Professor Arun Sundararajan and Scott Galloway – Employment in the Sharing Economy

Professor Arun Sundararajan and Scott Galloway – Employment in the Sharing Economy

[MUSIC] [Prof. Scott Galloway]: We’re here
with Professor Arun Sundararajan,
Professor in the IOMS Department at NYU Stern School of Business and the author of ‘The Sharing Economy’. Professor, tell us about the
book and what are the sort of the two or three insights from this book. A lot of heat, a lot of information around the shared economy that are different or that you’re really proud of. What is the inside here?
[Prof. Arun Sundararajan]: Well,
I wrote the book because I think that the label ‘sharing economy’ is misleading in terms of the scope of the change that we’re witnessing. I see us as sort of at the early stages of a fundamental transformation and how we organize the world’s economic activity. We are getting rid of the 20th century corporate model, where companies accumulated resources and produced goods and services and we are taking that to a 21st century model in which you still have platforms, that are large companies but they are drawing on resources from a distributed crowd of people. [Galloway]: So under, you know,
it seems like one of the key thing is – underutilized assets. Things that other other people own so you don’t have the capex cost, create a platform and then utilize what’s underutilized assets. Is that right?
[Sundararajan]: That’s, that’s certainly one part of it, that’s where the sharing economy started. Let’s tap into assets that are fallow, let’s tap into the car seats, let’s tap into people’s spare bedrooms, put them on Airbnb. But it’s more than that. I think, that there’s a invention of a new way of organizing things. So the transformation that we’re going through is far deeper than simply tapping into spare assets. We’re drawing out efficiencies but we’re also changing the relationship that customers have with what they acquire by shifting from people owning things like cars to people thinking of automobile as a service-on-demand. [Galloway]: So ownership is moving to rental.
[Sundararajan]: Yes. [Galloway]: Loosely speaking,
who are the biggest winners and losers and that as we move from this corporate kind of structure to more of a distributed structure and we move from an ownership model to a rental model. Who are the biggest winners, who are the biggest losers?
[Sundararajan]: I think, in the automotive sector, the big winners are going to be the new platforms – Uber, Lyft and some of the old tech platforms – Google, Apple Didi Chuxin in China. The losers are going to be the auto manufacturers because they’re seeing the basis for competition in the industry shift from what they’re good at to what the tech companies are good at. Building a relationship with a customer through a digital interface.
[Galloway]: So in the shared economy, in your view, there’s going to be this distributed organization, if you will, ownership going to rental is going to be a transfer of value from automobile manufacturers to some of the shocker tech platforms right, that are already on a roll. You think that’s going to be continued value transfer. What about in the hotel space?
[Sundararajan]: Well, the hotel space is expanding dramatically and so the market for short-term accommodation has expanded tremendously because of Airbnb. So far not much substitution of hotels for Airbnb has happened but that’s going to change. So over time, the share of short-term accommodation that the traditional hotel industry has is going to shrink. The total value that they’re going to be capturing is also going to shrink. But the space, in general is going to expand dramatically. So whether they can capture some of the, whether the existing hotel players can capture value depends on how quickly they can pivot their business models to accommodate the crowd based capitalism model where you’re not just franchising to people who then build buildings and accommodate people but for example, you are forming relationships with apartment buildings, putting a concierge in the lobby and saying, “Well, this is a Hyatt-branded or a Marriott-branded apartment building. [Galloway]: So, you’re more optimistic, if you will about residential or the hotel industry. It feels like the Sun has already passed mid-day on auto. It sounds like you think, ‘Okay, GM, Ford, Fiat, Chrysler, they’re gonna continue to hemorrhage value but it’s sort of a wait-and-see or TBD around the hotel industry. Is that right?
[Sundararajan]: Yeah, I think there’s still time for the hotel industry. Airbnb is already the world’s largest provider of short-term accommodation by pretty much any metric that you choose. You know, Marriott, Starwood put together 1.1 million rooms. Airbnb, already 3 million by early next year, over 1 million instant book room. So by any metric, Airbnb is going to be way bigger than any other player in the hotel industry. The industries that I’m watching now are energy and health care. [Galloway]: Say more, energy, how do you share energy? [Sundararajan]: Well, at this point, it’s hard to create a crowd-based capitalism or sharing economy model for energy but in a few years, battery technology will be good enough for us to store the solar power that we generate and at that point, people who have solar panels on their roofs can start to become energy distributors to other people in their neighborhoods.
[Galloway]: Got it, healthcare, how does how do you share in healthcare?
[Sundararajan]: Well, at the low end of health care, assisted living. I cut my finger cooking and I need someone to come and stitch it up. Things that are non-emergency, things that are not open-heart surgery, there’s a lot of inefficiency in the system now. I see platforms emerging that will allow us to connect with registered providers, with licensed providers who can provide assisted living, who can provide, sort of low end health care services.
