Be Partners In Regulation, Or Be Prepared To Be Forced Out

05/12/2016 11:34
Yuya Shino / Reuters

The decision by Airbnb to enforce London's regulations limiting the number of nights homes can be used for short-term lets marks an important turning point for the so-called 'sharing economy'. For the popular home-sharing platform, it is a decisive departure from previous resistance to government regulation - notably in the United States - towards cooperation.

Critics of Airbnb argue that the platform has enabled people to flout the law by letting out their properties for more than the 90 days permitted by planning law. Furthermore, they argue that the company is contributing to London's housing crisis by removing homes from the market for long-term rental.

The research we carried out at IPPR - using Airbnb's own datasets - has found that at present levels its impact on the London housing market is negligible, and that the risks which short-term letting could pose in the future can be headed off with reasonable, robust regulation that all home-sharing sites must follow. Our recommendation was that Airbnb should develop their platform so that hosts approaching the 90-day limit should be warned that they are at risk of breaching planning rules, and that those attempting to let more than 90 days should be prevented from doing so unless they had the requisite planning permission.

Airbnb's decision to go down this route is a significant development. It places the burden of compliance on the homeowner rather than local authorities, with Airbnb taking on for itself an enforcement role of regulatory rules.

This new approach arguably strikes the right balance between the interests of homeowners seeking to gain additional income and the broader interests of society to ensure housing stock is available for residents, and for communities to be settled rather than transient. It also helps to maintain Airbnb's unique selling point of offering 'authentic' London stays - something that is typically offered through its hosts operating on a casual basis, rather than its commercially-run listings.

Airbnb's move reflects a growing realisation from tech companies that they cannot create the future of our economy alone: that the rules of the market are set by society, not by private corporations, no matter their own assessment of the social value of their mission, and despite many of their founders' Silicon Valley libertarian instincts.

There is a striking contrast between the approach adopted by Airbnb and that by the taxi company Uber in London. Uber's sharp business practices have been seen by many as hubris underpinned by business logic. It is well-recognised that there is a huge first mover advantage precisely because network effects tend towards monopoly, thus driving aggressive expansion. The same is true for all platform players. What is less well understood is that these firms are, in fact, rather vulnerable.

Companies such as Uber and Airbnb are often described as part of the 'tech sector', with their apps understood as technological innovations. Yet in sharp contrast to, say, pharmaceuticals, there is little proprietary innovation behind them. They are more properly understood as business model innovations that take advantage of advances in commonly available technologies from the smart phone to GPS. Crudely, there is no patent protection that would stop a new entrant.

As a result, policymakers have little to fear from taking a tough regulatory stance that protects the public interest. Indeed, the tendency towards monopoly is precisely the justification for appropriate regulation rather than simply allowing the free market to let rip. If sharing economy firms are unwilling to accept regulation, they can be allowed to leave. With relatively low barriers to entry, a new firm that accepted the regulatory framework would rapidly expand to fill the void left behind. Uber already has competitors, such as Hailo, seeking to gain part of its market share.

The challenge for public policy is to develop a sufficiently sophisticated approach that captures the benefits of new business models but minimises their drawbacks. Those who criticise Uber, for example, often fail to see that its rules-based system is displacing a minicab trade that in many cities is exploitative and arbitrary for drivers and provides poor quality for consumers. The recent court judgement that Uber drivers are not in fact self-employed but are employees and should have proper employee rights is exactly the right way for regulation to proceed.

Different parts of the 'sharing economy' will inevitably need different forms of regulation. Governments need to be smarter and bolder in how they approach this task. If they want to retain their social licence to operate, companies would be well advised to cooperate rather than try to resist.

Tom Kibasi is Director of the Institute for Public Policy Research