The Economics of Uber - YouTube

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Uber is the highest-valued private company in the world,

More than Airbnb, SpaceX, and Lyft combined.

Every day, 15 million rides are taken across 600 cities in 78 countries -

Everywhere from the Southern Tip of Africa to the tiny town of Gridley, California - home

of the Red Suspenders Festival, I’m sure you’re familiar.

Uber is so successful because it’s so convenient.

Open the app and choose a ride - standard, or luxury, or, in India, rickshaw.

Soon, even flying taxi.

Afterwards, you rate the driver, and they rate you.

1 through 4 stars being the worst experience of your life.

And five stars, anywhere from Mostly Tolerable to Absolutely amazing.

I’m only slightly kidding: a 4.6 average can get a driver deactivated.

Still better than Netflix’s thumbs up or down, which is 80% sure I’ll like The Emoji

Movie,

To which, I say:

Finally, Uber calculates the price, it’s really very simple:

Start with the regular base fare, add the per minute rate multiplied by time spent in

car, plus distance times the per mile rate, all of which depend on the city.

A $40 ride in Tokyo costs $1.62 in Cairo.

Then add the booking fee, and possibly airport, toll, cancellation, cleaning, and lost item

fees.

UNLESS there are too many riders and not enough drivers, in which case multiply by a surge

price,

2, 3, or, on New Years Eve Two-Thousand-Eleven, seven times the normal price.

And as YoutUBERs have shown, algorithms can be manipulated:

If drivers log out at the same time, they create a shortage and trigger a surge.

Oh, it also uses machine learning to predict how much you’re willing to pay based on

route,

so maybe don’t call an Uber from the Burj Khalifa to The Bellagio, besides the fact

that you… can’t.

Even despite this, Uber is almost always cheaper, faster, and easier.

It took the most outdated, inefficient industry,

sprinkled in something called “Technology”

and completely reinvented the wheel.

Oh, come on, you should know by now, there’s always a twist…

In the 1930’s, The Great Depression… happened.

It wasn’t great, but it was depressing.

Every fourth American was unemployed and desperate for work.

Especially low-skill, low barrier-to-entry jobs,

But, YouTube hadn’t been invented, so, they drove taxis - lots and lots of taxis.

Meanwhile, fewer people could afford a ride.

And, as I was taught by a monopoly educating me about the danger of monopolies, When this

line goes up, and this ones goes down, prices fall and drivers get angry.

Like, violent protests in the street angry.

So New York City wrote the Haas Act.

Now, to legally operate a taxi, you’d need one of 17,000 licenses called medallions.

But 81 years later, with a million more people, it’s only 13,000.

You can see the problem.

The number of medallions issued is more political than it is practical.

Before, extreme competition made prices unsustainably low.

Good for riders, bad for drivers.

And then, the pendulum reversed - too little competition made taxis expensive and inefficient

- bad for riders, good for drivers.

One medallion, the right to operate a single taxi, was once worth over a million dollars.

But advice like this hasn’t aged so well.

Because: Uber happened.

Its drivers flood the market by not requiring medallions, draining their value.

High competition, low prices, and angry calls for regulation - Sound familiar?

This time, we aren’t in an economic depression, but many households are, which means lots

of drivers.

For you and I, Uber is revolutionary - the low prices of last century plus the magic

of these things.

And for drivers, well, yes and no…

If you ask Uber what the average driver makes an hour, they point you to this study: $19.19.

Another says 21.

Not too bad - unless, you look under the hood.

What they don’t include are the car, its depreciation, maintenance, gas, and some of

the insurance.

Adjust for these and things aren’t so rosy -

This study estimates the median hourly profit is eight fifty five before taxes,

less than minimum wage for 54% of drivers.

8% actually lose money.

You might say: But Uber is supplementary - a quick way to make extra cash between jobs.

And, that’s mostly true, about 60% have another primary income.

Plus, unlike taxis, who are even legally required to wear black socks in LA, with Uber, you

have some freedom.

But the reason people don’t drive more might only be they can’t.

Because Uber considers its drivers not employees, but independent contractors.

Employees are entitled to minimum wage, gas reimbursement, overtime, breaks, collective

bargaining, paid leave, and health insurance,

Which would cost the company about 4 billion dollars a year.

So they’re extremely careful to call drivers “partners”, and itself, not a transportation

company, but a “platform” -

Simply connecting riders to drivers, who decide when to work, what to wear, and so on.

But, Uber controls the prices.

And that’s the catch - if drivers are just independent businesses, Uber setting their

fares could be considered price fixing.

So, which are they?

That depends on who you ask and when, and the answer will shape the future of the industry.

But something doesn’t add up, The golden age for drivers came from regulating competition,

the same regulation Uber spends millions of dollars fighting.

Going back to the days of high competition and low prices.

But …why?

If Uber takes a cut from drivers, their interests should be the same.

Regulation, of course, slows its growth, but there’s also another reason:

Drivers compete - but Uber makes the same commission regardless of who picks you up.

Uber makes more money with more drivers.

But drivers want the opposite - less competition.

They look like other platform-vendor relationships - Amazon and its sellers, Apple and app developers,

Both of which need their vendors - if YouTube leaves the app store, Apple can’t replace

it.

But drivers are drivers - Uber needs them - but no one in particular; they’re disposable.

Something like 96% stop driving for the company in their first year.

The two seem economically intertwined, but as long as Uber can find more drivers, they

can keep fares unsustainably competitive with rivals.

The real winners of the Haas Act weren’t cabdrivers, who couldn’t afford million

dollar medallions, but their owners.

Instead of drivers giving away their first $100 a day to rent a medallion, now it’s

25% all day.

For many drivers, it’s still a very welcome and useful opportunity, but it isn’t quite

the groundbreaking revolution promised.

And it may not last…

On paper, Uber has the perfect business model:

Its huge network of drivers dominate the globe,

but it need not buy a single car or gallon of fuel.

All perk, and no work.

Something thousands of startups desperately try to emulate.

Most of which belong on Flopstarter, with products like the TIMELESS watch, which…

doesn’t tell the time.

So how did Uber lose four and a half billion dollars last year?

That’s 12 million dollars a day!

Many startups sacrifice profit for growth, But Uber is nine years old.

Facebook made money after two.

The company’s biggest problem may not be its legality, or controversy although there’s

plenty of that, but basic holes in its business model.

The magic of so many companies is the network effect.

Every new customer makes it that much easier to get another.

You join Facebook because Steve is on it, Kim joins Facebook because you are, and so

on.

For Uber though, this is only regional.

More drivers in New York does nothing for Beijing.

In fact, it failed in all of China.

Every city is a new chicken-and-egg problem:

Drivers need riders before they’ll drive, and riders need drivers before they’ll ride,

I do not like them, Sam-I-Am.

I do not like green eggs and - oh.

This helps keep prices low, and profits, nonexistent.

It’s inescapable and leaves only one path for Uber: self-driving cars.

Remove the driver, remove the money-eating machine.

But it means competing with the technology of Google and the auto-expertise of GM.

Either it’ll transform into one of the biggest transportation companies in the world, or,

it’ll be the end of the road.

It plans to go public next year.

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