A featured blog post written by Irving Wladawsky-Berger. Originally posted here.
A few weeks ago I wrote about my recent participation in the 2013 Roundtable on Institutional Innovation, an Aspen Institute event that took a close look at the impact of digital technologies on the evolution of companies and other organizations. At the Roundtable, I heard a number of interesting presentations. One of the most intriguing was The Collaborative Economy, by Jeremiah Owyang, a partner and analyst at Altimeter Group, whose research focuses on the changing relationships between companies and their customers.
Since the advent of the steam engine in the late 18th century, technology advances have been radically improving the productivity of business, enabling companies to significantly lower their prices while providing higher quality products and services. Throughout the Industrial Revolution of the past two centuries, a stream of disruptive technologies, – steam engines, railroads, electricity, cars, airplanes, phones, radio, TV and so on, – have transformed the economy and just about every single industry, as well as re-shaping the institutions of society.
Is our present digital revolution qualitatively different from those of the past two centuries, which were primarily driven by machines and other industrial age physical technologies? Could it be that our continuing advances in digital technologies are now leading us to a new kind of information society and knowledge-based economy, which could, over time, be as transformative as the 18th century transition from pre-industrial agrarian societies to technology-based industrial societies?
The industrial economy has been primarily based on production, with GDP as the key measure of economic activity. The collaborative economy feels very different. There is a lot I find appealing about it, in particular, its potential impact on the really critical issue of jobs in the digital economy. Given that large public and private sector institutions are not expected to create enough new jobs, the collaborative economy might be one of the most important ways for individuals to come up with all kinds of innovative ways of making a living.
In his excellent research report on the subject, Owyang explains what the collaborative economy is all about. He views it as the next major phase of the Internet-based economy of the past two decades. In the first phase, the Web made lots of information accessible to individuals, but control remained primarily in the hands of institutions. This one-to-many Web 1.0 then gave way to the many-to-many social media phase. Web 2.0 now enabled individuals to easily communicate and share content and opinions with each other. Now, the collaborative economy is enabling individuals to go beyond sharing information.“An entire economy is emerging around the exchange of goods and services between individuals instead of from business to consumer,” writes Owyang. “This is redefining market relationships between traditional sellers and buyers, expanding models of transaction and consumption, and impacting business models and ecosystems. We refer to this trend as the Collaborative Economy, defined as . . .an economic model where ownership and access are shared between corporations, startups, and people. This results in market efficiencies that bear new products, services, and business growth.”
This trend is also referred to as the sharing economy, the name NY Times columnist Tom Friedman used in a recent OpEd, Welcome to the ‘Sharing Economy’. The OpEd featured Airbnb, an online community marketplace where individuals list, find, and book accommodations around the world. Airbnb was founded in 2008 and already lists accommodations in 34,000 cities and 192 countries, including 23,000 in New York City and 24,000 in Paris. “The sharing economy – watch this space. This is powerful,” is Friedman’s overall conclusion.
According to Owyang, the collaborative economy is being driven by a number of converging market forces. Some are societal in nature, like the increasing population densities that make it easier for sharing to occur with less friction, as well as the growing awareness of sustainability and the need to make more efficient use of existing resources in order to temper our rising consumption. Other drivers are economic in nature, as individuals discover that they can monetize previously idle resources by making them available for a price to others. This is particularly important given the relatively high number of people that are unemployed or underemployed around the world.
Finally, the collaborative economy is truly a creature of our digital economy. It would not be possible without the social networks that enable peer-to-peer transactions matching supply with demand; the mobile devices and platforms that enable individuals to conduct such transactions any time and place; and the digital payment systems that reliably and securely broker the transactions between buyers and sellers. Online reputation systems, where people rank buyers and sellers, are critical to the smooth functioning of collaborative markets.
Investors have started to pay attention to these new business models. The report analyzed over 200 startups in this space. Over 1/3 of the startups have received a total of over $2 billion in VC funding. Besides offering accommodations for rent like Airbnb, startups have sprung up providing transportation and car-sharing, labor for hire, office space and equipment, and a variety of used products like textbooks, toys and clothes. As always, some of these startups will make it but many will not.
Existing companies risk becoming disintermediated by their customers now transacting directly with each other. How can companies reduce the threats to their business models? Could they perhaps leverage these new models for competitive advantage by participating in these emerging collaborative ecosystems?
