Hungary: The Painful Birth of the Sharing Economy

The rapid evolution of innovative business models rooted in a sharing economy has shaken up pricing and distribution of goods and services formed over many years in Hungary – in a similar way to how the internet itself had already reshaped the retailing, music and film industries, among others. In 2016, 4% of Hungarian retailing sales is expected to be generated by internet retailing.

The recent innovations are likely to challenge conventional business models in other sectors, like transportation and hospitality. The rise of sharing economy business models through the internet has acted as a catalyst and created plenty of opportunities for new entrepreneurs to offer their services in Hungary as well. At the same time, they are among the biggest threats to the regulated corporate world and may well see a swift backlash.

Uber banned, but Airbnb still legal and thriving in Budapest

The presence and dynamic growth of leading international brands like Uber and Airbnb has inflamed major debates on highly complex issues, such as taxation and the regulation of markets – all this spiced with the deep-rooted needs of Hungarians for state assistance when things get difficult.

Uber, the poster boy for aggressively taking business away from cab drivers in Budapest, was the first service if its kind. However, the passenger-ride dispatch service is now totally banned, as it would need registration and only fixed prices are allowed to be used, among other criteria, making Uber-like services uncompetitive against regular cabs. All this happened shortly after the company had managed to sign up more than 160,000 customers and 1,200 drivers by mid-2016, following its November 2014 launch. Meanwhile, a few other online platforms, like Taxify, to connect drivers and passengers for a ride-share either on short- or long-haul drives, still exist as their services were not considered similar to a licensed taxi service.

Short-term accommodation rental services, like Airbnb, have become the next number one target, as they benefit the most from the significantly increased flow of budget tourists. Airbnb is especially popular among foreign tourists, who prefer to stay in apartments to feel the buzz of downtown Budapest, rather than stay in mid-priced hotels. Currently, there are over 8,000 apartments listed on Airbnb, mostly concentrated in Budapest. This represents approximately a fifth of all short-term rental outlets in Hungary, which are serving mostly seasonal domestic tourists at popular holiday and spa destinations, but other popular destinations across the country are also catching up, creating a headache for people looking for long-term rental services, as supply is becoming more limited, not just for hotel operators.

Opinions are also divided – depending on one’s attitude towards free enterprise versus rigorous control of market dynamics, as used to be the case during the communist era. The pure short-term business interest, or how the person benefits from the emerging business models, either as a user, or as a service provider, also weighs heavily in deciding whether someone is for or against the new initiatives.

Less-known sharing economy players provide a multitude of services

Hungarians have jumped on the fast-running train of the sharing economy and it could prove difficult to stop it: the country quickly evolved into the home of self-made drivers, garage-fair organisers and hotel/facility managers, although everybody seems to be aware that an app or a service can be banned at any time, as with Uber. Oszkar.com, blablacar.com and, most recently, taxify.eu entered the passenger transport sector, while the internet is full of independent service operators offering parcel delivery for customers buying larger items, like furniture or fridges, which fit into a minivan. Yummber.com is a locally developed application to connect self-made cooks preparing meals at home for travellers and workers from nearby offices looking for authentic home-made food. The latest idea is Barking, an app developed in Estonia to rent out temporarily empty parking space when the owner is not using it – with all these collaborations conducted through mobile applications.

The buzz around these initiatives boosted the entrepreneurial spirit of Hungarians and sparked further creative ideas to support the main services – home cleaning, sales and marketing training for start-ups, and even interior design consultancy to help create appealing interior designs – to help wannabe fortune makers.

Let’s examine the major trends leading to the current situation and provide an outlook for future innovators with the intention of doing business in Hungary.

Sharing economy in Hungary – invented ages ago

Transactions between individuals (mostly without middlemen) were an integral part of Hungarian retailing and tourism culture even during the 1970s and 1980s – the final decades of communist rule – so the concept of sharing and making some money out of it is deep-rooted in Hungarian culture. The authorities also turned a blind eye and let these small deals go on. Renting out a cottage at Lake Balaton, the most popular summer holiday destination for foreigners, taking tourists from the airport to hotels, tutoring children, or selling used goods were common – even before online platforms existed: newspaper classifieds, notes on lampposts and word of mouth were the leading communication channels. The communist party let such deals take place as an extra source ofincome, which was the exception rather than the norm in the Eastern Bloc.

