Amid surge of the cut-rate 'sharing economy,' a backlash grows

(Updated Sept. 29 3:30 EDT) June Suwara is getting to know her neighbors these days, and she's not happy with some of them. The retiree is among a group of homeowners in Silver Lake, a Los Angeles suburb of some 30,000, protesting the growing number of residents renting out their homes on a short-term basis.

"They're ruining a nice, quiet neighborhood," says Ms. Suwara, pointing to a home across her street where the owners have moved out and new renters come and go every two or three days. "It's illegal, and they're making big bucks, and they don't even live there anymore."

But these homeowners – some earning thousands annually – do not see themselves as lawbreakers so much as pioneers in what has been dubbed the new "sharing economy." Mostly unregulated and unlicensed, a nascent sharing industry is being touted as a new mode of collaborative consumption in which private citizens from Seoul to Silver Lake are leveraging personal assets such as homes, skills, and cars on a person-to-person basis.

The movement is fueled by ventures such as Uber, YourMechanic, and Airbnb that use mobile phone applications and online listings to connect "customers" with providers, offering services ranging from ride sharing to an overnight stay in a local spare bedroom to a brake job performed in a customer's driveway.

As the sharing economy grows, cities and businesses are taking note – and raising questions. The fees for sharing ventures are far below what the "official" services might cost, partly because many don't pay taxes, fees, or insurance. San Francisco loses some $1.8 million annually to lost taxes, according to a recent study. And New York City disputed a short-term room rental by Airbnb host Nigel Warren, initially fining him $7,000 (later reduced to $2,400) before a city agency on Sept. 26 found in Mr. Warren's favor and rejected the fine.

With the sharing economy facing increasing scrutiny and controversy nationwide, the question is whether it can adapt when subjected to regulations, or whether mounting oversight will throttle the flexibility that has helped it flourish.

These conflicts are a familiar sign of clashing economic models, says Said Elias Dawlabani, author of "Memenomics: The Next-Generation Economic System." To Mr. Dawlabani, this new model represents a structural shift. Just as the Internet reshaped the music and book industries, for example, it is convulsing other industries by putting more power in the hands of individuals.

"People have to adapt their revenue-generation models to the new reality or become obsolete," he says via e-mail. Business analyst Stephan Liozu calls it a "big bang disruptive model" that has the potential to leave those who do not adapt "on the sideline."

The acceleration of the change and the innovation process is "phenomenal and has never been so impactful," he adds. "It matters to pay attention as other legacy sectors will likely be impacted very quickly."

Indeed, as the sharing economy has expanded across the globe, businesses such as hotels, taxicabs, and licensed repair shops have begun to push back. In New York, Los Angeles, San Francisco, and other cities, hotel and taxicab services have organized formal protests. Meanwhile, government officials have begun to grapple with the clashes between established industries and emerging business models.

On Sept. 19, the first statewide initiative to regulate a new sharing-economy business passed in the California Public Utilities Commission (CPUC). The regulators unanimously voted to create a new transportation category for ride-share start-ups, which now must meet a host of requirements to do business in the state. Similarly, cities such as Hamburg, Germany; Amsterdam; and Seoul, South Korea – where the home-share movement has taken hold – have proposed or passed laws making it legal to rent primary residences in an effort to prevent mini-hotels from springing up in residential areas.

In the clash of new and old, Dawlabani says, new regulations have to emerge to protect the public interest.

"In the case of Web-based businesses like Airbnb, repeated complaints from neighbors in certain communities might reach a tipping point and force new zoning rules to limit their activities," he says.

In Silver Lake, Airbnb has some 255 listings, which factors out to roughly 93 per square mile. Rentals less than 30 days in length in a residential zone currently violate Los Angeles zoning laws – as building and safety officials told a fractious Sept. 9 community hearing on the topic. Clashes in Silver Lake have grown to such a contentious level that a large number of residents who wanted to voice their opposition to homeowners renting rooms were "afraid to attend the meeting in person," according to local land-use specialist Robert Cherno. They deputized him to attend on their behalf.

The community hearing, held in a local church, brimmed with defenders of the home-sharing idea, many speaking of their own involvement despite the presence of three officials from the Los Angeles Department of Building and Safety in charge of investigating and enforcing code violations.

When these officials informed the crowd that short-term rentals violate current zoning codes for residential areas, the sharers were undeterred.

"I have been doing this for two years," says Vanessa Johnson, who does not live in Silver Lake but came to the meeting. "What happens here will affect what we can do all over the city," says Ms. Johnson, who rents her entire house for $100 per night while living elsewhere. "My husband has cancer, and this income allows me to stay at home with him rather than leave him alone during the day while I go out to work."

The meeting was dominated by similar stories of homeowners who spoke of avoiding foreclosure via the steady income from short-term rentals. Filmmaker Victoria Byers has just listed a room in her home on the Airbnb site, hoping to underwrite postproduction costs for the film she has just finished shooting – a rock musical about Mary Magdalene.

"We have kind of a rock 'n' roll house with lots of musical instruments around," she says, adding that she hopes to attract a crowd that appreciates Silver Lake's bohemian atmosphere.

But Ms. Byers says she has met resistance from neighbors who have long-term renters in their own houses. "They don't want me to rent out my room for short stays," she says.

Brazen lawbreakers?

