The Truth About The Sharing Economy
Once upon a time, a long time ago in a city called San Francisco, a traditional black car limousine company owner had an idea: what if all the annoying costs associated with owning & operating vehicles and employing drivers and paying insurance could be pushed onto poor people while his company took most of the profit?
Not surprisingly, once it was dressed up in the garb of a smartphone app, this idea appealed greatly to venture capitalists who loved the model. It was a pyramid scheme par excellence, with the added appeal of being perfectly legal.
That company is now world-famous: Uber.
Uber has spawned hundreds of imitators worldwide across a range of market segments. Deliveroo and Fooby compete with UberEats while AirBnB provides an alternative to hotels around the globe while Turo offers more options and convenience than Hertz and Avis can ever hope to match. All of these companies, and so many more, rely on one simple financial model: make money by acting as the intermediary between customer and vendor and cream off nearly all the net profits.
At first glance this seems like a good deal for everyone. More choice for the consumer, less marketing hassle for the vendor. What’s not to love? Plus, the term sharing economy sounds so warm and fluffy, like a month-old puppy staring at us with adorable wide brown eyes. Every parent wants their kids to share their toys, everyone wants to share the experience, who doesn’t want to share the wealth?
Thanks to the global hysteria over SARS-COV2, these app-based intermediaries have seen their valuations reach the stratosphere as the traditional competition has been destroyed by government shutdowns, lockdowns, and all the other knee-jerk mass panic actions resulting from irresponsible media sensationalism and political opportunism. Today there’s scarcely a venture capitalist or investment banker alive who doesn’t believe the future will be dominated by the likes of Uber, even though nearly all these companies are still making massive losses each quarter.
But what lies beneath those valuations and under all the marketing hype that’s been generated?
The hard fact is that every one of these companies relies on pushing costs onto the shoulders of the people least able to bear them in order to make a tiny number of people obscenely rich. Far from being “the sharing economy” the likes of Uber, Deliveroo, and Turo are the most rapacious and cynical entities we’ve seen since the end of Victorian-era child labor.
Let’s take a look at Uber, the poster child of our modern form of exploitation. Uber’s basic model is simple: there are people who’d like to get from Point A to Point B but they don’t have their own transportation. Their traditional options would be public transport (bus, metro) or taxi. In many US cities there is little or no public transportation worth talking about and taxis are scarce and expensive. Meanwhile there are people who have transportation but no job. By connecting these two sets of people, both appear to achieve a net gain. The person wanting to get from Point A to Point B accomplishes their goal more rapidly than by using public transport and more cheaply than by using a taxi. Meanwhile the gig worker gets a little income.
What’s not to love, right?
Except when you start to look at the total cost of providing that trip from Point A to Point B, things change radically. Uber relies on the fact hardly anyone is capable of assessing real costs. The gig worker only thinks about the gasoline their vehicle consumes, so to them it’s a net win. But when all costs are factored in, the picture is very different.
First of all, not even the most sophisticated Uber driver can go from customer to customer seamlessly. A significant percentage of time is spent waiting for the next pickup, which in summer and winter in most places means keeping the engine running to power the air conditioning or the heater. So the driver is burning a small amount of fuel and wearing out the engine. Police cruisers, which spend more than 90% of their time in this way, are notorious for being sold at end-of-life to buyers who think they’re getting a great deal on a vehicle with only 12,000 miles on the clock — until they discover the engine needs to be rebuilt because it’s endured the equivalent of 240,000 miles while standing still.
Next up comes depreciation — every mile driven decreases the value of the vehicle regardless of any other factor. Now add in things like running costs: transmission, oil changes, brake pads & rotors, alternator; in fact anything at all that wears out as a consequence of use. No Uber driver I’ve ever spoken to has a clue about the real impact of all those rides they provide. But when you do carefully factor all those things in, plus the idle time spent waiting for the next customer, it turns out that being an Uber driver is a loss-making proposition. Sure, in the short term it seems like you make some money, but then… there’s that unexpected $1,500 to replace the catalytic converters, or the $600 brake job, or $800 for the new tires, or some other big-ticket item that you weren’t thinking about when you earned $32.67 for that trip between Daly City and Sausalito.
