Core magazine: The end of capitalism?
04 April 2017
- Exclusive article from Warwick Business School's magazine Core
- WBS academic Ola Hendridsson says we are seeing the rise of uberisation
- He argues premium services are becoming cheaper and easier to find
- This could challenge our ideas of ownership and the concept of capitalism
Rioting taxi drivers. Smear campaigns against journalists. And an ever-growing number of lawsuits.
Welcome to the world of Uber.
Love it or hate it, nothing seems able to stop the growth of Uber, the disruptive Silicon Valley ride-hailing company whose ambitions are as great as its name.
It operates in more than 350 cities and 60 countries, with 1.1 million – and growing – active drivers, and by early 2016 was valued at an astonishing $62 billion.
The secret of its success is an app that allows customers to summon the nearest Uber driver at the touch of their smartphone screen to take them wherever they want. The price of the journey rises and falls with demand - known as ‘peak pricing’ - and at the end of the journey driver and passenger can, eBay-like, rate each other. Clients can even track the car as it threads its way through the traffic towards them. It’s addictive.
Airbnb, founded one year before Uber, uses the same business model. It is a website and app for people to list, find and rent rooms, and by the start of 2016 it had 1.5 million listings in 34,000 cities and 190 countries. In 2015 it was valued at more than $20 billion. It even provoked similar reactions from hotel and B&B owners fearful for their own livelihoods as Uber did from minicab drivers.
There are many other companies all with ambitions to be the Uber of this or that.
And this process has a name.
It is called ‘Uberisation’. While Uberisation may mean different things to a venture capitalist and a licensed taxi driver, it is a process that has a number of components everyone can agree on. It combines the use of real-time data, mobile payments, instant gratification, use of workers or buildings not employed or owned by a company (described as being ‘decoupled’), and dynamic pricing, to create a new low-cost, on-demand economy that could manage what Karl Marx failed to do and bring about the end of capitalism as we know it.
“What Uberisation means to me is that the premium services we buy are easier for us to find and use by decreasing both our search costs as a customer and the marketing costs of the seller to near zero,” says Ola Henfridsson, Professor of Information Systems and Management at Warwick Business School. “Digital technology enables a market to develop between people that might not have existed before, and this has been called the sharing economy.
“I use my BMW for an above average 40 minutes a day and for the rest of the time it stays in the parking lot. From an economic standpoint this is very inefficient. However, what if I could safely rent it out while it is parked and know that it would be back by 5pm? Well, I would.
“That’s what Uber does. It destroys traditional business models [in this case the car hire company]. It may even start to destroy capitalism itself as the autonomous vehicles that companies like Google and Uber are developing don’t need drivers, so taxi services like Uber will be so cheap that we will stop buying so many cars, because there would be no reason to want to own a car when you could get such an on-demand service at such low cost.
“If ownership becomes less important and ownership is important for capitalism as we know it to function, well then…
“The same is true for Airbnb. I have a four-bedroom house with an annex and I could rent it out to the bowling players in Victoria Park in the summer. Now Airbnb provides me with the mechanism to choose who I let stay and earn £50–70 for a night. It is good for the economy as I am reusing empty space and it’s good for me as every pound I earn is profit.
“It won’t destroy hotels, but it will reduce their number.”
What is more, the network effect is a phenomenon by which a service like Uber or Airbnb becomes more valuable the more people use it, and this effect, Henfridsson believes, accounts for their strategies of growing as quickly as they can, as well as the winner-takes-all culture that they have to competitors, regulators and journalists.
However, critics argue that rather than a revolutionary new economic system, it is classic red-in-tooth-and-claw capitalism that makes its money by getting in between consumer and supplier. Henfridsson concedes they may have a point.
“It is a difference in degree rather than in kind, as these services operate in a very lean and efficient way,” says Henfridsson. “Just think about the number of people employed in the market and distribution systems of a traditional industry and the number of people employed by Uber or Airbnb. You hardly notice these apps are there.”
Moreover, the loose coupling gives services like these an additional competitive edge as employing workers or leasing buildings is very expensive. If an Uber driver makes a mistake or if an Airbnb property isn’t satisfactory then they can be quickly replaced.
Henfridsson warns that there is a downside to this.
He says: “In the industrial revolutions of the past, we have been able to compensate workers with new jobs, but not necessarily this time.
“We may have to change our mindset as to the nature of work, as this kind of digital technology will release a lot of people from tedious labour-intensive jobs and replace them with – what? The future is unclear. One solution might be a universal basic income, but someone still has to pay for that."
He believes home energy may be another industry that will be Uberised as new technology will allow homeowners to generate solar power and store the energy for use during the dark. This will create a market for homeowners to share energy with other homeowners and this market will be very difficult for power companies to compete with. Education may be another vulnerable area.
“This may mark the emergence of a new economic system that will spell the end of capitalism and the birth of collaborative commerce,” says Henfridsson. “Whatever it is, Uberisation is an economic force that it is going to be very hard to stop despite the protests of taxi drivers and regulators. If it’s not Uber itself, it will be something else.”
Ola Henfridsson teaches Digital Business Strategy on the MSc Management of Information Systems & Digital Innovation. He also teaches Strategic Information Management on a number of undergraduate programmes.