How will the sharing economy bubble burst?

How will the sharing economy bubble burst?

haring economy companies are the darlings of investors, pundits, and the Silicon Valley elite.  A cottage industry has sprung up around describing and extolling the sweeping economic changes of this new way of doing business.  By disrupting the models which have dominated long-established industries for years, the sharing economy is creating whole new ways of doing business – lessons which are even working their way into the plans of well-established corporate giants.

The growth of sharing economy companies is frequently described in bombastic terms like “exponential” or “explosive” – reflections of the media hype which has surrounded their rapid rise to prominence.  Yet there is one particular term – one that long-term investors frequently look for – which has not been used to describe the sharing economy:  “sustainable”.  For all their sudden and massive accumulations of wealth, there are still doubts about whether the sharing economy will last.

The tech economy has seen many bubbles of enthusiasm before, all of which have burst when the expectation of continuous growth meets the reality of normal business cycles.  The sharing economy will be no different.  But which part of the sharing economy is currently operating in a bubble?  Which part of it is inherently unsustainable?

Customer enthusiasm waxes and wanes quickly in the technology world.  Today’s shiny new device or flashy new website could be tomorrow’s Blackberry or, respectively.  Yet it is unlikely that the sharing economy’s bubble is one of shifting customer loyalty.  Barring a massive breach of trust, there is currently no indication that customers are abandoning Uber for a return to regular taxis.  Airbnb is so successful that even institutional real estate investors are starting to use it.  The advantage to consumers is clear, and increasingly hard to undermine.

The financial models of sharing economy companies show no signs of ebbing either.  Investors remain bullish, in part from the hype surrounding the disruptive model of the sharing economy, but also from the strong revenues and profits which bring consistent growth (at least so far).  In terms of the fundamentals, the sharing economy seems to be on strong ground.

The sharing economy’s primary weakness may be in its very name.  In order to offer its services, sharing economy companies depend greatly on the willingness of people to offer their talents and resources in return for a chance to profit.  Lyft needs a critical mass of drivers in order to offer the level of service its customers expect.  Taskrabbit relies on a pool of workers willing to both offer their services and bid against one another for the privilege.  If there is one thing that makes these businesses sustainable, it is those who share.

This is where the sustainability of the sharing economy may face a considerable bubble.  Right now, it’s hip to drive for any number of ridesharing services.  Right now, putting your apartment up for rent is a fun way to make some cash on the side.

Yet the second that doing so becomes unprofitable (due when Uber treats you like a contractor), risky (when Airbnb refuses to protect homeowners), or simply uncool, the sharing economy will quickly face a fundamental threat to its core business.  These companies care less about consumer demand than they do about the supply of their product.

The genius of the sharing economy is that companies only pay for the direct provision of a service – all the perceived baggage which comes with established contracts for labor or goods are replaced by a more nimble, agile model.  Yet that is also its potential downfall, particularly when people start to value the security which comes with “baggage” – social benefits, retirement savings, insurance coverage.  For a short time, people may experiment with new ways to profit from their everyday lives.  Yet when the experiment grows tiresome, the sharing economy’s bubble may well burst.