Things don’t get any better when you look at non-vehicular models. True, the bicycle courier delivering a Jalfrezi to a customer five miles from the restaurant isn’t burning gasoline and the cost of new brake pads is minimal, but they aren’t making the same kind of money on the trip as an Uber driver. Although they don’t have to pay for automobile insurance they are incurring physical risk (which should be priced in, but isn’t) due to weaving in and out of traffic; they are breathing deeply air that is heavily polluted and thus shortening their lives (the value of which is not priced in either) and they’ll need to eat more to power their muscles (which they also don’t account for in their mental budgeting process). And very rarely can these lycra-clad gig economy slaves even earn the local minimum wage before all these hidden costs are added in.
Meanwhile restaurants are selling meals below cost due to the astonishing cut demanded by intermediaries such as Fooby and UberEats, which demand as high as 35% of the gross price charged to the customer. Most restaurants are now operating at a net loss thanks to their total dependence on food-delivery companies, and will not survive another 12 months in this mode.
Wherever we look we see tech companies placing themselves between customer and vendor and creating economic models that don’t work for anyone except customers who are getting a limited-time-only windfall that is based on taking billions of dollars in venture capital and subsidizing every single transaction in the chain. It’s impossible to avoid comparison with WebVan, the great white elephant of the dot-com boom, which lost money with every order fulfilled but planned somehow to make it up in volume.
Even more amusing, the likes of Uber have to find ways to justify their absurd valuations. It’s not enough to draw a graph projecting that every single trip made by every human being on Earth will be in an Uber by 2022; that won’t justify the risible expectations of the markets. So Uber has to become a food delivery company and a parcel delivery company as well. But even that is insufficient. Look at the ridiculous expectation drivers have: they want to get paid! So now Uber plans for a fleet of autonomous vehicles to improve its margins by removing drivers and replacing them with…. eye-wateringly expensive big-ticket capital items. Which makes the economic model even worse than before because now there’s no one to naively absorb most of the cost of providing the service. Perhaps Uber will soon announce plans to launch satellites into orbit and carry people to colonies on Mars and Titan. Sure, it will lose billions with each launch but… it will make it up in volume. Just like WebVan.
As we all know, this time it’s different (because it’s always different this time). This time coronavirus has changed the way economics works and venture capitalists will always have more and more billions to sink into perpetually loss-making unicorns that will somehow make it up in volume some distant day. Just like the Internet changed the way economics worked, which is why all those hundreds of dot-com companies went on to make huge profits and are still with us today. I mean, rusticgardenwalls.com is a trillion-dollar valuation company, and babydiaperstoyourdoorstep.com is worth twice as much!
Well, a couple of dot-com survivors are still with us today, mainly Amazon. But let’s not allow reality to dampen our enthusiasm for the gig economy. As consumers we’re being treated to a one-time discount on convenience. We can live entirely on our sofa, ordering clothes and electronic toys and food and whatever else we want via a plethora of smartphone apps. Doubtless there’s even a company selling Lay-Z-Boy chairs with built-in plumbing so the occupant need never get up, ever.
Life is great.
Unless you happen to be a gig worker perpetually on a treadmill knocking yourself out to earn less than minimum wage once all true costs have been factored in. Not only won’t you be able to afford to order anything delivered to your home — you soon may not have anywhere to call home at all.
That, however, is a tiny insignificant detail compared to the stock-based wealth amassed by the founders of these wonderful sharing economy companies in consequence of unbounded investor enthusiasm. So if you’re an Uber driver or a Fooby cyclist or a restauranteur calculating your out-of-business date, remember that all your hard work and sacrifices are for a good cause: making someone else rich beyond their wildest dreams.
As for the rest of us, it makes sense to exploit gig workers to the fullest while the party lasts. Because at some unknown point in the future the markets will wake up to the fact that the whole economic model is totally unsustainable. At which point trillions of dollars of market capitalization will evaporate in a puff of cold reality and the doorstep deliveries will turn from cascade to trickle. Chances are those deliveries will start costing more too, as the few surviving companies realize that perpetual losses aren’t in fact the most smart and stable genius way to operate a company of any kind once the VC tap has been firmly turned off.
And if you’re a home-based day trader, it may be worth ordering a couple of economics textbooks and actually reading them before placing your next bet on the can’t-lose always-goes-up over-inflated stock markets of today.
Unless you want to participate in the sharing economy in the most meaningful sense of the phrase, and share in the losses when the bubble inevitably bursts.