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The Sharing Economy: Why Are So Many So Afraid?

It hasn’t been a great week for Airbnb. On Tuesday representatives of New York State Attorney General Eric Schneiderman and lawyers for the apartment sublet company Airbnb met in an Albany court. At issue is a broad subpoena issued by the New York AG last fall, demanding that Airbnb turn over information about its “hosts” (those who list their apartments) in the belief that thousands of them are in violation of the law by acting as de facto unregistered hotels. Airbnb has challenged the subpoena on the grounds that it constitutes an invasion of privacy of the thousands of people who use its service. Then, on Wednesday, the San Francisco city attorney brought suit against two local landlords, alleging that they illegally evicted residents in order to convert residential housing into short-term rentals advertised on Airbnb and similar services.

The San Francisco case in particular appears to have considerable merit. (According to the City Attorney’s Office, two of the evicted residents were disabled, while the Airbnb-ization of the city’s already painfully squeezed housing market is troubling at best.) A larger issue to be considered, however, is that Airbnb is part of a wave of companies whose business model is inherently disruptive both of existing industries and existing laws. Those industries and many regulators are challenging these new business models, and the outcome is critical to the future arc of our entire economy.

Airbnb is part of a suite of new companies—among them Uber (which Schneiderman is also investigating for alleged price-gouging), Aereo (in the news this week because of a pending Supreme Court case), HomeAway, and Lyft—that are frequently described as constituting the “sharing economy.” It’s a poor term at best. None of what these companies do is “shared,” because nothing is free; everyone is in it to make some money.

What is notable about these models, however, is that they provide technology allowing users and buyers to transact without mediation by the powers that have traditionally controlled those transactions. So Airbnb matches those with rooms to those seeking to rent rooms; Uber matches cars and drivers with those seeking to hire cars and drivers; and so on. In a sense, Bitcoin serves a similar function, providing a direct means of exchange for any set of buyers and sellers anywhere in the world, with clear pricing and no involvement by banks or payment companies.

At stake are hundreds of billions of dollars of revenue (which will not be “shared”). Incumbents are attempting to protect that revenue using the legal system. As we all know, laws are not simply the manifestation of societal norms of justice and a need to protect and serve the common good. They can also be tools crafted in the interest of established groups and businesses to further their needs and inhibit those of others. Regulations used to protect and steer the common good are essential, but laws used to stifle innovation are deadly.

Until recently, however, the U.S. has mostly steered away from the worst effects of laws and regulations used to kill innovation and new business models. Yes, the Big Three car cartels in Detroit managed to make it nearly impossible for any competitors to manufacture cars for much of the 20th century. Their implosion in the 2000s created an opening for Tesla. Yet now states such as New Jersey are responding to the complaints of car dealers and attempting to shut down Tesla’s direct-to-consumer sales model—which is another variant of cutting out the middleman. Taxi and limousine commissions have taken to courts to fight Uber, and a similar surge is happening with Airbnb. (Perhaps a more positive sign was that rather than litigating against Zipcar, which offered peer-to-peer car rental, Avis simply bought it in 2013.)

It’s comforting to imagine that, in the end, the power of innovative technologies and business models will win out over status-quo thinking and entrenched interests, all for the public good. In the late 1990s, the established music industry viewed digital music as a proximate threat, pursued file-sharing innovator Napster with a vengeance, and won in court. It won that battle, only to see digitization overwhelm its distribution model anyway. Further disruption occurred when the iTunes-driven ecosystem of today upended the brick-and-mortar stores selling albums and CDs. That ruined several chains, but enriched Apple and the lives of hundreds of millions of users.

For a more troubling precedent, we could look to what happened in India in the 20th century. After its independence from Great Britain in 1947, the Indian economy was known as the “License Raj,” denoting a web of rules and regulations that required anyone attempting to open a business or do something new to navigate an endless gauntlet of permits and permissions from multiple government agencies. This system was seen as a primary cause of almost nonexistent growth in this crucial historical period.

Just as India is fleeing as quickly as possible from its License Raj, however, the U.S. is showing signs of constructing one. Established companies, aware of the precariousness of their franchises, are determined to maintain their position. They use the tools of regulation and litigation as a powerful bludgeon—the Tesla debacle in New Jersey is a particular lowlight.

These rearguard actions assume a zero-sum economy where every gain for innovative entrants is a loss for incumbents. That may be true in some cases, but it is hardly a given. Certainly with music and video, peer-to-peer has led to an explosive growth in usage rather than new entrants carving up a finite pie. It’s too soon to tell whether Uber will actually decimate the taxi industry, but in New York City, medallion sales are hitting record highs even with the onslaught of Uber—an early indication that Uber may simply lead to more people using car services, not fewer people taking taxis.

The only way that new models will avoid the snare of old-guard companies and ill-considered laws is for regulations and laws to adapt to new technologies and new business models, rather than be used as tools to inhibit them. Instead of indiscriminately challenging the Ubers and Airbnbs of the world, regulators should be guided by what is in the public interest. If Airbnb hosts are in fact illegally evicting disabled residents from their homes in San Francisco, authorities should hit back hard. But if new companies are simply creating models that provide more access to rides, more ease of facilitating travel and tourism, more ways of buying cars—all of which indisputably boost local economies—then our regulatory and legal system should embrace them, not impede them. The surest way to create a zero-sum world is prevent the efflorescence of models that unlock ever more economic activity. These upstarts are only the enemy of old industries if those industries fail to evolve.

This piece was originally published in Slate (April 25, 2014)

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Zachary Karabell
Head of Global Strategies, Envestnet, Inc., Consultant to Investment Committee*

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