Airbnb and Uber are, far and away, the two poster children for digital businesses disrupting physical-world industries in deep ways. As such, it is unsurprising that they have been reaping all the growth, value, attention and regulatory scrutiny that comes when scalable marketplaces hit up against large and entrenched industries.
Uber’s private market valuation has accelerated far more rapidly than Airbnb’s in the last several years. But many of the technorati believe that Airbnb has—in the long term—a more defensible business than Uber because Airbnb is a natural global monopoly whereas Uber is engaged in a market-by-market dogfight.
Recently, however, as local regulation attempts against both Airbnb and Uber evolve—notably Airbnb’s big blow in New York—a secondary narrative is becoming clear.
The class of natural global monopolies, while theoretically more valuable, might also be more susceptible to local regulation than region-by-region marketplaces. That is because the number of voters in any one place who benefit from global monopolies is smaller than the number of people they negatively impact. The benefits are spread broadly; the negative impacts are concentrated.
Natural Global Monopolies
Most networks—even big ones—are regional and factional. There aren’t that many networks that become more valuable the more global users they have, regardless of where those users are.
Take Facebook. On some abstract level, a new Facebook user in a faraway place like Africa or Indonesia might make my experience on the service marginally better. But in a practical sense, adding people I don’t know to Facebook doesn’t do me, as an existing user, all that much good. There are economies of scale in providing the service. And perhaps the value of the service in a celebrity-broadcast-oriented sense (i.e., live video), but not for the average user.
Airbnb, however, pretty clearly fits in this rarified strategic place of global return on scale.
Any given traveler can go almost anywhere on earth. That means that as hosts add inventory to the Airbnb network, the network becomes more valuable to me as a traveler on some level almost regardless of where that inventory is.
The inverse is also true. The more travelers who look for a place to stay on Airbnb, the more valuable a more liquid network is for hosts. That makes it more enticing for hosts to list on Airbnb.
The fact that we live in one world, and any given person might travel to any given destination globally is fantastically good for Airbnb. It means that it is the leader in a natural global monopoly. If you are traveling to Sao Paulo, you obviously don’t want to have to figure out the best local marketplace for room rentals. You just want to look at the deepest single marketplace you can find.
If this is what gives Airbnb its intellectual business mojo, the inverse logic is what makes Uber such a rough business.
While it is nice to be able to go to a new city and pop open the same app to get a ride, almost all of a person’s transportation needs occur in their home market. My transportation budget may be technically global, but more than 90% of my spend is local.
That means that while there might be return-on-scale benefits in any given market for a ride-sharing company (creating liquidity and matching a bigger customer base with a bigger provider base), winning in one city doesn’t give you that much of an advantage in other cities.
The fact that ride-sharing is not a natural global monopoly means that even the largest player must constantly quell local rebellions in each of their markets. Uber needs to deal with Lyft retaking market share in San Francisco by plowing in marketing dollars even if Lyft has nowhere near the global footprint of Uber. Uber also needs to deal with Gett in New York cropping up with a regional offering.
Uber has to be willing to slog it out with upstarts so long as small players are willing to put in a small amount of money regionally to challenge them. Uber’s global might and investment does them no local good.
In pure theory land, and setting aside ultimate market size (which in both cases is enormous), this dynamic should make Airbnb a far higher-margin and more attractive business.
Regulation is Horse of a Different Color
Regulation works a bit differently, however. In the case of local regulation, it turns out that global monopolies might be in a far worse place than their local brethren.
A few weeks ago, New York Gov. Andrew Cuomo signed a law that basically made Airbnb illegal in New York, an enormous market for the company. While enforcement of the decision is on hold, it is the most recent example of local regulations that are quite negative for Airbnb. How could this happen to a service that is so well-loved?
The problem is that, by definition, if you live in a given city, you almost certainly aren’t a local consumer of the service. New Yorker voters aren’t the ones using Airbnb in New York as guests.
Of course, the hosts themselves are local. However, by raw numbers there are far, far more people in New York working in hotels and the hospitality industry than there are Airbnb hosts. So, the local votes and local mandate just aren’t there.
That means that Airbnb, when trying to defend its right to operate in a given market, ends up having to make really complicated arguments about how it benefits a local area. Does the monetization platform they provide make real estate more valuable to those with a space to offer? Do extra travelers that couldn’t afford a hotel improve local commerce for merchants? What about affordability? What about the construction industry if fewer hotels are needed?
These are all complicated issues that you could explain, study, and try to use to sway votes. But the net reality is that a service where most of the benefits accrue to those who aren’t local voters starts at a major disadvantage.
The beauty for Uber, which despite occasional flare-ups has been successful in staving off regulation, is that the bulk of its consumers and drivers are local to any municipality. And, of course, there are far more users of Uber than there are taxicab drivers. This gives Uber very direct access to a populism card—the horde of consumers who use Uber in a given city—to fight off regulation in a market-by-market way.
So, the net might be that local monopolies have to deal with the cost of never-ending local competition but have stronger bases of local support to fight off regulation. Global monopolies have the opposite position on the board.
Challenge to Capitalism
In the end, Airbnb and Uber are both clearly very useful and good platforms for people. These platforms, empowered by identity and connectivity, allow us to reduce needless production of cars and needless building of hotels. They make better use of what we have and make us happier.
The challenge is that they aren’t necessarily good for capitalism overall and especially not so on a region-by-region local level.
And, as I have written about before, this is the challenge of our times. For generations, technology has led to more production and more capitalist growth, but technologies that drive efficiency do no such thing.
It would be a shame for us as a society to regulate away services that help us reduce and reuse in productive ways. But I believe that if we don’t figure out big and bold ways to navigate these transitions at the federal and global level with good laws and good transitional plans, we will be dramatically worse off.