Saturday, 15 July 2017

When it's somebody else's money you don't care.

This is usually hailed as a problem with the public sector, but, as an attitude, it's much more universal. Take Uber. What Uber charges is basically rent for the use of its app. Its unavoidable input costs are pretty close to zero in the grand scheme of things - a few people to keep the computers running happily. Yet "Uber has raised about $11.5 billion from 14 rounds of venture capital and private equity investors" and in 2014 it lost $671M against a net revenue of $495M and in 2016 its reported loss was $2.8Bn on a net revenue of $6.5Bn. Quite apart from wondering where all the money is going, you have to wonder why the owners of the company don't do anything about it.

As a side effect, it is reported in Wikipedia "The increased usage of Uber and other ride-sharing companies has negatively affected the values of taxi medallions in many cities. Many banks that lent money against medallions as collateral faced increasing risks of default." thus demonstrating that the value of the "medallions" (permits) is simply rent.

18 comments:

Lola said...

Sounds like a win for the Uber drivers to me. That or the Uber 'investors' are idiots.

Mark Wadsworth said...

They spend it on advertising.

Nice to see war if rent seekers in action. A pity they can't both lose.

Rich Tee said...

I read an article recently that the economics of Uber's business model mean that it can't survive unless it eliminates all the competition and becomes a monoploy. This would explain why it behaves so aggressively.

Can't remember the details of it now.

Lola said...

RT. Or the drivers end up owning the platform.

Bayard said...

Given that the Uber drivers both supply their own equipment (the car and phone) and are paid by results, not by the hour, it's hard not to conclude that the pressure for them to be classified as employees, not self-employed, is mostly coming from the other side in this rent-seekers' war.

Mark Wadsworth said...

L, do you nean that Uber drivers get their advertising paid for? It's not much help to them as they are in a very competitive market (against other drivers) where all 'rents' are competed away.

B, do you mean that the pressure is from the normal taxi drivers who really are self-employed and thus only pay one-third as much in National Insurance?

Bayard said...

Mark, well Uber would have less of a competitive advantage if the drivers were deemed employees as they would have to pay employers' NI. It's pretty tortuous logic to say that normal taxi drivers are self-employed whereas Uber drivers are employees, but that is par for the course these days. Mind you, there appears to be some pressure from the drivers themselves who think they would get a better deal if they were on at least the minimum wage*, but this may be a fabrication based on a few drivers who have been paid to appear in the press and say they want to be employees. After all, it's in the interest of the government that as many workers as possible are deemed employees so that the govt can collect the maximum Employment Tax (aka employers' NI).
*Of course they would most likely be unemployed if Uber was forced to treat them as employees, as Uber would probably simply stop operating in this country.

Lola said...

MW. If Uber cannot exclude competitors it could be worth diddly squat. All the returns would end up with the drivers.

Lola said...

There a very few barriers to entry for marketing platforms like Uber. Uber can be easily replicated. Hailo for example.
Uber and Hailo solve the greatest problem for taxi drivers, finding fares.
Plenty of businesses outsource their marketing - mine for example uses unbiased.co.uk as our prime way of driving inquiries outside our normal networking and referred enquiries.
The Uber drivers are precisely the same, the only add on is the brand values of Uber which go some way to guaranteeing quality and reliability.
The Uber drives provide all the tools of their trade' - car, mobile phone, insurance.
And this way of making a living is going to grow. It precisely fits the networked world.
Of course it is a direct threat to Unions and Government agencies like the HMRC. It largely makes the former redundant and the latter just hates not to collect tax, aka the wages of its functionaries, and will try any trick to get workers classified as 'employed'.
And IMHO gig economy workers are much less likely to vote for big government interventionist political parties.
Uber is disruptive on so many levels. Is it any wonder that all the beneficiaries of the status quo are trying to sabotage it?

Mark Wadsworth said...

L, there is are two massive barriers to entry. Half a billion for advertising and a critical mass of tens of thousands of passengers and drivers. Karhoo tried it and went bankrupt.

Shiney said...

Mark

Re barriers....

There is no tech barrier - apps are easy to develop and back-ends are now 'elastic' thanks to Amazon. And there's no real network barrier while Net Neutrality is maintained. So we are left with Branding, really. And I just don't believe "Half a billion for advertising" is a barrier to entry in the same way as the others used to be. The biggie is, as always, the government, by way of regulation/licencing etc.




Mark Wadsworth said...

S, govt intervention on behalf of existing taxi drivers is a third barrier to overcome.

I never mentioned a tech barrier because I don't think there is one, you could knock up an Uber-like app for a few thousand (or tens of thousands or whatever).

The three barriers are: half a billion for advertising to become number 1, a critical mass of users (passengers and drivers) to maintain your number 1 place and govt regulations.

Clearly it is bloody difficult overcoming all three barriers simultaneously which is why Karhoo threw in the towel, a quarter of a billion pounds later.

Shiney said...

Mark

Yes - but loads of users/subscribers used to be a tech issue (scaling/platform) until very recently. Now it isn't.

My argument is that #2 (the network/critical mass/user base) is not a 'barrier' as such any more - it can be overwhelmed really quickly. Sometimes the game just 'changes' and subscribers are worthless 'assets'.... MySpace, Yahoo, AltaVista, Hotmail anyone?.

Govt regs are usually the biggest issue and protect the incumbents.... which is why (eg. taxi drivers) like them and press for more... the incumbents that is.

ontheotherhand said...

Money is never a barrier to entry. If you have a sound profitable business plan you will raise or borrow the money.

What they have as a barrier is the advantage of being number one in a model that relies on network effects. Punters want to wait the least amount of time to get a cab, and so the network with the most drivers is best. Drivers want the network that keeps them with a paying fare for the greatest % of time, and so want the network with the most paying customers.

What I would expect to see happen however is copycat entrepreneurs who go for 2nd tier cities not yet served by Uber, with the intention of flogging it to Uber one day. This happened with eBay and Amazon back in the day. This could explain why Uber is losing money - it wants to expand with a land grab before the imitators get there. (I believe Uber guarantees an income to new drivers in new cities to get the thing going.) For example, Uber only opened in Oxford a few months ago. Some of its expertise is in smoothing the PR, buttering up the council, and dealing with the black cab protest. A naĂŻve start up would be bleeding cash to drivers whilst trying to do the same for the first time.

Mark Wadsworth said...

Sh, OTOH has explained it better than I can. Yes, Uber might become the next MySpace if somebody throws even more money at it and gets lucky. Meet the new boss, same as the old boss...

Shiney said...

@MW @OTOH

So if #1 Money and #2 Network/Technology 'can' be overwhelmed then that leaves government regulations..... but then, everyone, even the state, gets usurped eventually. And surprisingly quickly sometimes.

And here's a radical thought..... perhaps the regs should be there to ensure there ARE new entrants, not to stop them with unnecessary rules.

Mark Wadsworth said...

Sh, if the govt wanted, it could shut down all this rent seeking in taxis tomorrow.

1. Abandon the privileges of black cabs (reserved parking spaces in front of stations, permission to use bus lanes) and the restrictions on mini-cab drivers (can't pick up passengers who flag them down) and allow anybody with a clean licence, suitably insured care and no convictions for GBH to do what he or she wants.

2. Set up a free at point of use ride-sharing app that everybody can sign up to and set his or her own prices, as long as these can be agreed before the journey starts.

Shiney said...

@MW

Exactly....

And as to #2 - doesn't the govt. At some point 'somebody' will open source a platform like this, perhaps funded by ads' and boom.... uber are toast.