Owyang strongly recommends that they should. He offers a pragmatic framework, the Collaborative Economy Value Chain, to help companies figure out how to best embrace these new business models. The framework comprises three stages, each requiring a greater degree of maturity and investment: Company-as-a-Service;Motivate a Marketplace; and Provide a Platform. Let me say a few words about each.
In his October, 2010 book, Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Uncertain World, MIT Professor Michael Cusumano says that companies should servitize products andproductize services as one of their top business strategies. He writes:
“Managers (at least in product firms or service firms that offer standardized or automated services treated as products) should use service innovations to sell, enhance, and even de-commoditize products or standardized services. Services can also be new sources of revenues and profits, such as an ongoing maintenance or subscription stream. The goals of most firms should be to find the right balance between product and service revenue, and then to servitize products to create new value-added opportunities and pricing models as well as productize services to deliver them more efficiently and flexibly, such as by using information technology and service automation.”
That’s what Company-as-a-Service is all about. We see this all around us, from Netflix offering films as media-streaming subscriptions rather than mailing CDs, to Salesforce providing a variety of business applications-as-a-service. Company-as-a-service is a major reason for the strategic importance of cloud computing, which for a number of years I’ve thought of as being essentially the Internet of Services.
Motivating a Marketplace is the next stage in the Collaborative Economy framework. It means going beyond selling their own offerings as-a-service over the Internet and enabling the creation of a community around their brand, helping other companies and individuals provide their own related products and services. This is a major cultural, as well as business step. Companies must now become effective ecosystem leaders, extending their management capabilities beyond the boundaries of the firm to now encompass their value-add partners, and offering them information, services and other assistance to help them succeed.
Despite its young age, Airbnb is a company that is building such a marketplace. “Airbnb has also spawned its own ecosystem -,” writes Friedman in Welcome to the ‘Sharing Economy, “ordinary people who will now come clean your home, coordinate key exchanges, cook dinner for you and your guests, photograph rooms for rent, and through the ride-sharing business Lyft, turn their cars into taxis to drive you around.”
Providing a Platform, the third stage, means enabling ecosystem partners to actually build their products and services on common platforms, tools and interfaces, whether these are provided by the ecosystem leader or by a consortium of partners. It requires not only having a common platform, but also making available the required technical specs and support so the partners can effectively use it for their offerings.
Major vendors like Microsoft, Oracle and IBM have long supported a large community of application and software developers on their platforms. Amazon, eBay and Walmart have built major e-commerce platforms, where in addition to selling their own products, they offer products from lots of other companies and individuals. A number of startups are based on such collaborative platforms.
Open source communities, – such as Linux, Apache and OpenStack, – are examples of collaborative economies that have been jointly created by a consortium of partners. In such communities, a variety of stakeholders, – including large and small companies, vendors and users, startups, research labs, universities and individuals, – come together to jointly develop specific offerings for the benefit of the IT industry and society in general.
It’s too early to tell how collaborative economies will evolve in the future and how big they’ll become. As is generally the case with disruptive innovations, they face a number of challenges. Owyang mentions a few: government regulations, effective trust and industry-wide reputation systems, threats from incumbent companies and uncertainty about startups. These are the kinds of challenges any major new initiative generally faces. None feel like show-stoppers.
I truly hope that collaborative economies become a major factor in the digital economy. Last December I participated in a roundtable discussion on Work and Value in the Digital Economy, convened by MIT’s Center for Digital Business. The roundtable addressed some really critical questions, including: what is the future of jobs; where will jobs come from in the coming years?; and will the nature of work be significantly different? After listening to a number of experts throughout the day, the main conclusion I took away from the roundtable is that, – while having lots of ideas, hypotheses and hopes, – we truly don’t know where jobs will come from in the coming years.
Global competition continues to drive large companies to aggressively focus on productivity, leveraging IT-based innovations to get their work done with fewer employees. And governments will continue to shed jobs given thepressures they face to reduce costs and slim down. If this is indeed the case for a long time to come, we need to become a much more entrepreneurial society. Large numbers of people will have to invent their own jobs, based on new types of work organizations that leverage digital markets and platforms.
While experts and politicians have no clue as to what to do, the collaborative economy may well be the invisible hand’s answer to this critical societal challenge. It is truly one of the most exciting and important innovations in our 21st century digital economy. All of us, – policymakers, business, VC’s, the research community, and others – must thus do everything possible to help the collaborative, sharing economy succeed.