[Galloway]: Or even a room in their house. “Come here and I’ll take care of you. You’re sick but not deathly ill. Come, come stay in my house and I’ll be your caregiver, something like that? [Sundararajan]: And in parallel, what’s gonna happen is that we’re gonna realize that the way that we organize health care through hospitals is fundamentally inefficient. We don’t need all of the capabilities located under one roof. You can sort of start to get scale economies from some of the equipment that is underutilized and so healthcare has always been historically slow to react to changes in digital and I think one of the barriers to expanding the sharing economy into healthcare is trust. You know, in the mid 90s, we started with eBay and there was enough trust in the system through the online feedback to get you to ship a package to someone.
[Galloway]: Because of ratings. and you talked about the importance of identity, knowing who is a verified person on the other end creates better behavior, which creates trust. Is that accurate? [Sundararajan]: Well, yes and even
if you don’t know the identity of the person, you might trust them enough to receive a package from them in the mail, but you’re not gonna
trust them enough to let them sleep in your spare bedroom or to get into your car or you’re not gonna trust someone enough to get into their car and say drive me to another city. So we’ve got the identity, we’ve got the digitized social capital that has come online through Facebook and LinkedIn, we’ve got the online feedback systems as well, we’ve got all these other digital cues and they’ve gotten us to the point where space sharing and car sharing is now viable at commercial scale. In BlaBlaCar, which is the city to city ride-sharing platform in France, is now carrying five times as many people as the Eurostar train network in France everyday. You add up all the people who travel on the network every day and it’s way more than the number of people who travel on Amtrak.
[Galloway]: But no cab backs from the government attacks.
[Sundararajan]: Yeah, there’s nothing like billions of dollars of invisible infrastructure created. But I don’t think we’re still at the trust point where healthcare is on the table but we’re gonna get there soon because every time you create a new infrastructure for trust, you’re expanding economic potential and so as we raise the trust bar and as we sort of make the digital trust infrastructure more sophisticated, you’re gonna see more and more industries. Industries where right now we go to corporations because that’s the only trusted reliable way.
[Galloway]: Because we can sue them or they have a public market stock company or anything with Inc. or INC or has a logo or runs an ad, we think we can trust. [Sundararajan]: Yes, and we’re used to it and we know that they’re gonna do good by us because they want to maintain their brand. But you can sort of throw that out and replace that with a digital trust infrastructure and make that peer-to-peer as trust online
becomes more sophisticated. [Galloway]: A platform just as NYU provides accreditation, these platforms will provide some sort of accreditation or screening, right?
[Sundararajan]: Yes, I mean they’re sort of becoming like micro franchising operations, where you’ve got millions of little Airbnb franchisees who are relying on the brand of Airbnb to get their business, who are conforming to some loose guidelines but who are also independently building their own brand and running their own tiny businesses through the platform. Uber drivers, not so much a franchising play that resembles a traditional organization more, but there are lots of different varieties of this new entity. It sort of, is somewhere between the organization and the market, sort of this new hybrid and I think that’s gonna be the template for the cooperation.
[Galloway]: So talk to me a little bit about the changing dynamic or compact between organization and its employees / contractors. How is that shifting to the share economy? [Sundararajan]: Well, it’s shifting in a good way fundamentally but there’s a lot of work to be done. What do I mean by that? The relationship between the individual and the institution has historically been, “I give you my talent and my labor and you give me a wage.” Now that’s shifting to a relationship where the individual says, “I’m gonna run my small business through you and you give me brand and you aggregate demand for me and you sort of wrap, a commercial sort of wrapping around my small business. Now this is fundamentally empowering for the individual, right, because it shifts their role from provider of labour to owner of capital. By that, I mean they’re running a small business rather than simply being a salaried employee. The trouble is that we’ve constructed a really good social contract around the full-time employment model. I mean, if you think about Upton Sinclair’s ‘The jungle’, a 100 years of full-time employment was not a great model to begin with. We’ve done a ton of work. {Blank} Now we’re inventing this new freelance micro entrepreneurial relationship and we haven’t yet done the work to wrap the social contract around it and so people look at freelance and they look at full-time employment and they say well full-time employment looks better. They miss the point that the shift of freelance, the shift to micro entrepreneurship is fundamentally empowering for the individual and now it’s up to us to do the work to make sure that the individual has the same kind of social contract that they had as a full-time employee.
[Galloway]: So just to push back on that one until we can share health insurance, it feels like companies are just using “the share economy” to arbitrage people from full-time employees where they get equity and they get workers’ rights and they get benefits to “contractors”. I think uber has about one-and-a-half million of them now. They don’t share in the goodies. I mean they get some flexibility, they get on-demand labor but it feels like there’s a negative arbitrage of some of the benefits or job security in, and over time this may not be a good thing unless they organize as you said {Blank} and try and demand more.
