses that grew up on it, such as Yahoo, Google, YouTube, and Facebook.
The World Wide Web began as a peer-to-peer network of individuals who were both providing and consuming content. Yet twenty five years on, the World Wide Web is dominated by the media presence of large companies, though there is still plenty of room for individuals, mid-sized companies, and aggregators of smaller companies and individuals. While the platform itself began in decentralized fashion, its growth in complexity led to increasing centralization of power. Everyone started out with an equal chance at visibility, but over time, mechanisms were invented to navigate the complexity. …
This is indeed just a small sampling of the insights shared in the essay; do check it out and keep an eye on that spot for further installments in the series.