The value of platforms is based on their power over the market and its participants. Without the need to produce physical goods, there is no inventory required. Platforms can be accessed easily on demand from everywhere and from anybody due to the digital nature of online and mobile solutions. The business model of platforms focuses on facilitating the exchange between two or more interdependent groups instead of building products or services. It is the magic of match making, nothing else then connecting consumers and producers or other peer groups. In doing so they create large, scalable networks with reduced transaction costs and increase efficiency. Theoretically, it leads to large future profit margins. (Zysman, 2015) Chaudary, Parker and Alstyne point out one critical success factor of platforms. It is the emergence of network effects. Positive network effects mean the impact that the number of users have on the value for each platform user. The more user’s participate, the more value is offered to every single one, due to the increase of possible connections. (Choudary et al., 2016)
19 Network effects create economies of scale on the demand side of a business in comparison to the twentieth-century prevalent monopolies based on supply economies of scale, driven by production efficiencies. Nowadays platforms use the latest technological improvements to shape the demand side efficiently using social networks, app development, demand aggregation, and other methods to increase networks and value to users. “Demand economies of scale are the fundamental source of positive network effects and thus the chief drivers of economic value today.” (Choudary et al., 2016) Together with more attractive pricing, the network effects can achieve extensive market expansion and massive market adoption. This power can result in oligopolies and monopolies. Choudary et al. highly recommend to internalize and foster platform business models with positive network effects. (Choudary et al., 2016)
One of the biggest challenges for the platform business model is to overcome the chicken and egg problem. In a two-sided peer to peer platform both peer groups value depends most commonly on the number of users from the other peer group. Consumer won’t use the platform if there are no providers and vice versa. The value results from the network and if there are no active users, the network does not seem to be valuable. (Choudary et al., 2016)
To overcome the chicken and egg problem of platforms Choudary suggests eight ways to launch a successful platform: (Choudary et al., 2016)
1. Follow the rabbit strategy: Approach users from other platforms and convince them to offer their services and skills on SKILLITY.
2. The piggyback strategy: Crawl the internet with automated data-gathering software tools to obtain information about service providers who are already active in the internet.
(e.g. craigslist or Facebook groups) Create new accounts immediately for these service providers and give skill seekers the impression, that these providers are participating
20 already. At the same time inform the merchants about the solution and automatically created account and invite them to use the platform.
3. The seeding strategy: The platform offers other value rather then the network to one side of the users in order to incentivize them to move to the platform. Other users will follow, because they want to engage with them.
4. The marquee strategy: This strategy provides incentives to a key user set to use the platform. With the “influencing” key user set being on the platform the rest of users will follow.
5. The single side-strategy: This approach converts a business, product or service, that benefit a single set of peer users into a platform by attracting a second peer group who wants to interact with them.
6. Producer Evangelism strategy: offer business tools and other platform features (Escrow etc.) as main incentive to motivate skill providers to bring their clients on the platform as well.
7. The big-bang adoption strategy: This strategy uses traditional push marketing strategies to attract a high volume of attention and interest t (Cowen & Sutter, 1999)o the platform. The effect is a simultaneous onboarding, that instantaneously creates an almost fully-developed network.
8. The micro market strategy: this strategy selects and begins with a tiny market that comprises participants who are engaging in interaction already. On this way, the network can provide effective matchmaking even in the earliest stage of growth.
21 4.3 The Blockchain Revolution of societal agreements
Blockchain is a break-through technology, that opens possibilities for innovative forms of contracting and cooperation, exceeding that of monetary currency transaction such as the first blockchain Bitcoin by far. (Nair, M. and Sutter D., 2018) It has the power to reconfigure all human activities. Apart from its technical details, this chapter focuses on the potential for voluntary society.
