How to make a fortune without ‘doing’ anything: The Uber, Airbnb story

November 24, 2014, 10:00 AM UTC
Photograph by Justin Sullivan — Getty Images

Uber is much in the news recently, for mostly the wrong reasons. One of its senior executives threatened to investigate journalists who wrote negative things about the taxi service platform. An Uber passenger was allegedly attacked by a driver. And an Uber-affiliated driver ran over a pedestrian in San Francisco. And the company’s CEO has been accused of fostering a frat boy culture.

Without downplaying the seriousness of these events, I believe the fundamental issues posed by Uber have less to do with the company’s specifics and more to do with a business model that works by offloading responsibilities, something that many other platform companies—businesses that make money by making connections rather than providing a real product or service—do as well. I am not sure people fully appreciate the many problems inherent in this type of business.

This summer, I used Airbnb to rent a house in Claremont, Calif. The booking fee was $79—more than 10% of the rental cost. Did the house have a king-sized bed, I inquired of the owner? She would put one in time for our rental, she assured me by e-mail.

Four weeks before the reservation date, I tried to reach her. No response. Airbnb provided only modest help, with a long lag between e-mailing them and getting any reply. In the end, no king-sized bed, so we stayed at the Sheraton in Pomona as hotels in Claremont were fully booked by that time. Airbnb did, with some prodding, refund our entire booking fee, but they didn’t have to. As the company’s terms of service clearly state, this is an online platform and “Airbnb is not an owner or operator of properties.”

What a great business model. Airbnb collects money for providing a matching service on a highly scalable IT platform but faces none of the normal operating costs entailed in providing accommodations. The company is not responsible for maintenance and repairs, cleaning (or cleanliness, an issue that has caused a colleague of mine in Berkeley to stop using them)—or anything, really.

Making a business out of not being responsible

Of course, Airbnb is not alone in perfecting a business model in which companies take fees for doing nothing other than facilitating transactions. As it makes abundantly clear in its terms of service, Uber does not function as a transportation carrier nor does it provide logistics services. Passengers and drivers, and maybe even pedestrians in the way of Uber cars, are pretty much on their own.

Similarly, eBay is not a retailer. As it explains in its user agreement, eBay does not “guarantee the existence, quality, safety, or legality of items advertised.” I bet the retailers who get stuck with toys with lead in them or with inventory they can’t sell wish they had thought of such a clever out.

The list of companies that build platforms but eschew responsibility for the quality or even availability of goods or services grows daily, and why not? Margins can be enormous if you don’t have to deliver anything other than a website.

Give these companies credit for learning from experience. Remember Webvan, the startup run by a former Accenture executive that ran through $1 billion in an effort to build a business delivering groceries to homes? Webvan hired employees to drive trucks that the company purchased to haul products from its own distribution centers operated by extraordinarily complex software. Dumb business plan. Today, companies such as Instacart use contractors, not employees, to buy products at existing grocery stores and deliver it to people. Much less investment and risk.

Amazon could follow suit and raise its profit margins significantly. Why should it have warehouses or warehouse employees? It, too, could turn itself entirely into a transaction facilitator and simply take a cut for bringing buyers and sellers together—never needing to house a book or anything else it sells.

No responsibility, greater profits

So, what’s wrong with this? Nothing, if you don’t mind a sort of Wild West business ecosystem. The nice thing about big companies with substantive physical businesses is that you can collect taxes from them, regulate them, enforce employment laws, and do all the other things that go out the window in the “new economy.”

For example, while Airbnb posts requirements for its “hosts” to adhere to disability and anti-discrimination laws on its website, enforcement is obviously much tougher than it would be in dealing with a hotel chain. Many cities and counties that have passed hotel and occupancy taxes aren’t going to collect from Airbnb, which has finally agreed to collect taxes only in a handful of cities and leaves it to the individual “hosts” to comply with tax regulations.

There are regulations that govern how long people, particularly in transportation, can work. These regulations seek to protect drivers and others from accidents. Good luck enforcing those rules on thousands of independent contractors. And say goodbye to unemployment insurance and employer contributions to Social Security—because most of the people working for these companies are independent contractors, not employees.

The other nice thing about real businesses providing real products and services is that if there are problems, there is an entity that can offer remedies. The old Webvan would be responsible if it delivered rotten produce or bad meat from its warehouses, but not the new delivery services. Retailers like Nordstrom guarantee their products’ quality, not eBay. Limousine companies have established liability for hiring and supervising their drivers, and paying when things go wrong. Not Uber, although that remains to be seen as cases wind through court. Hotels carry liability insurance and have the financial wherewithal to protect guests who are assaulted by their workers or otherwise harmed by building safety problems. Not Airbnb, which certainly has plenty of financial resources but, as a “non-operator,” has shed any responsibility for what happens to you in your temporary rental.

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Offloading responsibility, including the responsibility for liability insurance, compliance with government regulations, and payroll taxes, saves costs, lots of costs. This gives new economy companies an inherent, and maybe even unfair, advantage over the competition.

Company attempts to shed responsibility for their employees—and costs—is an old story. Many years ago, some employers decided that having actual employees was a pain. There were the payroll taxes, the expense and time of hiring, legal exposure to wrongful discharge and discrimination suits if you fired people; all in all, too much trouble. So, employers offloaded employees and their work to temporary help agencies and contracting organizations, which is one reason that “nonstandard employment” has grown so rapidly and there are even associations representing the interests of the many companies operating in this industry.

The IRS and state employment services feared that they were going to lose out on unemployment and payroll taxes from independent contractors. So, they developed a checklist to ascertain whether “nonemployees” doing work for some company actually were or were not employees, and they conducted audits to ensure employees were treated as such.

The jig may soon be up

Cities and states are beginning to try to impose some oversight on at least some of the new economy companies, although such efforts are often met with derision and characterized as stifling innovation. I am not sure that avoiding responsibility and legal liability is really as “innovative” as is sometimes claimed. Bypassing zoning regulations on where hotels can be located and negating licensing requirements related to who can pick up passengers poses risks that, if you believe the terms of service agreements, truly should make the buyer beware.

For those people who worry about income inequality, there is another reason to think twice about these new business models. In a careful analysis of 53 countries from 1960 to 2006, University of Michigan business school professor Gerald F. Davis and a colleague found that the higher proportion of employees who worked in large companies, the lower the level of income inequality. This makes sense because internal labor markets and the greater social contact among employees reduces variation in wages much more so than in market-like arrangements.

Call me old-fashioned, but I actually like a company whose “terms of service” entails providing the product or service I am purchasing rather than stating all the things it is not responsible for. I prefer to buy from a company that stands behind its products, with management that cares enough about its customers to provide oversight of its employee workforce and quality assurance for its services.

Jeffrey Pfeffer is Thomas D. Dee II Professor of Organizational Behavior at Stanford’s Graduate School of Business. His latest book, Leadership B.S.: Fixing Workplaces and Careers One Truth at a Time will be published in September, 2015 by HarperCollins.


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