Uber and the Economics of Disruption

In a previous post on Uber Mathematics, I asked how the magic of digital would allow a centralized company with international overheads (Uber or Lyft) to provide a service more cheaply and cost-effectively than local cab companies.

Uber once promised it would achieve economies of scale, thanks to network effects. But then, as Ali Griswald comments,

What is scale if not a company that operates in 72 countries and more than 10,500 cities, which last year had 118 million active users every month and completed 6.3 billion rides/trips/deliveries? Uber is the definition of scale, yet it is still nowhere near consistent and reliable profitability.

Uber appears to retain an advantage over local cab companies in terms of consumer convenience, which we can frame in terms of the economics of alignment. But as Henry Graber points out, it remains to be seen how much consumers are willing to pay for this convenience when they are no longer being heavily subsidized by over-optimistic investors, and Uber is no longer the cheapest option.

Another point Graber makes about Uber is that it has disrupted alternative modes of transport, by a combination of predatory pricing and political influence, and the regulatory environment in many cities has been altered in Uber's favour.

There are processes here that operate at different tempos. There is a demand tempo - getting sufficient numbers of drivers to a specific location at a specific time to satisfy peaks of demand. And an acquisition tempo - how long does it take to increase the number of available drivers, given the necessary investment in vehicles and equipment, driver training, and a whole range of safety issues.

Because there's a big difference between these two tempos, the challenge for a healthy ecosystem is in the intermediate tempo, which we call the integration tempo. What are the options for cities to restore requisite variety to local transportation?

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Aaron Gordon, Uber And Lyft Don't Have A Right To Exist (Jalopnik, 30 August 2019), Uber and Lyft Are Out of Ideas, Jacking Up Prices in Desperation for Profit (Vice, 27 May 2022)

Henry Grabar, The Decade of Cheap Rides Is Over (Slate, 18 May 2022)

Ali Griswold, Uber wants to show you the money (Oversharing, 10 May 2022)

Uber Mathematics 5

Continuing a series of posts on Uber's business model.  Much of this material also applies to Lyft and other similar operations. For previous posts, see https://rvsoapbox.blogspot.com/search/label/Uber

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Another thing about Uber is that it operates as a two-sided platform, matching passengers with drivers. Two-sided platforms can only operate successfully if there is sufficient demand on both sides - people looking for rides, drivers looking for work.

As I noted in an earlier post, Uber might initially have been able to recruit more drivers than it needed, in order to provide a high quality of service to its customers. Many people may have signed up as drivers based on unrealistic estimates of the likely earnings, costs and overheads, but obviously this is not sustainable for long.

So if Uber's pricing model can't pay the drivers enough to make the job worth doing, who would be surprised that Uber is now facing a shortage of drivers? While Uber customers experience increasing prices and worsening service levels.

So after years of what they regarded as unfair competition, traditional taxi services are now returning to popularity in large cities such as London (black) and New York (yellow).

But this has also resulted in an excess of demand over supply. In recent years, traditional cab driving has been hit by a triple whammy - competition from Uber et al, environmental regulations forcing older polluting vehicles off the road, and of course the COVID pandemic forcing many potential passengers to stay at home. So there is now a shortage of drivers and vehicles across the industry.

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Will Dunn, Why is there an Uber shortage? (New Statesman, 8 November 2021)

Caroline Tanner, Why yellow cabs are (again) your best bet in New York City (MSN, November 2021)

James Tapper, Black cabs roar back into favour as app firms put up their prices (Guardian, 30 October 2021)

Uber Mathematics 4

As I have previously noted, drawing on research by Izabella Kaminski and others, there is something seriously problematic about the current business model of rideshare platforms such as Uber and Lyft. It seems that the only route to profitability is via some disruptive event in favour of their business. Although investors have poured eye-watering amounts of cash into these companies, this only makes sense as a bet on such an event occurring before the cash (or investor patience) runs out.

How does the magic of digital allow a centralized company with international overheads (Uber or Lyft) provide a service more cheaply and cost-effectively than a distributed network of local cab companies, many of which are run by one rather harassed guy in a small booth next to the train station? Well it doesn't. Even screwing the drivers can only go so far in stemming the losses.

So what is this disruptive event, that these companies and their investors are eagerly waiting for? One theory was that the rideshare platforms could only be profitable once they had eliminated all competition, by a combination of undercutting rivals and doing deals with local authorities - for example, offering to run other elements of the local transport network. Once a monopoly had been established, then they could start to push the prices up.

