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The Sharing Economy Is Dead. Long Live the Leverage Economy!

By Augie Ray | June 23, 2016 | 3 Comments

MarketingCustomer Experience

Let me start by saying that I am a customer and fan of the services offered by Uber (took a ride Monday!), Airbnb (recently booked a family member into a nearby property) and other so-called “sharing” companies. In fact, just this week I gave a presentation about customer experience in which I cited Uber as an example of what brands can achieve with customer-centric product and service experiences. So, I say this as a fan and not as someone who is either anti-tech or anti-innovation: The time has come for companies in the space to stop hiding behind the “sharing economy” label and to improve collaboration with all concerned parties. Failing to do so puts these companies at risk as the industry, customer relationships, and regulations mature.

A year ago, I mounted a passionate defense of the term “sharing economy.” At the time, I argued that the word “sharing” was appropriate given these business models facilitate the mutual consumption of assets in contrast to traditional individual ownership and consumption. While this is still true, I cannot shake the feeling that companies have gotten a lot of PR and are camouflaging risky corporate practices thanks to the humanist adjectives they use, including “sharing,” “collaborative,” “trusted community marketplaces,” “the crowd” and “connected.” Who can be opposed to those ideas? It’d be like hating motherhood and apple pie!

The problem is that few of these “collaborative” companies are, well, collaborative. For a while, this was easy to overlook, because many consumers agree that some of the regulations these companies flouted were unpopular and, arguably, unnecessary.  For example, Uber bypasses municipal safety regulations in many cities, and most of us don’t care because we feel safer in an Uber than a taxi. (On my last taxi trip, the driver exceeded the speed limit by 25 mph and barreled through a late yellow light near to a phone-distracted pedestrian, and I reached for my phone to give a bad review only to realize I could not.)

Because we agree some codes are outdated and appreciate the much stronger customer experience offered by the startups, it has been easy to disregard how these companies unilaterally pick which rules they like and which they do not. Laws that shield the companies from unfair practices or protect their intellectual property–yes, please! Laws requiring they follow standard background checks or adhere to local rental ordinances–hey man, can’t you see we’re trying to innovate here!?

But it is getting harder to ignore the dangers of self-determined laws and regulations. After all, while we give a wink and a nod to Uber snubbing livery laws, do we want the manufacturing plant in our town deciding which environmental standards they’ll ignore or food companies to go maverick on safety codes?

As citizens, we all are part of the greatest collaborative platform of all–no, not Uber or Airbnb but democracy. If people don’t like certain laws, they can petition their lawmakers to change them; if citizens are not satisfied with their elected officials’ response, they can mount a recall or campaign for their defeat. Unless we want companies to set their own laws based on what is best for stockholders (or a handful of VC investors hungry for rapid and sizeable returns), then we must question the green light we give to sharing economy firms to pick the laws they deem worthy.

It seems that green light may be turning yellow. Los Angeles charged a handful of landlords with illegally evicting tenants to convert their units to short-term rentalsThe New York State legislature has passed a law that would ban Airbnb users from listing some short-term rentalsChicago just implemented new (relatively mild) rules for Airbnb. San Francisco’s Board of Supervisors unanimously passed a law requiring Airbnb hosts to register with the city. And Austin residents rejected a plan to allow Uber and Lyft to self-regulate.

In response to the new regulations, the sharing companies and their supporters have too often returned to the same old scripts. They accuse officials of being in the pockets of traditional companies. They label new laws as anti-consumer (even as consumers are asking for them). And they accuse officials of being opposed to innovation. In short, these companies ignore that their industry is maturing and many stakeholders are now asking for actions to ensure safety, equitable tax collection, a level playing field for all players, affordable housing availability, and fair rules that protect residents living adjacent to high-traffic, unlicensed hotels.

The reaction to the ride-hailing situation in Austin provides a great example. I have seen tech leaders repeatedly declare that Austin “kicked out Uber and Lyft,” which is a substantially misleading perspective that demonstrates the biases and risks at play. Austin held a referendum in which 55,000 people voted–17% of the registered voters in Travis County–and despite an $8 million lobbying effort by Uber and Lyft, Proposition 1 failed by a 12-point margin. Because they didn’t get their way, Uber and Lyft took their bat and ball and left the city, leaving thousands of drivers and tens of thousands of riders scrambling to replace their services. Of course, Uber and Lyft can do business (or not) anywhere they wish, but this situation aptly demonstrates the reputation and business risks ahead if sharing economy companies do not collaborate with all parties–not just users of their services but also concerned citizens and officials.