[Sundararajan]: Yeah, I don’t think that this relationship between Uber and its providers is gonna persist. I mean, first off it’s not a new idea but I’m gonna sort of arbitrage by converting people who have a particular kind of relationship with me into independent contractors. It’s something that companies have been doing. We’ve got lawsuits against FedEx, against Microsoft.. [Galloway]: Interns, contractors, part-timers everything yeah.
[Sundararajan]: So it’s, it’s a familiar problem. I think Uber is actually far more justified than any of these other companies in sticking with the independent contractor model, because its drivers really are independent. They are not set hours, they are not sort of required to work a certain minimum amount, they are not managed in any sort of meaningful way. [Galloway]: You talk to Uber drivers and they love it. I mean for all the negative articles and people like me talking about the death of the middle class. Every time I’m in an Uber I say, “Do you like it?” and they love it. What is.. there’s been some articles that say some Uber drivers though, when you take into account maintenance, gas that it’s almost like a payday loan that they’re making $7.75 an hour and that they’re just borrowing against future payments and it’s not good economically. Have you done any studies on what the actual compensation is for these drivers, because it seems like there’s a war breaking out and the drivers are the beneficiaries.
[Sundararajan]: You know, Uber got into this market earlier than other people and Uber’s real capabilities over the last four years have been to grow rapidly, raise a lot of capital, replicate across cities. They’re very much sort of a 20th century organization in that sense. They’ve grown very rapidly, and as a consequence they’re the only game in town in a lot of cities. But they’re facing some real competition now, for example, from Juno in New York. It says ‘I’ll cap commissions, I’ll give you drivers equity in the company.’ Juno has 14,000 drivers to Uber’s 40,000 in just three months.
[Galloway]: I heard about one in Austin, where it’s a non-profit. Which ones are these, have you heard of them? [Sundararajan]: I’ve heard of a couple of
cooperatives, after Uber and Lyft left but you know, the point I’m getting to here is that, Uber got in early and defined a particular contract with the drivers, {Blank} that has a high commission rate. That’s gonna get squeezed as competition comes in and platforms realize that, without the drivers they don’t have a service. The barriers to entry are low, drivers can drive for multiple platforms so you don’t have those Facebook-Google type network effects then are gonna make one platform dominate. So I think the market will take care of this sort of value split between the providers and the platform to some extent. In a way, that will cause us to shift away from the status quo, where Uber drivers aren’t making enough money in certain cities and towards a model that is more equitable for the drivers. [Galloway]: So, last question. Uber’s 61 billion dollar valuation right now in the private markets
is overvalued or undervalued? [Sundararajan]: Oh, that’s a tough one. [Galloway]: It’s not a competitive dynamic, is this company worth as much as Boeing? It seems like there’s.. I would have said six months ago, that Uber was worth it because it felt like they were just running away with it. Now all of a sudden it seems like they’ve got
some deep pocketed competitors. [Sundararajan]: Okay so, I’m gonna dodge that question by answering it in the following way.
[Galloway]: Okay. [Sundararajan]: I think Uber could be a trillion dollar company if it plays its cards right. The big challenge they have is changing behavior, getting people to stop spending on cars and starting to spend on Uber while maintaining margins and keeping away competition. This is going to be a tough path. If they can accomplish it, they’re definitely worth the 61 billion dollars but they’ve got to make sure that they don’t chase profits too soon. If they go after short-term profits now rather than acquiring market share..
[Galloway]: I don’t see any evidence that they’re chasing profits. [Sundararajan]: Well, you know I think that there’s a lot of pressure because the valuation is so high for a pre-IPO company that at some point if they’re gonna have to move from sixty billion to a hundred billion for the next round of financing.. but what we have to realize is that while Uber has 80 to 85 percent of the US market form, you know mobile hailed ride-sharing, they’ve only got a less than a percent of the spend on transportation. It’s a tiny, tiny fraction and what they’re really going after is the 1.2 trillion dollars that we spend on new and used cars every year, not the 11 billion that we spend on taxi. [Galloway]: So if, in fact, you think there’s a nonzero probability, it could be worth a trillion dollars that would argue that it’s probably still a good investment. [Sundararajan]: Yeah, if you have faith in Uber’s management team and you have faith in them to hold strong against investor pressure, to go after profits, I think it could be a good investment. [Galloway]: Professor Arun Sundararajan, your book, is ‘The Sharing Economy’ available on Amazon and in every brick-and-mortar store, I assume.
[Sundararajan]: Every brick and mortar store that’s left, yeah. [Galloway]: Great, thanks for your time, Professor.
[Sundararajan]: Thanks.

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