Airbnb, Uber and problems with the digital-sharing economy

Airbnb, Uber and problems with the digital-sharing economy

HomeAway's lawsuit against Airbnb and the Uber subprime auto loan controversy highlight an uncomfortable fact of the emerging digital-sharing economy: They're still just businesses.

If I have an apartment in San Francisco, and I'm going to be away for a week, and you want to stay in my apartment, I should be able to charge you for the privilege. You get a furnished room for less than the cost of a hotel, and I get to put my apartment to work making money back when it would otherwise be empty.

That's the business model behind Airbnb -- held up as the vanguard of the new digital-sharing economy, alongside car service Uber -- that brokers deals between travelers and renters. Seems pretty simple and straightforward, right?

In theory, sure. But in practice, the concept of of "sharing" has hit a seemingly never-ending hit parade of public scandals, private lawsuits and legal battles in cities across the U.S. This week, the battle came home to San Francisco in two major ways: A lawsuit filed by HomeAway against rival Airbnb claiming that the city unfairly favors the latter with specifically-tailored laws, and reports that Uber pressured its drivers into taking seriously unfavorable loans in order to buy nice new vehicles.

These two cases tell you everything you have to know about why the sharing economy  isn't as nice as you might think.

About Airbnb

Let's look first at Airbnb: Founded in 2008, it has seen massive success as a way for people to make money from their homes and properties while they're not living there by connecting them directly with short-term tenants. And despite a few minor scandals (including a renter who destroyed his Airbnb host's home, prompting Airbnb to take out an insurance policy for its customers), the company has seen massive success. In fact, during last summer's World Cup, Airbnb was the single biggest hospitality provider in Brazil.

Setting aside the bad behavior of individuals, this seemingly simple concept carries with it a load of uncomfortable, difficult-to-answer questions. Is an Airbnb a hotel or a short-term apartment? Is it even legal for a tenant to rent out their space in the short term?

In New York, using Airbnb is illegal in many circumstances, thanks to provisions mandating what constitutes a hotel. But more than that, New York just hates Airbnb -- if it's not pressure from the powerful hotel lobby (har har) to heavily regulate and tax Airbnb usage, it's pushback from the apartment-dwellers who don't want their Airbnb-hosting neighbors to give keys to the front door to complete strangers.

In San Francisco, the local government has been a lot more, well, accommodating. Thanks to the "Airbnb law" passed city recently, short-term rentals are fine as long as you're a permanent San Francisco resident, pay applicable hotel taxes, and don't rent your place out more than 90 days of the year.

Critics say the law only serves to jack up housing prices in the already-too-crowded San Francisco Bay Area, but hey, people have to afford their juiced-up Silicon Valley rents somehow.

The net result of municipal government beneficence: a lot of red tape cut and grey areas cleared up. That hans't stopped HomeAway from claiming that the part of the Airbnb law that restricts rentals to permanent San Francisco residents is anticompetitive; HomeAway's model specializes in renting properties like vacation homes, and since it doesn't participate directly in the financial transaction (serving more like a personal ad than Airbnb's marketplace), it has a hard time paying hotel taxes. Both Airbnb and attorneys for the city of San Francisco seem to think that argument is without merit.

Uber takes on Lyft

Meanwhile, let's look at the controversy around the sharing economy's other golden child, Uber. When it first launched in San Francisco in 2010, Uber's big differentiator was that it let you skip the hassle of finding a cab by calling a black car directly to you, via a GPS-powered mobile app, with payment automatically charged to your credit card at ride's end -- gratuity included. It wasn't very "sharing" at the start.

These days, "Uber" is used interchangeably with "taxi" among the Silicon Valley in-crowd. People complain mightily about surge pricing -- where Uber jacks up prices during periods of high demand by as much as 400% to make sure cars are always available for those who really need it -- but not enough to stop shelling out for it. For out-of-towners who have never taken one before, it's so simple as to sometimes be mistaken for magic. For those who live in an Uber market, it can be addictive, if only because it's always such a nice alternative to a crowded bus after an exhausting night out.

That message turned out to be powerful enough to spark a revolution in livery, and Uber saw massive growth that led it to expand to major urban markets across the United States and abroad -- though New York City, true to form, has seen a much slower adoption compared to the rest of the country thanks to its strict taxi licensing rules and pressure from the yellow cab lobby.

But all that growth has to come from somewhere.

Uber's history is actually best defined by its competition with Lyft, which markets itself as the kinder, gentler alternative cab service. Both let you hail a car to your exact location with your phone. But where Uber's pilot service offering was a black car, driven by a man in a suit, Lyft hired anybody with a car and a desire to make a little extra spending money, sending them a pink plush mustache to affix to their car's front grill so prospective riders couldn't miss it. Prices were lower, and riders without a yen for living the mafioso, tinted-window lifestyle loved it.

Uber didn't quite go as far as giving drivers stuffed facial hair, but in 2012, it launched the UberX program, a lower-cost service for those who similarly wanted to turn their own cars into cabs. From there, the competition between Uber and Lyft has gotten incredibly intense: When Lyft cuts prices, Uber cuts them further. Both companies can afford to take losses thanks to heavy venture capital investment (Uber has taken in $1.2 billion thus far; Underdog Lyft has raised $332.5 million); it's just about getting people to take rides with its drivers.

In short, Uber is willing to do anything to keep growing, and isn't afraid to dip into its deep pockets to do so. Which is why it has been at the center of a few ethics scandals in recent months: From brand ambassadors taking Lyft rides just to recruit drivers, to phoning in phony ride requests to Lyft to jam their dispatch, to claiming that its drivers make six figures while actively cutting their commissions, Uber seems to have very few scruples when it comes to wrecking the competition and building its fleet.

Which is why it's sad, but not unsurprising, to read the Valleywag report that Uber is pressuring its UberX drivers into buying fabulously lavish vehicles that they can't really afford with subprime loans offered by its partners. See, Uber doesn't really  care if drivers are stuck with shady loans that would essentially force them into "indentured servitude" to the company, as long as Uber has drivers with nice vehicles working for them and not the competition. Drivers sign up because Uber promises them the world, and when they don't make as much money as they say -- well, someone has to pay for this nice new car.

Sharing doesn't scale

There are other sharing economy startups that let you share anything from boats to scooters to office space. And while on the surface, that economy seems to be a great way to give friends and neighbors a little extra cash for the things they aren't using, remember that these businesses are still businesses, and that money doesn't always go where you'd hope or expect it to.

Silicon Valley's classic problem is about scale: How do you take a good idea, and make it really, really big? For a pure technology company, that's easier than it used to be. Just throw a cloud at it until you have enough computing capacity to figure out the next move.

That doesn't work so well once people enter the equation. People have livelihoods and interests and opinions. Paying a friend $10 for a ride has virtually no global impact. But when 10,000 people pay 10,000 friends for rides, that's a pretty big ripple. Everyone has to remember that value doesn't just appear from thin air. Everything has its cost somewhere down the line, whether its in inadvertently shoring up housing prices, causing a security risk in an apartment building, or making a driver work extra hours because you went for a car with the lowest rate.

It just isn't as simple as sharing and playing nice.

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Tags popular scienceemerging technologyUberAirbnb

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