Obviously this strategem only works if the consumers accept the price rises, and the guy in the booth doesn't find a way to take back his business.

Another theory was that they were just waiting for self-driving cars. This would also explain why they weren't looking after their drivers properly, because they didn't expect to need them for the longer-term. However, not everyone was convinced by this. Aaron Benanav thought that they will have to wait rather longer than they originally reckoned, while Sameepa Shetty noted that Uber's ambitions in this regard were currently focused on small favourable pockets rather than being spread across the whole operation, and quoted an analyst who worried that investors were throwing good money after bad. 

At the end of 2020, we learned that Uber itself had come to the same conclusion, selling off the driverless car division to focus on profits.

So remind me, where are these profits coming from?

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Uber sells self-driving cars to focus on profits (BBC News, 7 December 2020)

Aaron Benanav, Why Uber's business model is doomed (Guardian, 24 August 2020)

Julia Kollewe, Uber ditches effort to develop own self-driving car (Guardian, 8 December 2020)

Elaine Moore and Dave Lee, Does Uber deserve its $91bn valuation? (FT, 17 October 2021)

Sameepa Shetty, Uber’s self-driving cars are a key to its path to profitability (CNBC, 28 January 2020)

Gwyn Topham, Peak hype: why the driverless car revolution has stalled (Guardian, 3 January 2021)

Related Posts Uber Mathematics (Nov 2016), Uber Mathematics 2 (December 2016), Uber Mathematics 3 (Dec 2016)

Regulating Platforms

On Friday, Transport for London (TfL) declared that Uber was not fit and proper to hold a private hire operator licence. Uber's current licence expires next week. However, Uber can continue to operate in London until any appeal processes have been exhausted. (TFL Press Release, 22 September 2017)

By Saturday afternoon, a petition in Uber's favour had raised half a million signatures. Uber seems to put more energy into campaigning against evil regulators than into operating within the regulations, and was evidently already prepared for this fight. (You don't send out messages to millions of customers at the drop of a hat without a bit of forward planning.) As Emine Saner writes,

"Calling for better legislation certainly is not as exciting as a glossy app, or whipped-up social media reaction, but it may make your trip home safer – and would be a better use of online petitions."

The protests follow a number of well-worn arguments

• Many users of the Uber service (especially young women) have become dependent on a cheap, convenient and supposedly safer alternative to public transport and expensive taxis.

• Many drivers have borrowed heavily to invest in the Uber business model, and fear being thrown into penury.

• This is an anti-competitive and technologically backward move, prompted by entrenched interests. And as TfL is itself a transport operator, it is not appropriate that TfL should regulate its competitors.

None of these arguments can be taken completely at face value.

• It is true that many women believe the Uber model is safer than the alternatives; however, some women have been raped, and other women have had extremely scary experiences. Uber is accused of failing to carry out proper checks, and failing to report serious incidents.

• Uber service is cheap not only because it cuts costs and exploits its drivers, but also because it is subsidized by Uber investors. This looks suspiciously like predatory pricing rather than fair competition. Analysts such as Izabella Kaminska argue that Uber will only become profitable when it has driven its competitors out of business, at which point it will be able to increase its prices. Like much of Silicon Valley, it appears to operate according to the Peter Thiel anti-competition playbook. Even Steve Bannon has been heard arguing for closer regulation of what are effectively monopoly platforms.

• Technology companies such as Uber sometimes describe themselves as "disruptive". While it is true that disruptions sometimes yield socioeconomic benefits, the belief that disruption is always good for competition is based on ideology rather than evidence. Regulation is generally opposed to disruption.

• And as Stephen Bush points out, it's not as a digital start-up company that Uber has fallen foul of regulations, but as an old fashioned minicab operator. (As John Bull explains, Uber London is just a minicab company; the app is operated by Uber BV in the Netherlands. This corporate separation helps Uber to finesse both regulation and tax.) Persuading politicians and economists to see Uber as a shining example of technological progress is just "a very, very clever marketing trick".

I'm quoting Steve Bannon because I'm just amazed to find something I agree with him about.  Regulating platforms is not the same as regulating regular companies, and the general art of regulation needs a kick up the proverbial. However, that is no reason to diss the current regulations or regulators, who are doing the best they can with insufficient regulatory mechanisms and resources. Experience from other cities shows that if Uber can't get its act together, there are plenty others that can.