First of all, if you claim to be a consumer-centric, community-based, crowdsourced company but you abandon a market because you do not like the outcome of a free and fair referendum of the people, then you are no longer a consumer-centric, community-based, crowdsourced company; you’re just a typical for-profit company striving for financial advantage.  Austinites seemed surprised by Uber’s and Lyft’s unilateral actions. They apparently expected the ride-hailing firms to adapt to their wishes, but for all the trappings of “sharing” and “community,” these companies are not benefit corporations, being held accountable for their transparency or positive impact on society. Uber is, in the end, a seven-year-old organization that must justify a valuation greater than the GDP of approximately two-thirds of the nations on earth.

Moreover, the unwillingness of those in Silicon Valley to frame this event in honest terms–not a forced eviction but a willing abandonment of the market–demonstrates an aversion to seeing the very real trends occurring in the marketplace.  Many people are no longer willing to look the other way as startups defy the rules. Consumers are anxious for change, but they expect it will come from negotiation and compromise, not ultimatums and blackmail.

Finally, while supporters of the sharing economy cheer the skyrocketing valuations of companies owning almost no fixed assets, the lack of assets is a double-edged sword. It may furnish remarkable levels of financial leverage, but it also means that entry and switching costs are relatively low. When Uber and Lyft abandoned Austin, some young, hungry startups flooded in. If one of them captures drivers’ and riders’ attention with an identical set of features and a greater willingness to live up to the ideals of the collaborative economy, people’s preferences may shift away from the leading ride-hailing services faster than you can say “Myspace.”

Which brings me back the question of labels.  It is time we matured along with the marketplace and adopted a new word–one that provides less cover for companies that are neither very transparent nor collaborative. There are a variety of other terms people use to describe this space, but none seem quite right. “Peer-to-peer” fails to consider how Uber and Lyft are racing to replace private cars and drivers with a fleet of self-driving vehicles; “on-demand economy” doesn’t reflect that some services, such as Airbnb, are not really on-demand; and the “idle economy” works only so long as participants offer unused assets rather than, as is happening, turning currently productive assets (rented apartments) into more productive assets (unlicensed hotels).

My suggestion is that we consider adopting the name “Leverage Economy,” which aptly describes what every party is doing. Drivers, hosts and independent contractors leverage their assets, time and skills to make money. Riders, guests and those purchasing services leverage the platforms to save money and gain flexibility over traditional providers. And the platforms themselves are leveraging technology (along with other people’s time and assets) to earn profits and exploding valuations from VC investors.

Not only is “leverage economy” a more accurate term, but it may encourage us to think about what is truly happening with this business trend–not selfless sharing and transparent collaboration but an attempt to leverage people and assets to better productivity. That can be a very positive thing for all parties, but it requires us to ask how much leverage we wish to accept. Is it okay for one person to leverage their residence if doing so reduces others’ enjoyment of their residences? Is it acceptable for a company to leverage the time of independent contractors who are willing participants, even if their compensation may amount to less than minimum wage? And how much leverage do we want to allow for-profit companies to set their own rules?

The leverage economy can be a good thing for many. It also has the potential to harm others. With greater transparency and collaboration that considers the legitimate concerns and wishes of all parties, we can work together to find the right balance. Companies that fail to do so could find themselves doing irreparable harm to their reputations, customer relationships, and ultimately, their valuations.

The sharing economy is dead.  Long live the leverage economy!

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  • Congrats, Augie. Although, as you are well aware, I love to argue w/ you, & will do so at the drop of a blog post, I think you’re onto something important here. We really need to get beyond the memes & favored phrases &, yeah, the pleasure of a Uber ride vs. the frustration of trying to catch a cab on 57th st. alongside an equally miserable HORSE who (yes, who, not which) just wants to do whatever the hell a horse wants to do when it’s otherwise imprisoned waiting for a “customer” on 57th st.
    I hope you don’t mind — while your minders might — that this is the first time I’ve heard your voice since you’ve joined Gartner. Be a good EE, by all means, but continue to speak your mind…
    So I can continue to tell you how so wrong, so wrong, you can (occasionally) be…
    Oh, but 17% — really want to wave a flag on that?

    • Augie Ray says:

      You are always welcome to (try to) tell me how wrong I am. 🙂

      I appreciate the comment, Ken. As for the 17%, since 100% of the voters had the opportunity to cast votes, the referendum was well publicized (thanks to the cash spent by Uber and Lyft) and 17% did vote, it all seems fair. For a local referendum that may be a pretty good turnout–the last midterm elections in the US only drew 36% of eligible voters.

  • Network effect invariably results in value concentrating at the core and top of the “stack” whilst costs are pushed to the edge and bottom. In the long-run this is not sustainable.

    Little work has been done on “settlements” north-south and east-west within and between networks/actors that equilibrate this disparity in a generative and self-sustaining fashion.