In medieval times the social constraints or reputation of people in small villages enforced trust, certainty and transparency for business activities. When trade expanded to people that did not know each other, a trustworthy “middle-men” was required as a neutral authority with enforcing trust on both sides. Yet these middle men developed into complex and inefficient institutions. According to Hansen and Kokal, Blockchain has three properties, that disrupt the system of middle men: Disintermediation of trust, immutable record and smart contracts. They point out the advantages of having an incorruptible record and the benefit of storing data such as ownership rights and personal information. (Hansen & Kokal, 2017)
The Blockchain is a distributed ledger with a permanent record of all transaction maintained on user’s computers. This publicly verifiable ledger, the decentralization of power through a distributed mining and computational network, open entry, and open source nature of its code all allow the creation of trust (trust machine) without the need for a middle man who requires impartiality and authority to trust in. (Nair, M. and Sutter D., 2018) This is why Nait and Sutter find, that the technological nature of Blockchain enhances voluntary cooperation and create trust among participants by replacing the need for a third-party enforcer of rules, or so called
“middle-man”. As they point out, the power of Blockchain is to be seen in its stability and efficiency and that no singular person can control it alone without the consensus of the other participants. The complete ledger is stored by each node or participant of the Bitcoin network
22 on the respective persons computer. For verifying transaction and maintaining this ledger, the so called “miners” are rewarded with Bitcoins for their voluntarily supply of computational power. The resulting system is a publicly verifiable, distributed ledger of information, that engenders transparency and creates trust. There is no way of cheating by faking false transactions, altering or concealing in any way, due to the cryptographical sealing. (Hansen
& Kokal, 2017; Nair, M. and Sutter D., 2018) Other factors that lead to increased security, viability, transparency, democracy, trust and cooperative efficacy are (Nair, M. and Sutter D., 2018):
- Blockchain has low barriers of entry and is easily accessible for everyone online.
- Nodes are geographically dispersed
- Open Source Code of the Blockchain is publicly visible and verifiable
- Code is necessarily visible to all users publicly and can only be adjusted with a consensus of an existing group of preapproved senior members.
According to Nair and Sutter, Blockchain enhances cooperative efficacy. (Nair, M. and Sutter D., 2018) The cooperative efficacy generally defined as joint effectiveness of voluntary mechanisms, contributes to a common cause and can overcome free-rider problem or achieve lowered transaction costs. (Cowen & Sutter, 1999) Nair and Sutter conclude, that the Blockchain indeed lowers transaction costs and overcomes the free-rider problem by creating trust and hence increases cooperative efficacy. (Nair, M. and Sutter D., 2018)
According to Hood and Heald, both publicly visible source code as well as publicly verifiable data help to increase viability and trust for the users. (Hood & Heald, 2006) Blockchain combining both, finally leads to full transparency and highest possible governance in the Blockchain.
23 Applications and possible use cases of Blockchain can be seen for digital currency, automated contract enforcements, assurance contracts, property-title registration, dispute resolution and regulation of corporations. The letter two are crucial for the business model, that we propose in chapter 6., which is why we explain these applications shortly.
Regulation of Corporation: Nair and Sutter present the idea, that Blockchain can revolutionize the form of corporations with much better governance and effective or decision rights (or better protection of decision rights) for shareholders over the strategy of the corporation. The distributed ledger innovation can eliminate the principal agent problem efficiently offering more direct participation to the shareholders when executing their voting rights. The principal agent problem describes the conflict of interest between owners and the manager’s. Increasing cooperative efficacy through the Blockchain finally eliminates this issue and protects better against fraudulent management. Blockchain can also reduce the transaction costs of governance as for example allowing stockholders participate in the decision making process with consensus voting for the corporations they own. This means, that the distribution of profits, execution of voting rights and the release of accounting data or financial statements could be exercised by a smart contract on the Blockchain and therefore cut third-party’s by offering more direct participation, cooperative efficacy, security, trust and increasing the relative performance of voluntary mechanisms.