Such transactions kept growing even during the 1990s, and widespread access to the internet just gave it a further boost. The ethical stance on paying taxes for the income generated in this way has traditionally been low, however. Hotel operators, retailers, taxi companies and other stakeholders never questioned the status quo, although these transactions took some of their sales. It also resulted in lower tax revenue for the state and local governments, although they benefited from additional revenue in other ways, mostly from tourism.

The big question – to regulate or over-regulate

Most innovative concepts are to help break down conventions and match demand and supply in real time. Some categories are often over-regulated, or unnecessarily protected by administrative tools, as argued by proponents of the free market and free enterprise. The issue is complex and nowadays more people tend to look for shelter from the state as a caregiver in our world full of uncertainties, therefore less regulation is highly criticised and often blocked. Of course, any relief on the tough conditions hurt the business interests of the existing market players, which are not prepared for this type of competition.

The Hungarian taxi market is the best example. It is highly regulated, without any opportunity for differentiation between the various taxi companies – for example major branding visuals are standardised and fees are fixed (even in the case of sharp changes in fuel prices). This gave Uber a huge and special competitive edge as its aggressive, adjustable pricing (with driver feedback and proper tracking of the route taken) was warmly welcomed by locals and tourists alike.

Can transparency and ethical business practices take out the sting?

New business models should assure state organisations and legislative bodies that the revenues generated are transparent and participants are paying their taxes fairly. Of course this would be a highly fragile status quo, but it would help to answer the objections often raised. Eliminating cash from the process and tracking transactions online would create more transparency and provide the necessary peace of mind for both parties, as well as the tax authorities.

The new business models require new approaches in taxation as well: there is a need for a more simplified reporting system with fair rates to pay. It is better if operators proactively prepare master plans with special attention to tracking sales and reporting and paying taxes. Of course, cooperation with local authorities is also essential – which should also be more flexible themselves. The countries with greater adaptability will make more out of the potential as opposed to the ones completely banning a service. For example, Hungary has successfully launched a flat fee tax payable monthly for small businesses with annual sales of less than HUF6 million. It has also managed to eliminate a lot of paperwork.

Bans are not a long-term solution

All marketers that feel the competitive threat from these new applications have to work harder to prove their models are valid and the price they charge for their services is fair. The new models bring unconventional pricing schemes and new meaning in terms of value. Nowadays, lower overhead expenses, more flexibility and, last but not least, more personal interaction and service are the key competitive edge of the start-ups. This is an issue corporations have to address, perhaps completely redesigning the value chain, taking into consideration the offers of new competitors. For example, evaluating the driver, the host or the cook itself and not just a company – as in the case of hotels or retailers – gives a new, more human touch to the whole process and it has multiple advantages in creating trust and branding.

Innovators in the sharing economy are smart, like Hungarians, who are said to enter a revolving door after you, but find a way to emerge from it before you. The evolution of the sharing economy during the past 2-3 years has clearly demonstrated bottlenecks and major challenges, but there is a whole new ecosystem of services building up.

The market will flourish and further new ideas will be tested and fine-tuned every day, so it is better to prepare for later conflicts and carefully plan business strategies. Of course, some players will just find loopholes in the regulations, but there will be real innovations and game-changers. This will happen after each and every ban or tightening of the rules, just as in the case of Uber, when plenty of other new initiatives got ready in next to no time to fill the market gap created by the forced suspension of the service.

It seems governments cluster sharing economy models into three major groups in terms of how to regulate them: either ban, tolerate, or support these initiatives, depending on how an app or a service fits into the paternalistic policy, or what is the net takeaway from the voice of lobby groups. For younger readers this has echoes of communist ideology in terms of the arts, when a piece or an artist would be totally banned, tolerated or supported, according to the judgement of key decision-makers. There are plenty of challenges ahead of us before all business models receive the same evaluation around the world and principles are unified.