Franchise redux: The professionalization of the sharing economy has deep implications

By Drew Patterson, Guest Contributor , written on May 4, 2014

From The News Desk

Editor’s note: This is a guest contribution by Drew Patterson, CEO of Room77 and co-founder of Jetsetter and Kayak.

It has been an eventful two weeks for the sharing economy. New York Attorney General Eric Schneiderman and Airbnb are battling in the courts of law and public opinion. The New York Times delivered a day-in-the-life of a prototypical Airbnb host. Even The Economist weighed in with an op-ed calling for less regulation on these businesses.

But for all Airbnb and Uber’s much deserved “disruptive” acclaim, these businesses have older roots than the hype cycle suggests. According to conventional wisdom, Airbnb and Uber enable “regular individuals” to make a few extra bucks renting out an extra bedroom or giving fellow travelers a ride. They unlock a new class of assets, where fellow consumers share in collaborative consumption.

In fact, while these businesses nailed rapidly changing consumer preferences  –  buying services at time of usage, rather than owning assets fits the post-recession, Millennial sensibility of the moment –  the supply side of their businesses does not match the narrative. Supply in these marketplaces is increasingly delivered by entrepreneurial, small business owners, not fellow consumers. Uber and Airbnb are best understood as reimagined franchise operations that leverage mobile data, the social graph, and continuous feedback loops to deliver a better consumer experience.

A review of the franchise model makes clear the similarities. Franchising is “the practice of selling the right to use a firm’s successful business model.” A franchisor (e.g. McDonald’s) defines the practice for its business and generates demand and consumer awareness. It then contracts with franchisees (e.g. individual McDonald’s owners) to create scale and operate the enterprise. For franchisors, the model is capital efficient (as franchisees provide the capital for their outlets) and shares risk (as franchisees pay fees based on gross revenue not profitability).

To spell these out in more detail:

Generating demand under a common brand.

Franchisors like Subway, Holiday Inn, and H&R Block built well-known brands on the back of heavy media spend, and they channeled this demand to local franchisees. This demand drives franchisees’ outlets, but also creates dependency. Franchisees don’t build a brand of their own, and customer data rights are heavily circumscribed. What success would an Uber driver have absent Uber’s demand generation? How can an Airbnb host or Uber driver create an ongoing relationship with his or her customers? Like old-school franchisees, sharing economy suppliers gain access to demand, but only on a transactional basis.

Defining consistent service practices.

Standard service practices  –  telling franchisees how to run their business  –  are a central element of franchising. Whether the Subway “$5 footlong” or McDonald’s instruction on the right way to fry a fry, franchisors have always guided franchisees on how to run their business. Consistent operations are necessary to the franchisor; without a common service level, it’s tough to build a brand. The sharing economy is quickly moving in the same direction. How many Uber’s have 6 oz bottled water in the back seat? Why is Airbnb providing hosts with hospitality instructions and hiring hotel legend Chip Conley?

Ensuring quality controls.

Franchisors benefit from using their franchisees’ capital and resources to scale, but incentives diverge around quality control. While a consistent experience is critical for the Holiday Inn brand, it’s easy to see an individual operator’s motivation to cut corners. Demand is guaranteed by the brand, so why go the extra mile to deliver a great experience, especially when a local operator lacks an ongoing customer relationship? As a result, franchise brand standards go on for hundreds of pages, and performance requirements are written into contracts. Mystery shoppers and consumer surveys are one way to track service levels, but logistics limit the franchisor’s ability to police performance.

Here the genius of Uber and Airbnb is revealed. With mobile as a service delivery mechanism (e.g. where is each Uber driver right now?) and embedding consumer feedback loops into the product (e.g. you can’t book another Uber before rating your last ride), these sharing economy businesses have visibility into franchisee operations that McDonald’s could only dream about. And unlike traditional franchisees that have a long, litigious process to deal with service failure, Uber and Airbnb respond by simply reducing demand to poor performers through market operations or blacklisting bad actors.

Professionalizing supply.

While the “sharing economy” suggests consumers pooling assets for collective use, in reality the supply base of these businesses is increasingly professionalized. In February, the travel media site Skift compiled data on the concentration of Airbnb supply. According to their research, 30 percentof Airbnb’s NYC listings come from hosts with multiple units. If one were to look at the actual distribution of bookings, I suspect the percentage would be even higher. Some small hoteliers now use Airbnb as a distribution channel.

Over time, professionally managed inventory will surely crowd out individual consumers who lack the time and resources to manage their assets as aggressively. Viewed through this lens, the sharing economy looks less like neighbors renting out a spare bedroom (which Skift found was less than 2 percent of Airbnb inventory) and more like an incredibly efficient franchise operation to harness the energy and assets of local entrepreneurs.

So if one accepts the claim that the “sharing economy” is less about consumers sharing use of an asset and really a re-imagination of franchising, what are the implications?

“Sharing economy” models (or franchising redux) will appear in categories that historically supported large franchise networks.

Uber and Airbnb’s innovations around service delivery are real and profound. Opening the Uber app, it’s astonishing that they can deliver a high quality driver to one’s doorstep in 3 minutes every time. Integrating mobile into service delivery and using short feedback loops to monitor performance yield a fundamentally better consumer experience. The categories that have supported franchise networks (travel, transportation, education, tax prep, dining) are ripe for new entrants. In “Uberification of the Service Economy,” Steve Schlaf complied venture investments against this theme.

Regulatory pushback.

In New York, Airbnb has been fighting tooth and nail to avoid disclosing usage patterns of individual hosts. The more data reveals a professionalized supply base, the harder it will be to argue for different rules and regulations. Adherence to insurance requirements, taxes, zoning limitations, licensing, and safety practices are inevitable as Airbnb, Uber, and others look more and more like their established competitors from a supply standpoint.

Embrace of “Sharing Economy” techniques by established players.

Existing players may be slower to integrate these practices, but over time they will surely embrace them. At CheckMate (full disclosure: I’m the co-founder of the company), our mobile check-in solution empowers hoteliers with the tools for mobile guest interaction and provides real-time feedback loops on service delivery and operating performance. Wyndham now posts TripAdvisor data on its websites to create a tighter feedback loop between guests and operators. Similar techniques will appear in other franchise operations.

Uber and Airbnb have shown how mobile and social can upend an existing service model to deliver a radically improved experience. However, we should see these businesses for what they are:  highly efficient franchise operations ,  not models of collaborative consumption among fellow consumers.

Editor’s note: This is a guest contribution by Drew Patterson, CEO of Room77 and co-founder of Jetsetter and Kayak. The post went through Pando’s usual editorial process and Mr. Patterson was not paid for his work.

[Image via Foreign Pixel]