- Thank you to brilliant. org for supporting PBS. - If you're too young to remember the launch of ride sharing apps like Uber and Lyft, let me tell you, it was magical.
With just a tap of your phone, a driver would show up in minutes to take you across town for a fraction of what a yellow cab would charge. Somehow, those wizards of Silicon Valley figured out how to revolutionize the taxi industry. And we all reaped the benefits of low prices and immediate service.
- Things have changed in the sharing economy since then. The average price of a ride share trip has gone up around 40% in just the last year. Airbnb rentals are about 35% more expensive.
Many of these companies point to a pandemic related surge in demand and drop in labor supply, but even food delivery apps like DoordDash, which posted strong revenues throughout the pandemic are dramatically raising their prices as well. Many experts say that what's driving this industry-wide price hike has less to do with the pandemic and more with the fact that many of these companies are finally trying to become profitable. - Wait, you mean more profitable?
- Nope, I mean profitable, period. Despite being once valued at over $80 billion, Uber has never turned a profit. Far from it in fact.
- In 2020, the company lost $6. 77 billion. And for you blame that on COVID, keep in mind that's actually an improvement over 2019 when they lost a whopping 8.
51 billion. Since its launch in 2009, Uber has burned through roughly $20 billion of investor capital. And while they are perhaps the most extreme example, they're hardly alone.
- Lyft,, DoorDash Grubhub, Spotify, Snapchat, these are just a few of the many billion dollar tech companies, what insiders call unicorns that have never made a profit. Even Airbnb, which was at one time, the rare unicorn that made money has started posting losses. And this was before the pandemic.
Despite becoming a ubiquitous part of our economic and cultural landscape, very few of these companies have figured out how to actually make money doing what they do. - And yet, investors continue to pour money into them. In fact, money losing companies that went public in 2018 actually did better on the stock market than ones that made money.
- It doesn't make any sense. Isn't making profits the whole point of business? - Well, it's not unusual for a startup to operate at a loss for some period of time.
After all, you have to build infrastructure, so R&D and hire employees before you can start earning. What makes the tech sector unusual is the staggering amount of loss investors are willing to tolerate. - Amazon has a lot to do with that.
Despite years of losing money, and years more of barely breaking even, the company was valued higher than firms with far bigger profits. It's all about market dominance. The idea is to spend gobs of money to expand aggressively without worrying about profitability.
So that one day, you'll be the biggest player in the industry. Insiders call this blitzscaling, and it's pretty popular on Wall Street these days. - But 10 years and billions of dollars later, most of these tech companies haven't made any tangible progress towards profitability, and it's not clear how much longer investors' patients will last.
Think about it. Food delivery apps like DoorDash, Grubhub literally had a captive customer base stuck in their homes throughout the pandemic and still can't figure out how to make that a profitable year. - Some economists think that the real problem is that many of these companies never had a viable business plan to begin with.
Transportation economist, Hubert Horan says that far from revolutionizing the future of transportation, Uber has not solved any of the industry's longstanding structural problems. And that it has higher costs than every traditional operator in every category other than fuel. They figured out how to shift costs like making drivers pay for their own vehicles, but that's not really any efficiency.
Having a million individuals buy and maintain their own cars is less efficient, Hubert argues, than buying and servicing a fleet in bulk. The company will eventually have to make up the difference in the form of higher wages if they want to attract drivers. - So then were they ever able to offer such low prices?
Because their investors were essentially subsidizing them. New York Times technology reporter, Kevin Bruise compares the industry's pricing to a store that sells $1 bills for 75 cents. Sure, word of mouth will be fantastic.
But if you ever wanna make money, you'll have to raise your prices to say 125. And if you think your customers will stick around for that, good luck. - This is not to say that there aren't some tech firms that are genuinely innovating or that Uber might not someday figure out how to make taxis more efficient.
But what's clear is that many players in the sharing economy only got where they are through artificially low prices. There's a mystical aura around tech that makes it seem plausible that a ride from the airport could only cost $5. But in reality, the only innovation was a willingness to lose money on every transaction.
Even Amazon isn't really performing miracles. The majority of their relatively small profit margin comes from their web hosting service, not the retail sector. - So what?
You might think, if a bunch of rich investors wanna subsidize my convenient lifestyle. I admit we certainly partook in what journalist, Kara Swisher called assisted living for millennials. Her words, not mine.
- However, while very few of these tech brands have managed to achieve the dominance of say Facebook or Amazon, they have acquired enough market power to put some serious pressure on traditional small businesses. Restaurants that felt compelled to play ball with DoorDash and Grubhub are now being squeezed by commissions as high as 30%. And the taxi industry, which for years was carefully regulated to ensure profitability and broad socioeconomic access has been decimated by Uber's low prices, which no profitable business could ever hope to match.
Chillingly, a recent internal document from Uber identified public transportation as their next competitor. - Today, as these companies start to tighten their belts, prices are going up and maybe that's a good thing. Maybe a ride from the airport should never have cost $5 in the first place.
As Kevin Roose, put it, "Getting someone to clean your house, do your laundry or deliver your dinner should be a luxury if there's no exploitation involved. " As it strives to narrow its losses, Uber has been steadily lowering its labor costs, down to below minimum wage according to some studies. And now surprise, surprise, they're having trouble finding enough drivers.
Perhaps their self-driving division could pick up the slack except they sold that off in late 2020 for a gain of 1. 6 billion. And it still wasn't enough to offset their operating losses that quarter.
- Now, we're not saying you should dump your Uber stock if you happen to have it, all this may sound bad, but Wall Street doesn't seem to be overly bothered by it. Maybe Uber will someday become the Amazon of transportation that they hope to be. But even if they don't, we should be weary about what these companies are trying to accomplish because the end game of blitzscaling sounds less like modern innovation and more like old fashioned monopoly.
And the only point of having a monopoly is to be able to squeeze your workers and customers. - Ideally, the market should reward companies that truly innovate and make industries more efficient and productive, and some are genuinely doing that. - But we shouldn't let the mystique of tech distract us from the fact that some of the biggest players have just been buying their way into the game.
And that's our two cents. - And that's our two cents - Thank you to brilliant. org for supporting PBS.
- Brilliant is an online learning platform for STEM with hands-on interactive lessons. You'll get to see math, science and computer science in a new way through visual examples. Brilliant for curious learners, both young and old, professional and inexperienced.
- For example, there is a course called probability, statistics, and finance that can provide you with the fundamentals so you can quantify predictions. - Or you can jump ahead into statistical modeling, matrices and markov chains that are used in quantitative finance. - As you learn by doing, brilliant.
org will guide you through the powerful mathematics and statistics use to model the chaos of financial markets. - Click the link in the description to learn more. - To see the real world effect these companies can have on their workers, check out this episode of Future of Work, a six part docu-series we hosted for the PBS voices channel.