Dispute Resolution: The Blockchain can also create trust among trading partners by resolving disputes automatically with an Escrow function written in a smart contract. The payment is deposited and hold back into an escrow account, which releases funds only once the service client confirms the receiving of a service or good and the client releases the funds. Being written in a Blockchain the Escrow is publicly visible as verifiable, therefore trustworthy. In case of a dispute, “trust agents” can intervene and decide who gets the payments. Because the
24 trust agent has no full control of the escrow account and locked money in it and does not know the personality of the related party’s his only interest is to decide in favour of fairness and dispute resolution. With such a multi-signature escrow account, being publicly visible the risk of appropriation by the trust agent is eliminated. Naiv and Sutter call it the creation of a marketplace for trustworthiness and reputation. On this market trust agents would compete with each other on the basis of reputation and fees charged (Nair, M. and Sutter D., 2018) The company or platform offering such an Escrow function for dispute resolution benefits from the increased fairness, trust and can even outsource the activity of customer support to the crowd of Blockchain participants, hence offer to pay an automated reward to the service of dispute resolution to the “trust agents” in the network.
Customer Loyalty Programs: According to Kowalewski, even loyalty programs are vulnerable to be disrupted by Blockchain and Smart Contracts. The advantages are to be seen in a bigger variety of redemption options and tradability on crypto markets for loyalty reward assets. Even the loyalty programs most valuable data can be attached to the rewards with support of the smart contract enabling the users to decide what to do with this peace of data. (Kowalewski, D.
& McLaughlin, J. & Hill, A., 2017)
5 Market research
This section analyses the global freelance economy and gives insights about the world of freelancing and its estimated size. Secondly, we analyse the prevailing trend from formal employment towards freelancing. Thirdly, we analyse the grey labour market with its inherent issues and threats for workers. Finally, we research the market for competitors and their freelancing platform strategies.
25 5.1 Freelance Market
History & Growth
As mentioned at the outset, “gigging” has witnessed a significant growth within the past two decades, driven by advances in technology and changing global economic conditions. Indeed, a recent report by global consultants McKinsey states that up to 162 million people in the United States and Europe—or between 20% and 30% of it is population at working age engage in some form of independent work. US government statistics from the Small Business Administration agency show that the entry rate of non-employee businesses is now as much as three times that of employee businesses in some cases. (Farrell, 2016)
The McKinsey report outlines four major classes of individuals who partake in the gig economy as independent workers. They are:
- Free agents, who “actively choose to work independently work and derive their primary income from it.” (Farrell, 2016)
- Casual earners, who “use independent work for supplemental income and do so by choice.” (Farrell, 2016)
- Reluctants, who “make their primary living from independent work but would prefer traditional jobs”. (Farrell, 2016)
- Financially strapped, who “do supplemental independent work out of necessity.”
(Farrell, 2016)
Figure 2: 2016 McKinsey Global Institute survey
26 It further states that casual earners and free agents (doing independent work by choice) report greater work satisfaction than reluctants and financially strapped, who do so out of necessity.
Interestingly, free agents also are more satisfied in multiple dimensions than those holding traditional jobs. This indicates, that nonmonetary aspects of freelancing are valued by many people. (Farrell, 2016)
What this means is that coming from a situation where traditional employment has been perceived as the desirable norm (and still generally is), independent employment is not only becoming more of a widespread due to push factors, but also because more people are choosing to use that route to navigate through the world of work. The flipside of this is that as freelancing/flexible employment/on-demand work gains prominence, there have been a number of negative consequences in terms of offered compensation, employee rights, work benefits, working hours and even healthcare plans.
Uber for example, has spent a lot of time in court trying to prove that its drivers are not actually its employees, and hence are not entitled to workplace health insurance. Other gig platforms with less visibility than Uber continue to fly under the radar as many complain that they are in fact being exploited – required to work full time hours or longer for essentially no benefits and less pay. The rise of freelancing in their view, is merely the rise of corporate greed which is exploiting the millennial generation and depriving them of the guarantee of income, homes and security that their parents had.
Independent work is rapidly evolving, supported by the emergence of digital platforms. As of today, just 15% of surveyed freelancers have used a digital platform to offer their services, but this could change rapidly as the burgeoning on-demand economy continues its linear growth.
(Farrell, 2016)
27 State of Present Market
A market research by Askwonder puts the total market size of the global gig economy at $ 1.5 trillion. Half of the world's freelancers are US-citizens. The total number of independent workers worldwide can approximately be put at 77 million. (Askwonder, 2018)
The gig economy is growing fast. Presently, platform-based freelancing is not yet displacing the traditional payroll employment. Yet this could change soon and fast. Available data shows that online freelancing is concentrated in large metropolitan areas so far. (Hathaway, 2016) The rise of digitization allows skilled workers to become self-employed. 41.9% of freelancers obtain their training from universities and colleges, 43.8% are self-trained, while 13.4% learn on the job.
