The On-Demand Economy Enters Phase II
The local on-demand economy (LODE) is shrouded in question marks and is frothy with early stage experimentation. But one thing we do know is that it’s moving really fast.
In that spirit, our featured video clip this week is the opening presentation at last month’s BIA/Kelsey NOW. It examines the converging trends that produce the LODE opportunity, and its future economic impact.
To underscore it’s pace, we’ve juxtaposed the video with an analyst roundtable about what’s changed in the short period since then. Below is the roundtable transcript, featuring analysts Mitch Ratcliffe and me.
Below that, see the embedded video of Mitch’s BIA/Kelsey NOW presentation. The principles still remain intact, though the marketplace is rapidly evolving (“The players have changed but the game is the same.”).
Mitch Ratcliffe: As we move on from the “Uber of x” approach into a more nuanced understanding of individual on-demand markets, what key learnings have you encountered since BIA/Kelsey NOW?
Mike Boland: One of the key lessons is that applying Uber’s model to other verticals doesn’t necessarily work. Though it has attractive unit economics, those don’t play out in practice, especially with products that have a wider quality variance. In other words, the Uber model works when you have a fleet of service providers that are relatively interchangeable. That’s what makes their supply/demand matching algorithms work so well — governed by things like proximity and minimal wait times. With things like Home services, there’s a great deal of variance in quality level from one provider to another. Home services is also a recurring service, where trust and loyalty can develop with one particular LODE worker. Per the above point, that quality variance makes service providers less interchangeable, which compromises overall quality control. It also messes with the logistical systems that dispatch supply based on things like proximity and boosting margin. That’s the other thing… some verticals like home services have razor-thin margins so matching supply and demand, a la uber, has little room for error. These are some of the reasons why HomeJoy imploded, despite the common cry that it was all about fighting policy battles about employment status.
MR: Speaking of that, what’s your take on the 1099 contractor/employee debate? Should companies be hiring or is the contractor approach still the right way to go?
MB: There’s definitely a lot of reform that’s needed and I see both sides of the argument. The right answer is somewhere in the middle. LODE companies need to protect and reward their service providers better, as they constitute the supply density that creates the network effect that these marketplaces are built on. Conversely, lots of LODE workers and advocacy groups want to have their cake and eat it too. They’ve enjoyed the flexibility of the gig economy, yet want the same benefits afforded to workers who are told when to come to work and what to wear. They can’t have it both ways. One answer lies in policy — in creating a third designation of worker between part time and full time. But because government is always too slow in keeping up with technology, the nearer term solution will be on the private sector. The Ubers of the world should say ‘fine, here’s your full salary and benefits, but now you have to show up at work when we say, and follow our code of conduct, decorum and attire.’ I think they’ll find that this option is less appealing to a large swath of their driver pool who will opt for the flexibility afforded under their current system. And if they don’t like it… there are other drivers that will. Uber is a business. It should be a good corporate citizen, but no one ever said it’s a public service.
MB: Shifting back to you Mitch, a great deal of your opening presentation at BIA/Kelsey NOW focused on this employment angle and how LODE is much more than just a new business model: It has larger societal and macro-economic implications. Where do you land in the employer/employee debate?
MR: I don’t see a debate happening yet, but the posturing that will lead to a substantive policy discussion. Right now, we’re seeing the question of contractor and employee cast only in the terms of historical experience. New technology, particularly the logistical tools that have given global enterprises such a huge advantage over small business during the past 40 years, is changing organizations and, consequently work. I also don’t think this is as simple as adding a “third category” of worker to address the gap between contracting and employment, because forms of corporate organization are fragmenting and specializing — into B Corporations, or Benefit Corporations, that mix delivery of a public good with profit-making enterprise, as one example among many new corporate forms emerging now. Work will change with that transformation of the organization.
We already have a population in which 40 percent of workers are “contingent,” which means they do not work full-time in a single job. Making the LODE model work may require extending corporate tax benefits to individual workers, so that they can invest in their skills and equipment with the same tax advantages as a company. As Shane Ginsberg of EVB, a leading digital marketing agency, said at BIA/Kelsey NOW, the onus has shifted to the worker to keep themselves skilled to compete. All those trends point to the need for a major generational debate about the relationship of work to compensation and the social benefits that the industrial economy made almost universal. New ideas, combined with established wisdom, will drive an important debate about the work and company structures. We’re hoping to help that debate come into sharp focus.
MB: Back to the theme of what has changed in this rapidly moving LODE space, what has changed most in your viewpoint since we introduced this topic to the NOW audience in early June?
MR: HomeJoy’s collapse, which was rapid and startling, surprising almost everyone outside the company’s inner circle, put the scare into investors and primed critics to condemn the LODE rather than critique the HomeJoy experience. It’s clear to everyone that Uber’s accomplishments are substantial and highly differentiated rather than the generic solution to every supply-and-demand challenge. And everyone can see that $40 billion in funding doesn’t ensure success now. That is, of course, how every other market has developed. We’re at the height of investor interest in the on-demand segment and I expect to see some cooling.
However, there are many good teams out there building intriguing and increasingly popular services that will continue to prove that flexibility is a requirement for companies and workers if they want to serve the mobile risk-taking consumer who have shown that there are markets for many unexpected services. The industry will benefit from the reflection HomeJoy forces investors and entrepreneurs to apply to future decisions. We are still in the first few minutes of this game, and it may go 28 innings, not just nine, before it becomes, as we expect it will, the new normal. By that time, the policy debate will be well under way, and there may be genuinely fresh opportunities to make work and life better for everyone involved in local business.