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John Bull, Understanding Uber: It’s Not About The App (Reconnections 25 September 2017)

Stephen Bush, The right are defending Uber, because they don't really understand it (New Statesman 22 September 2017)

Martin Farrer, Nadia Khomami et al, More than 500,000 sign petition to save Uber as firm fights London ban (Guardian 23 September 2017)

Ryan Grim, Steve Bannon Wants Facebook and Google Regulated Like Utilities (The Intercept, 27 July 2017)

Hubert Horan, Will the Growth of Uber Increase Economic Welfare? (September 14, 2017)

Izabella Kaminska. For references see earlier post Uber Mathematics 2 (December 2016)

Sam Levine,'There is life after Uber': what happens when cities ban the service? (Guardian 23 September 2017)

Jason Murugesu, Night bus or black cab - what will save stranded Londoners post-Uber? (New Statesman 22 September 2017)

Andrew Orlowski, Why Uber isn't the poster child for capitalism you wanted (The Register, 26 September 2017)

Emine Saner, Will the end of Uber in London make women more or less safe? (Guardian, 25 September 2017)


Related posts (with further references): Platform, Regulation, Uber

Uber's Self-Defeat Device

Uber's version of "rational self-interest" has led to further accusations of covert activity and unfair competitive behaviour. Rival ride company Lyft is suing Uber in the Californian courts, claiming that Uber used a secret software program known as "Hell" to invade the privacy of the Lyft drivers, in violation of the California Invasion of Privacy Act and Federal Wiretap Act.

This covert activity, if proven, would go way beyond normal competitive intelligence, such as that provided by firms like Slice Intelligence, which harvests and interprets receipts from consumer email. (Slice Intelligence has confirmed to the New York Times that it sells anonymized data from ride receipts from both Uber and Lyft, but declined to say who purchased this data.)

It has also transpired that Apple caught Uber cheating on the iPhone app, including fingerprinting and continuing to identify phones after the app was deleted, in contravention to App Store privacy guidelines. Uber CEO Travis Kalanick got a personal reprimand from Apple CEO Tim Cook, but the iPhone app remains on the App Store, and Uber continues to use fingerprinting worldwide.

Uber continues to be massively loss-making, and the mathematics remain unfavourable. So the critical question for the service economy is whether firms like Uber can ever become viable without turning themselves into defacto monopolies, either by political lobbying or by covert action.

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Megan Rose Dickey, Uber gets sued over alleged ‘Hell’ program to track Lyft drivers (TechCrunch, 24 April 2017)

Mike Isaac, Uber's CEO plays with fire (New York Times, 23 April 2017)

Andrew Liptak, Uber tried to fool Apple and got caught (The Verge, 23 April 2017)

Andrew Orlowski, Uber cloaked its spying and all it got from Apple was a slap on the wrist (The Register, 24 Apr 2017)

Olivia Solon and Julia Carrie Wong, Hell of a ride: even a PR powerhouse couldn't get Uber on track (Guardian, 14 April 2017)

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Related Posts

Uber Mathematics (Nov 2016) Uber Mathematics 2 (Dec 2016) Uber Mathematics 3 (Dec 2016)
Uber's Defeat Device and Denial of Service (March 2017)

Uber's Defeat Device and Denial of Service

Perhaps you already know about Distributed Denial of Service (DDOS). In this post, I'm going to talk about something quite different, which we might call Centralized Denial of Service.

This week we learned that Uber had developed a defeat device called Greyball - a fake Uber app whose purpose was to frustrate investigations by regulators and law enforcement, especially designed for those cities where regulators were suspicious of the Uber model.

In 2014, Erich England, a code enforcement inspector in Portland, Oregon, tried to hail an Uber car downtown in a sting operation against the company. However, Uber recognized that Mr England was a regulator, and cancelled his booking. 

It turns out that Uber had developed algorithms to be suspicious of such people. According to the New York Times, grounds for suspicion included trips to and from law enforcement offices, or credit cards associated with selected public agencies. (Presumably there were a number of false positives generated by excessive suspicion or Überverdacht.)

But as Adrienne Lafrance points out, if a digital service provider can deny service to regulators (or people it suspects to be regulators), it can also deny service on other grounds. She talks to Ethan Zuckerman, the director of the Center for Civic Media at MIT, who observes that

Greyballing police may primarily raise the concern that Uber is obstructing justice, but Greyballing for other reasons—a bias against Muslims, for instance—would be illegal and discriminatory, and it would be very difficult to make the case it was going on.

