The rising popularity of Gig Economy is creating an opportunity for platform owners to disrupt the market norms disguised as empowerment tools. The reality cannot be further from the truth and the ultimate exploitation of self-employed, which will lead into social and economic breakdown of the market economy. Here we examine some of the main reasons this development is presenting dangerous challenges to workers, service providers, consumers, and the social order.
What are Market Norms?
In purely economic sense, market economy works on principal of Supply and Demand. Markets are any physical, and now virtual places, that suppliers meet consumers to offer their goods and services for sale. In a perfect market, price is determined by Supply and Demand, where demand exceeds the supply prices will rise, and where supply exceeds demand prices fall. This is simple enough concept, which hides many other aspects that help markets functions properly.
Power of Dominance
Where a supplier or market venue becomes dominant, markets no longer function in it’s pure sense, hence the concepts of balance between supply and demand become distorted. In a distorted markets, some actors have more power relative to others, hence they can influence (distort) supply-and-demand concept and determine the price by controlling supply. Case in point is cartels such as OPEC, or market dominance such as Google, where Google can set the price or modus operandi.
For example OPEC can influence the price of crude oil by increasing or decreasing production. In the same way Google is now setting the standards of the Internet, and due to their dominance of search, they can bully and impose their will on the Internet. Recent examples of this is their recent push for Responsive Design or SSL, which is forcing website owners to comply to whims of Google technical orthodoxy.
Price Arbitrage
Not to be confused with arbitrage pricing theory in asset pricing, market arbitrage is the available profit within any given market sector, and whether this allows new actors to enter a market profitably.
Let’s take an example of telecommunication liberalisation in the UK. The high prices charged by the monopoly of GPO (original owner of infrastructure in the UK before it was spun out as BT), meant there was a huge price arbitrage enabling other actors to enter. However, the new actors had to be protected from any anticompetitive actions that BT could take to crush the new entries. This was handled with great care and finesse by OfCom, enabling new entrants to establish and grow by taking advantage of the arbitrage. Today, UK telecom market is highly competitive and prices have fallen beyond anyone could have imagined in 1980s when deregulation was 1st enacted.
What are platforms?
These are high tech version of old fashioned markets. Just as in the old days farmers took their products to local markets to sell (Suppliers meeting the Consumers), platforms operate the same way in the new digital market.
The Internet was a great platform when it was not dominated by Google, but the Republic of Internet has long disappeared thanks to Google’s dominance. Website which was the access portal for vendors to the Internet Market have become victims of Google’s whims, and as a result Internet is no longer a benign and neutral market platform it once was.
Despite Google’s dominance, the popularity of Internet as the platform of choice for marketing your product and services has not waned. The arrival of mobile data and smartphones have made Internet ubiquitous and accessible world wide, which has created an opportunity for a new type of Platforms to appear.
New platforms
Uber, AirBnB, Booking.com, Upworks (previously known as Elance), and myriads of other specialists platforms have appeared with varying degree of success. In general these platforms have had profound impacts on supply-chain, social norms, and economic activities. They are not just disruptive technologies but are social disrupters.
What is Gig Economy?
In essence this is contract and casual work, were there is no employment contract, no continuity of supply or guarantee of income. This is the old fashioned way of doing “Piece Work”, and getting paid for the output rather than input. Uber or AirBnB cannot, and will not guarantee work or income, and by the same merit supplier does not guarantee availability to work unless he or she chooses the time and place of service delivery. It all sounds great and easy, until the supplier has to fund their business or life’s basics. If there is no income there is no food on the table, and there may not even be a table to put the hypothetical food on to. This is going back to pre-industrial and early-industrial serfdom, but with a new and glitzy name and good PR.
Impact of Platforms
The impact of these new market platforms are far reaching both in economic and social terms. Our political and legislative processes have been hopelessly slow to adapt, and in some cases been unaware of the long-term impact of these platforms.
AirBnB and other vacation rental platforms are disrupting housing supply, as more stock is switched to short-term vacation rentals, from long-term rentals. In most large cities this is causing massive rental hikes due to shortage of long-term rental stock. It is also putting at risk thousands of smaller hotels, and the employment that comes with them. Additionally, local and central government are losing out on tax revenues, whilst still having to provide services. Most property owners registered with platforms such as AirBnB tend to keep their rental revenues under the tax radar. It is only recently that some of these platforms have been bounced into tax declaration due to threat of legal action by authorities.
Uber and other ride companies not only generate revenues under the radar and enable tax avoidance, they also are putting taxi drivers around the world out of business. These semi-skilled jobs were the last refuge of people who lost their jobs in dying industries such as mining, heavy industries, etc. These jobs are also under serious threat due to Artificial Intelligence, but likelihood of surviving this double blue is pretty low and outlook very much bleak. Not every one of these people can be reskilled to write code for the next generation of apps and platforms, so we will see job losses without any alternatives for the people who worked in these segments.
The reluctance of the politicians in early intervention has a lot to do with the consumer psyche. How could politicians outlaw the modern day Robin Hoods, who drive down prices hence empowering the consumers?
