The announcement that Lyft's founders are leaving the company spurred Wired to say it "signaled the end of the gig economy dream," and I think Wired is right.
The luster has been dulling for a good couple of years now, and it's probably time to reset our thinking. Gig work will still exist. It just won't rewrite the rules of the economy. We won't have a gig economy. We'll have the same old economy, just with more gigs available in it.
That reset will have implications both for how insurers organize their own work and for what they insure.
The Wired article focuses largely on the "dream" part of the "gig economy dream." It talks about the good vibes that the founders wanted to create when they "recruited anyone with a license, a vehicle and a willingness to affix a pink fuzzy mustache to their car and greet strangers with a fist bump, welcoming passengers into their front seats." The article also describes how the founders wanted to reinvent urban planning by removing the need for "too many parking lots taking up space that could become parks or playgrounds or housing" and hoped to "help many people escape the tyranny of car ownership by letting them use other peoples’ vehicles occasionally instead." The article laments the dashing of those dreams in favor of a new CEO who is solely focused on "the realities of turning a failing enterprise around."
But the article also notes that "we are still learning about the complicated effects of decoupling service work from benefits like health care and sick pay" and, in general, tees up what I think should be broader concerns about the gig economy itself--not just the dreams it was supposed to enable.
Uber and Lyft certainly captured our collective imagination as exemplars of what the gig economy could be, and back when interest rates were essentially zero, they could raise all the money they wanted and just throw it at problems. But economic reality has a way of setting in, and it has.
When two colleagues and I did some consulting work five years ago for a major company trying to understand how autonomous vehicles might fit into the ride-sharing market, one of the scenarios we laid out for them had Uber and Lyft going bankrupt by now. An executive at the client had dismissed the companies as being great "for people who don't understand depreciation," so we laid out what might happen when drivers had to face up to the wear and tear they were causing for their vehicles, rather than just looking primarily at what they were paying for gasoline.
We saw that there could be other problems, too. Startups tend to begin with a "land grab." In the case of Uber and Lyft, that meant lining up as many drivers and customers as possible, as fast as possible. But startups have to move beyond the land grab phase to become real businesses, so Uber and Lyft were always going to start taking a heavier cut of the fares and begin raising those fares. That would mean fewer people deciding to spend their time driving, as well as more people deciding to find other means of transportation or just staying put.
It wasn't clear — at least to my two colleagues and me five years ago — where the equilibrium would be, but it was always clear that the luster would dim. (I wrote at length about the arc for e-commerce startups back in January, in case you're interested in reading more.) While there is still considerable uncertainty about just what the future holds for ride-sharing, especially with autonomous vehicles on the horizon, anecdotal evidence is mounting that ride-sharing will matter much more for those needing to summon a ride somewhere off the beaten path rather than becoming a dominant form of transportation.
I did my own little test a few weeks ago when I landed at Washington National Airport. While I had reflexively reached for my Uber app, I went to the cab line and saw that a taxi to Georgetown would likely cost me slightly less than the fare I was being quoted by Uber — and sure enough, it did, for a car that was right there rather than for one that would arrive in seven minutes.
This is the normal course not just for visionary startups but for big ideas. Remember the fuss about crowdsourcing, crystallized in a 2004 book by James Surowiecki? The book was certainly thought-provoking, but the notion is now relegated to niches. Even the political prediction markets that were all the rage have turned out to be interesting but not overly reliable. How about the notion that customer reviews would provide piercing feedback on products and companies? There's certainly some utility, but so many fake reviews get posted that you have to be careful if you're going to glean useful information from Amazon, Yelp, Glassdoor, etc. Or, how about wikinomics, popularized by Don Tapscott in a 2006 book with the grand subtitle, "How Mass Collaboration Changes Everything"? That idea just never played out. Instead of having the great minds of the world collaborating on pharmaceutical breakthroughs, we have low-level gigs being offered on Craigslist or via Amazon's Mechanical Turk, which an academic study in 2018 found pays $1 to $6 an hour.
So, where does the gig economy go from here?
The key issue that doomed wikinomics and that insurers need to consider as they think about incorporating gig work into their businesses boils down to transaction costs, the expenses incurred when buying or selling a product or service.
That notion takes me back to the late 1990s, when, in the first flush of the internet boom, tech evangelists talked about how it would eliminate transaction costs and break down the walls erected by major corporations. Companies, the thinking went, would increasingly be organized like major films in Hollywood. A group of talented people would get together for a time, work on a project and then head off to work with others on different projects.
It happened that I had a connection with Ronald Coase, who had come up with the notion of transaction costs in a 1937 article, "The Nature of the Firm," that eventually led to his being awarded the Nobel Prize in Economics, so I decided to go to the source and ask what he thought. Coase was in his late 80s at the time but was tuned in to the potential of the internet. (He lived to 102.) He agreed that the internet should slash transaction costs and said that some $2 trillion of expense in the U.S. economy could be targeted (giving me my headline for the magazine, Context, that I edited at the time). But he also cautioned that "one man's transaction cost is another man's revenue." In other words, those being targeted weren't just going to roll over.
Coase's breakthrough idea in "The Nature of the Firm" was that the size of a company depends on an equilibrium based on transaction costs. For instance, it might seem to be more efficient to have few or no permanent lawyers on staff, but if you have to hire them on a per-project basis, you run into transaction costs. You have to vet your prospects. You may have to wait a bit until the right ones become available. You have to bring them up to speed. You have to allow for some misfires. And so on. So the size of your internal legal department depends on a comparison between the cost and utility of having people you know quickly available and the cost and utility of relying on external resources. And that same sort of calculation affects every part of every business. That's why wikinomics didn't work: Coordinating resources on complex projects was just too slow, too complicated, too expensive.
Insurers already have considerable experience coordinating with outside resources, especially with agents but also with adjusters hired on a contract basis, with underwriters at MGAs, with third-party administrators and so on. Insurers are also increasingly using technology to deal with customers directly in ways that used to require an employee or a gig worker — for instance, having customers take their own pictures of the damage to their car after an accident or having them do a guided walk through their home in lieu of a traditional home inspection.
So, I think insurers are already pretty well-positioned for where the gig phenomenon will end up. They don't need to consider reinventing their businesses. They just need to focus on using technology and lots and lots of discipline to continually become more efficient about coordinating all the resources that go into a sale, into underwriting or into handling a claim.
Keep chasing away those transaction costs.
Where insurers might want to do some rethinking is in terms of how much they're gearing up to handle the risks of a gig economy that won't materialize. Lots of auto insurers have been innovating to cover ride-share drivers, but I don't think that market will be as big as many have projected. Yes, loads of writers and software programmers will continue to freelance from home, but, in general, the movement is back toward the office. Companies would love to dodge health insurance costs and other benefits by recategorizing employees as contractors, but a legal backlash seems to be gaining momentum against that tendency.
I often tell people that I've been watching the same movie on digital innovation for decades, since the Wall Street Journal put me on the computer industry beat in the 1980s, so I'm pretty sure I know how this story ends. The gig economy will be seen as a great term and an idea that animated a lot of progress but that didn't mark a fundamental change.
Cheers,
Paul