Mr. Cherno says the issue goes far deeper. "First of all, these people are brazenly breaking the law," he says. "They are very aggressive about their point of view and feel entitled to continue breaking the law even as they say they want to change it."

Many of the home-sharing supporters urged the neighborhood council in charge of the meeting to submit a request to the Los Angeles City Council to change the current law. Hope Arnold, who was featured in a recent Los Angeles Times story about home sharing, and who has reportedly made $39,000 through home sharing in 2013, was on the panel of featured speakers.

She made the case that sharers are law-abiding citizens who want the law to keep pace with the times. She told the audience that she routinely collected the city's 14 percent transient occupancy tax and encouraged hosts to file paperwork for a business license.

But this does not address the concerns of residents, Cherno says. Cities spent much of the past century passing laws that separate incompatible activities in the interest of public safety.

"Do we want to go back to the days when anyone can run any business they want anywhere they want to regardless of its impact on the neighborhood?" he asks.

While Councilman Scott Plante says he has not taken a position on the issue, he suggests that many sharers are essentially trying to be business owners and "are just using the fig leaf of being part of the sharing economy to do something that the city considers illegal."

Airbnb, the largest home-share site with listings in some 34,000 cities, counters such claims. The vast majority of home sharing is done for the experience of sharing, not strictly for income, and it is respectful of local residents and laws, says Molly Turner, public policy director for the home-share site. She calls many of the complaints against the site hosts "anecdotal," and suggests that many of the comments voiced by opponents are not firsthand and lack credible evidence.

In New York City, Airbnb joined the fight on the side of Nigel Warren, in a so-far successful bid to change the legal environment for home sharing there.

In Silver Lake, Cherno has photographs taken by residents that he says show short-term renters' cars parked in homeowners' driveways, as well as firsthand testimonials of late-night noise and street congestion.

Taxi wars

"This is a genuine public-safety issue as well, and these homeowners do not want their neighborhoods converted to mixed-use zones," he says.

Other peer-to-peer companies have faced similar strife as they have expanded into major markets. Taxicab companies from Los Angeles to New York have been fighting back against ride-sharing apps such as Uber and Sidecar. They have accused the new transportation groups of functioning as illegal cabs. A flier passed out earlier this summer by the San Francisco Cab Drivers Association and the United Taxicab Workers of San Francisco stated: "Unlicensed, uninspected, unregulated, and underinsured taxis are being allowed to roam the streets, creating a public safety hazard, increased congestion, greenhouse gasses, and unfair competition to law abiding cab drivers."

It added: "Under the guise of 'Ridesharing,' these rogue taxis are avoiding all regulations, inspections, fees, and insurance requirements enforced on legal taxicabs."

The fracas rose to the state level in California Sept. 19 when the CPUC, a five-member state agency, voted to regulate the new industry under a new category, transportation network company. Under the new guidelines, TNCs will have to apply for a CPUC license, conduct criminal background checks on all potential drivers, implement a zero-tolerance drug and alcohol policy, require employees to take a special driver training course, and provide $1 million of insurance coverage per incident, among other requirements.

Many cab companies say the new law doesn't go far enough, and the CPUC has promised to revisit the ruling in a year. But ride-share companies call it a sign of things to come.

"Under no circumstances will regulatory or entrenched backlash prevent the spread of the sharing economy," says David Mahfouda, founder and chief executive officer of the New York-based ride-share site Bandwagon.

He sees a new middle ground emerging. Competition with companies like his will force incumbents such as hotel chains and medallion cab consolidators to streamline and decentralize their operations, while new regulations will force collaborative companies to incur more overhead costs. Mr. Mahfouda says these new rules will both level the playing field and improve services and efficiencies in a variety of businesses "until the next disruption."

Not all peer-to-peer start-ups challenge existing businesses so directly. ThredUP, an online consignment store for children's and women's clothing, is trying to become the Amazon of used clothing.

"We want people to think in terms of reusing slightly worn items before they think of buying new," says CEO James Reinhart. And PivotDesk helps connect fledgling companies in need of cheap office space with large companies that have space standing empty. "One of the advantages we have is that we are not displacing an existing industry," says company founder and CEO David Mandell. "These are hidden transactions."

Working together

Other peer-to-peer start-ups are so new that they are not yet on the radar of existing businesses.

Or, in the case of YourMechanic, the two sides are beginning to work hand in hand from the earliest stages of the company's evolution.

Launched a year ago, YourMechanic.com links car mechanics with individuals who need repairs. But not every kind of car repair can be completed in a customer's driveway, notes founder and CEO Art Agrawal.

"In cases like a head-gasket job, which might take a whole day to finish, we refer them to a shop where they can get the work done," he says.

His company is so young that it doesn't yet have an app to kick back some benefit to him when he refers business to a shop. But he hopes that working with repair shops from the beginning so they can see the benefits will prevent confrontations later and allow both sides to profit.

He acknowledges that his model takes away the easy cash that car repair shops rely on in order to build larger relationships. "Brake jobs and other simple repairs are what those shops count on," he says. But he hopes that, down the line, both sides will see the value in sharing. "Right now," he adds, "there are only a handful, but I'm optimistic."

History is on the side of innovation, says Charley Moore, founder and executive chairman of Rocket Lawyer, an online legal collaborative. While zoning restrictions and other regulations might serve as speed bumps, he says, "I doubt that the genie of collaborative consumption can be put back into the bottle. Consumers usually get what they want."