Whilst consumers remain fickle, and only think of short-term savings, Governments need to act quickly before our social fabric is destroyed. Once social cohesion and economic stability is disrupted, rebuilding it is a hard and long struggle. Ask any country that has been through Civil War, and you can see the challenges of rebuilding society after a breakdown.
Price Arbitrage & Shake-out
Platforms use the price arbitrage created by regulations, operating costs, and the need for long-term investment to compete and drive down prices.
For example any ride sharing platform takes advantage of the operating cost differential between taxis vs casual driver. Traditional taxi drivers have to comply with myriads of licensing red tape and compliance, as well as financing their vehicle, all of which add to their operating costs.
However, as we have seen in many cases, once platforms become the dominant force, either prices start to rise again, or they squeeze the margin of the suppliers, so tight that the supplier is no longer able to make a living but simply living on subsidence income.
There are 2 examples of this. First is booking.com where at the beginning of their operations they lured in hotels with low commissions and promise of high volumes. Once they became established, their commission started to rise to today’s level of 17%-23%, representing 100% increase in their commission rates! This is a hotel sector where making 25% margin is an exception rather than the norm. Hotels that now sell majority of their rooms via platforms are finding their costs unsustainable, but they have nowhere to go as they have not invested in their own web presence and marketing.
Second example is Upworks. This used to be called Elance, which was one of the platforms enabling vendors (freelancers and companies) to offer their technical services such as web design, coding, copywriting, photo editing, etc. to website and business owners. Costs were low and averaged around 10%-15% for the vendors, and about the same for the buyers. Elance became extremely successful, and was eventually purchased by new owners and merged with ODesk. The new owners introduced a new system together with new commission and fee structure with effective rates of up to 30%. This resulted on many Vendors leaving the platform due to costs, leaving Buyers poorly served as the quality of vendors has deteriorated exponentially.
Experience tells us that in the long term, once there is a shake-out of competition, prices will go up. Prices rise either through platforms pushing prices up, due to market dominance, or vendors leaving the market so that there will be shortage of supply.
The only achievement of these platforms is to eat into the profits of the suppliers, hence transferring profits and margins from suppliers to platform owners. Enriching the founders and financial bakers of platforms, simply transfers the wealth from many (the operators) to the few (investors & platform owners). It is a perverse and unprecedented redistribution of wealth.
Jobs and Economic Impacts
Uber, Lyft, or other ride sharing platforms rely on casual drivers with lower cost of operations than traditional taxis, as they do not need to comply to any regulations. AirBnB relies of hosts not having the costs associated with authorised accommodation, tax compliance, and health-and-safety regulations.
More importantly, many of the drivers for Uber or Lyft are only doing this work for the short-term, such as tying them over until their next real gig, in between jobs, students trying to subsidise their studies, etc. For whatever reason they are not in this for the long-haul. Before these platforms came about, they would have been delivering pizza, or working behind a bar. Delivering pizza whilst studying did not disrupt an entire segment, however driving Uber cars does. Once taxi drivers can no longer afford to operate, the market will be reliant on casual drivers. There will be shortage of drivers, hence either prices have to go up, or we need new entrants. Either way, 1000s of taxi drivers would have lost their livelihood, and will be out of work or would have switched to other trades.
Social Order
Market economy requires social and legal stability. The reason the West has managed to thrive in market economy, whilst most of the developing countries have failed to replicate the success, is due to respect for the rule of law that brings social order and stability.
Uber riding rough-shots over the regulators is well documented, but need to be mentioned here as a reminder that some of these companies have questionable ethics. The ethos that is based on breaking the law in order to make money, is grained in these organisation’s culture. Freewheeling their way into operation, flaunting legislations, and ignoring or denying their social impact is built-in into their DNA.
By encouraging to break the law and undermining the rule of law, these platforms are encouraging the culture of disrespect for the law, which will in the long run disrupt the social order and stability. The fundamental basis of democracy is “Government by Consent”, which means we all agree to live by the laws that we might not 100% agree with for the sake of social stability. In return the system promises the choice that we can change the government, should the majority of us decide we do not like the rules they set. If we allow commerce to become the arbitrator of the laws we keep and those we get rid of, we will be heading for anarchy.
Summary
Platforms are disrupting the very fabric of the societies we live in, undermining the norms, and the laws that have created the environment for economic success, however imperfect it may be. By presenting themselves as the “Champions of the Consumers”, they have found a socially acceptable means of transferring profits and margins from the suppliers to the platform owners (and their shareholders and investors). The social and long term economic costs of this transfer of resources is unsustainable and will undermine the very basis of free markets and social stability we take for granted.
About the Author:
Ali Zartash-Lloyd is Managing Partner at Cognisant Associates a business consulting partnership. He is a management graduate from the University of Leicester. He held Senior Management positions at a number of Multinationals for over a decade including Director of Global SME Products at Avaya Inc. and European Sales & Marketing Director at Samsung Telecom.
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