One might also imagine Uber trying to discriminate against people with extreme political opinions, and defending this in terms of the safety of their drivers. Or discriminating against people with special needs, such as wheelchair users.

Typically, people who are subject to discrimination have less choice of service providers, and a degraded service overall. But if there is a defacto monopoly, which is of course where Uber wishes to end up in as many cities as possible, then its denial of service is centralized and more extreme. Once you have been banned by Uber, and once Uber has driven all the other forms of public transport out of existence, you have no choice but to walk.

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Mike Isaac, How Uber Deceives the Authorities Worldwide (New York Times, 3 March 2017)

Adrienne LaFrance, Uber’s Secret Program Raises Questions About Discrimination (The Atlantic, 3 March 2017)

 

Related posts: Defeating the Device Paradigm (October 2015), Uber's Self-Defeat Device (April 2017)

Uber Mathematics 3

Where are Uber's real competitors? The obvious answer would be the traditional taxi operators in large cities. Taxi services are usually controlled by city authorities or other regulators, to ensure that the prices are fair, and that the drivers and the vehicles are safe. Taxi drivers in various cities have protested against Uber, arguing that it cheats regulation by using unlicensed drivers to undercut prices. However, regulators (such as the UK CMA) have sometimes decided that consumer interests are best promoted by allowing Uber to compete with established providers.

Uber is therefore selling itself three ways - not only to passengers and drivers but also to regulators. In a sense, this makes it a three-sided platform.

However, as discussed in my earlier posts, some commentators are dubious that Uber can ever be profitable in this competitive space, even with substantial deregulation in its favour. What Uber really wants (they argue) is to persuade city authorities to stop investing in public transport, to stop subsidizing buses and subsidize Uber transport instead. If other competing modes of transport are decommissioned, the Uber business model starts to look quite different - just another privatized yet publicly subsidized monopoly, supposedly independent but effectively underwritten by the government.

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All you need to know about Uber (BBC News, 9 July 2015) Uber says TfL cab proposals 'against public interest' (BBC News, 2 October 2015)

Does Uber have an ally in the CMA? (Maclay Murray & Spens, 12 October 2016)

Anne-Sylvaine Chassany, Uber: a route out of the French banlieues (FT, 3 March 2016)

Dave Lee, Is Uber getting too vital to fail? (BBC News, 10 December 2016)


Related Posts
Uber Mathematics (Nov 2016) Uber Mathematics 2 (Dec 2016)

Uber Mathematics 2

Aside from the discussion of Uber as a two-sided platform, addressed in my post on Uber Mathematics (Nov 2016), there is also a discussion of Uber's overall growth strategy and profitability. @izakaminska has been writing a series of critical articles on FT Alphaville.

Uber is wildly unprofitable, suggest that prices will rise once they've succeeded at monopolizing the industry: https://t.co/m3HB3q5YZV pic.twitter.com/taXcHfD2g5

— Justin Wolfers (@JustinWolfers) December 1, 2016

There are a few different issues that need to be teased apart here. Firstly, there is the fact that Uber is continually launching its service in more cities and countries. Nobody should expect the service in a new city to be instantly profitable. The total figures that Kaminska has obtained raise further questions - whether some cities are more profitable for Uber than others, whether there is a repeating pattern of investment returns as a city service moves from loss-making into profit. Like many companies in rapid growth phase, Uber has managed to convince its investors that they are funding growth into something that has good prospects of becoming profitable.

Profitability in Silicon Valley seems to be predicated on monopoly, as argued by Peter Thiel, leveraging network effects to establish barriers to entry. This is related to the concept of a retail destination - establishing the illusion that there is only one place to go. Kaminska quotes an opinion by Piccioni and Kantorovich, to the effect that it wouldn't take much to set up a rival to Uber, but this opinion needs to be weighed against the fact that Uber has already seen off a number of competitors, including Sidecar. Sidecar was funded by Richard Branson, who asserted that he was not putting his money into a "winner-takes-all market". It now looks as if he was mistaken, as Om Malik (writing in the New Yorker) respectfully points out.

But is Uber economically sustainable even as a monopoly? Kaminska has raised a number of  questions about the underlying business model, including the increasing need for capital investment which could erode margins further. Meanwhile, Uber will almost certainly leverage its cheapness and popularity with passengers to push for further deregulation. So the survival of this model may depend not only on a continual supply of innocent investors and innocent drivers, but also innocent politicians who fall for the deregulation agenda.