A research by Askwonder in 2014 breaks down freelance work in terms of earnings as follows (Askwonder, 2018):
- Technology jobs ($486 million) - Admin Support ($110 million )
- Writing and translation ($109 million) - Design & Multimedia ($83 million) - Mobile ($71 million)
- Sales and Marketing ($49 million)
- Finance and Legal ($33 million) (Askwonder, 2018)
The global distribution of freelancers is as follows (Askwonder, 2018):
- North America: 50.7%
It should be noted that records distinguishing freelance work from payroll employment hardly exist around the world, so the available figures (which may have debatable accuracy) are used to extrapolate on a global basis. The continuing rise of independent work suggests that
28 companies will need to adapt and develop new tools and processes to efficiently handle the new independent way of working. (Askwonder, 2018)
5.2 The prevailing Trend of freelancing
According to the Intuit 2020 report, countries presently recognized as less economically developed will become the drivers of global economic growth, and at the same time, the cost of starting a business will fall substantially. (Intuit, 2010)
What this means is that freelancing is set to explode in popularity and application all over the developing world, from Africa to Asia through South America as young and ambitious populations of tech savvy people become economically active. While this is happening, small businesses will be affecting a shift in their expense models from fixed-cost to variable cost, adopting a pay-as-you-go approach to minimize the business’ investment risk exposure and liquidity requirements. The same report predicts that work will undergo a fundamental shift from full time to free agent employment. Freelancers and part time workers will replace the traditional employment type. Hiring contingent workers will become a long-term trend. Even more than 80% of large companies plan to extend their use of independent and flexible workforce. (Askwonder, 2018; Intuit, 2010)
The Huffington Post reveals how fast the freelancing market grows and projects that ''if even a small fraction of inactive youth and adults use these platforms to work a few hours per week, the economic impact would be huge — amounting to some $1.3 trillion annually by 2025, according to projections.'' (Askwonder, 2018; Lund, 2015) Lunds research expects, that current freelancer growth rates lead to a high level of freelancing in our societies workforce by that year. (Lund, 2015)
According to Wald, the growing prevalence of independent work brings tangible economic benefits, such as boosting productivity, providing opportunities for the unemployed and raising
29 labour-force participation. Digital platforms can amplify all these benefits through their faster matches, seamless coordination, larger scale, richer information signals and enabling trust.
Consumers finally benefit from the improved matching, greater availability of services and fulfilment of their needs. (Askwonder, 2018; Wald, 2014)
5.3 The grey labour markets
The so-called “grey labour market”, also sometimes known as the “informal labor market”,
“shadow economy”, or “black economy” is the part of the economy that is not regulated by government. That’s the reason why it is excluded from national GDP figures. It is generally characterized by low-skill “neighbourhood services” and activities that cannot be fulfilled in whole or in part over an electronic connection but must be done in person with physical encounter. (Turek, 2015) For example cleaning, painting, personal training, piano lessons, babysitting, grocery shopping, hardware installation, electrical work and plumbing. In most of the cases there are even tangible goods, such as tools or spare parts involved to carry out the service.
Within the offline freelance market space, there are two basic business models that generally characterize the way skill providers interact with their clients. There is the model whereby a labour hire broker or agency connects skill providers with local customers, handling all financial transactions including taxes, and withholding a service charge from the freelancers’
pay for this service. There is also the model whereby skill providers connect directly with their offline clients and usually accept cash payments which are incredibly difficult to track on a large scale for tax purposes. The consequence is tax evasion and the lack of social security.
30 Offline Labour Broker for Grey Market
The labour broker is increasingly becoming an obsolete entity as technology makes it possible for providers of handy skills to connect with clients and offer them their services directly.
The labour broker is increasingly becoming an obsolete entity as technology makes it possible for providers of handy skills to connect with clients and offer them their services directly.