Do peer networks like Uber distribute value fairly?
The ideal of capitalism I perceived as a child seems a far cry from what I understand today. American capitalism has moved from an industrial path that grew a middle class to one that seems to be increasingly taking the ugliest, most extractive form, reversing those gains.
In economist Thomas Piketty’s 2014 bestselling Capital in the 21st Century, his analysis found that the top 10 percent of Americans in 2010 owned 70 percent of the capital, trending toward the extreme capital inequality last observed in 1910 monarchical Europe. In the fall 2014 issue of the Journal of Post Keynesian Economics, Pavlina R. Tcherneva, an economist at Bard College, updated Piketty’s data through 2012 and looked at which groups got the benefits of economic expansion. In the postwar expansion of 1949–1953, the top 10 percent of Americans received 20 percent of the economic gains. In the most recent expansionary period, 2009–2012, the top 10 percent took in 116 percent of the gains, meaning that the bottom 90 percent saw a decline of 16 percent. Even more striking, during this same period the top 1 percent got 95 percent of the income growth. So we can conclude that the 2008 financial crisis resulted in losses being socialized (the U.S. taxpayers financed the $3 trillion bailout), while the gains were privatized and allocated to the top 1 percent.
If wages had kept pace with productivity gains since the 1970s, on average they would have doubled! In fact, productivity rose more or less continuously between 1945 and the present, but wages remained flat from around the early 1970s. For whatever reason, the rich got richer, the poor got poorer, and the benefits of improved productivity were not widely shared.
My last article focused on the strong prediction that we are going to see a significant part of the world economy transform into platforms (the organizing structure) and peers (the participants). Peers Inc is going to bring incredible productivity and efficiency gains. If capitalism is broken and productivity gains aren’t shared, that leaves the 99 percent of us with a very unpleasant outlook. This cannot become the template for the Peers Inc transformation. We have to find a better way.
When I was CEO of Zipcar, an advisor once asked me, “Robin, have you heard of the Golden Rule?”
Yes, of course I had: “Do unto others as you would have others do unto you.”
“No, no. It’s ‘He who owns the gold rules,’ ” he said, making clear the reality of capitalism.
Capital will always be important. As CEO of Zipcar, I served as a buffer between the pure capitalist instincts of most of my investors and the much more values-driven company I was creating. But Zipcar could achieve its goal of simple, seamless access to a car only if we had the investment of a lot of money. We needed to build a complex technology platform, and that would not come cheaply. It required many millions of dollars and many investors. Building the technology that was the foundation of Zipcar was not something I could do myself, cajole my friends to do, or finance on the back of the company’s cash flow.
So a charge I find particularly frustrating, and particularly naive, is that the platform owners — the founders and investors — are unfairly benefiting off the backs of the hardworking peers. Building a solid, elegant platform is a prerequisite to peer collaboration. Zipcar ended up needing to raise about $67 million before it broke even. BlaBlaCar had spent $13 million, wasn’t yet profitable when it raised its Series B $125 million, and likely won’t be profitable for the next few years. Yet millions of drivers are reducing their travel costs by sharing expenses with millions of passengers, who are themselves traveling more cheaply than they would by any other alternative. Airbnb’s financials aren’t public, but it is likely that it wasn’t at the break- even point yet when it began its B (second) round of financing, with a total of $120 million raised. People who claim that Airbnb shareholders are getting rich off the backs of hardworking hosts haven’t thought through what it costs to build a successful platform (tens of millions of dollars, maybe hundreds of millions). Nor are they appreciating that while investors see zero returns for many years, the very first Airbnb hosts are making money off each and every transaction. It can take hundreds, thousands, even tens of thousands of transactions before a platform breaks even.
Value is being created in three significantly ways. Let’s use Airbnb as an example.
One, the platform itself adds a lot of value by organizing the excess capacity, making complex transactions simple, and giving all the hosts the powers of a corporation.
Two, each host adds value by contributing their skills and assets. Generally speaking, a peer will participate only because it is worth it to him or her.
The third source of value is created by the group — the aggregated peers making a network — and this has enormous value. It is this third part of the value pie that the Incs generally eat as well. Venture capitalists valued Airbnb at $10 billion in 2014, surely taking this network value into consideration.
So, I do think platform creators get more than their fair share of the value created. In addition to their well-earned piece, they are also getting the value created by the network effect despite the fact that this is wholly created by the peers. I look forward to hearing people’s ideas about how we can practically get this third value creation— the network — to the community of peers that created it.
Regardless, platform building needs to be financed. Most platforms fail. In order to accept this risk, investors — who pay for something before the product or service is realized — demand their hefty fraction of ownership. No investment is risk-free. Very low risks get low compensatory incentives, and very high risks get very high rates of return. Certainly there is a lot of room for argument about whether founders and investors are being compensated fairly or proportionately for the real risks, or whether we are taxing real gains adequately, but the principle is sound. This is how capitalism works. When you start building a platform, you can’t know whether it will be successful, nor really be sure of its ultimate trajectory.
Many types of companies are impossible to finance by bootstrapping, which involves using earned income to grow the business. And there are times when competitive pressures can force companies that might have been able to grow organically by using their own revenues to instead expand faster and therefore bring in outside capital in order to compete. Some platform founders and their investors can have good intentions about the values they want to embed in a company, but hyper-growth, requiring lots of capital, can dramatically curtail the power and therefore the flexibility of the founders and undermine their intentions. And even the best intentioned founders or CEOs will one day be replaced. Ultimately, those who finance platform building will control it.
The Peers Inc framework thrives when peers are motivated to contribute. Platforms that do not adequately reward peers, value their contributions, and invest in their innovative potential will fail in the long term. Yet capitalism — with private investors interested in getting their money out of their investments as soon as possible and public company stock prices dependent on quarterly earnings — doesn’t care about the long term.
Broadly speaking, there are three options for financing the building of platforms: public financing, private investment financing, and crowdfunding. Each choice has different implications for how power and value will be shared with the participating peers over the short and long term. The blockchain, the system that underlies Bitcoin, is a perverted form of crowdsourcing, perhaps best described as crowd-doing. With the blockchain, the Peers Inc future could be replaced by a Peers Peers one. Some people will be participants in the transactions; others will be builders and supporters of the infrastructure (the platforms).
Bottom line: don’t underestimate the cost and risk of platform building, nor ignore the reality that s/he who finances it creates the rules of engagement. Our future — whether more or dramatically less equitable — lies with our clear understanding of the power and implications behind the choices we make today.