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Philip Boxer, Managing over the Whole Governance Cycle (April 2006)

Izabella Kaminska, Why Uber’s capital costs will creep ever higher (FT Alphaville, 3 June 2016). Myth-busting Uber's valuation (FT Alphaville, 1 December 2016). The taxi unicorn’s new clothes (FT Alphaville, 13 September 2016) FREE - REGISTRATION REQUIRED

Om Malik, In Silicon Valley Now, It’s Almost Always Winner Takes All (New Yorker,
30 December 2015)

Brian Piccioni and Paul Kantorovich, On Unicorns, Disruption, And Cheap Rides (BCA, 30 August 2016) BCA CLIENTS ONLY

Peter Sims, Why Peter Thiel is Dead Wrong About Monopolies (Medium, 16 September 2014)

Peter Thiel, Competition Is for Losers (Wall Street Journal, 12 September 2014)



Related Posts Uber Mathematics (Nov 2016) Uber Mathematics 3 (Dec 2016), Uber Mathematics 4 (September 2021)

Uber Mathematics

UK Court News. Uber has lost a test case in the UK courts, in which it argued that its drivers were self-employed and therefore not entitled to the minimum wage or any benefits. Why is this ruling not quite as straightforward as it seems, as @JeffreyNewman asks? To answer this question, we have to look at the mathematics of two-sided or multi-sided platforms.

Platforms exist in two states - growth and steady-state. A mature steady-state platform maintains a stable and sustainable balance between supply and demand. But to create a platform, you have to build both supply and demand at the same time. Innovative platforms such as Uber are oriented towards expansion and growth - recruiting new passengers and new drivers, and launching in new cities.

New Passengers

Every week in London, 30,000 people download Uber to their phones and order a car for the first time. The technology company, which is worth $60bn, calls this moment conversion. It sets great store on the first time you use its service ... With Uber, the feeling should be of plenty, and of assurance: there will always be a driver when you need one. Knight

New Drivers

They make it sound so simple: Sign up to drive with Uber and soon you’ll be earning an excellent supplementary income! That’s the central message in Uber’s ongoing multi-platform marketing campaign to recruit new drivers. McDermott

New Cities

Uber has deployed its ride-hailing platform in 400 cities around the world since its launch in San Francisco on 31 May 2010, which means that it enters a new market every five days and eight hours. ... To take over a city, Uber flies in a small team, known as launchers and hires its first local employee, whose job it is to find drivers and recruit riders. Knight

But here's the problem. In order to encourage passengers to rely on the service, Uber needs a surfeit of drivers. If passengers want instant availability of drivers (plenty, assurance, there will always be a driver when you need one), then Uber has to maintain a pool of under-utilized drivers. (Knowles)

Simple mathematics tells us that if Uber takes on far more drivers than it really needs, some of them won't earn very much. Furthermore, people with little experience of this kind of work may underestimate the true costs involved, and may have an unrealistic idea of the amounts they can earn: Uber has no immediate incentive to disillusion them. (This is an example of Asymmetric Information.) Even if the average earnings of Uber drivers are well above the minimum wage, as Uber claims, it is not the average that matters here but the distribution.

The myth is that these are drivers who can choose whether to provide a service or not, so they are free agents. Libertarians wax lyrical about the gig economy and the benefits to passengers. However, the UK courts have judged that Uber drivers work under a series of constraints, and are therefore to be classified as workers for the purposes of various regulations, including minimum wage and other benefits.

Uber has announced its intention to appeal the UK judgement. But if the judgement stands, what are the implications for Uber? Firstly, Uber's overall costs are likely to increase, and Uber will undoubtedly find a way either to pass these costs onto the passengers or to pass them back to the drivers in some other form. But more interestingly, Uber now has a financial incentive to balance supply and demand more fairly, and to avoid taking on too many drivers.

Uber sometimes argues it is merely a technology company, and is not in the transportation business. Dismissing this argument, the UK courts quoted a previous judgement from the North California District Court:

Uber does not simply sell software; it sells rides. Uber is no more a technology company than Yellow Cab is a technology company because it uses CB radios to dispatch taxi cabs.

However, Uber's undoubted technological know-how should enable it to develop (and monetize) appropriate technologies and algorithms to manage a two-sided platform in a more balanced way.

Update: similar concerns have been raised about Amazon delivery drivers. I have previously praised Amazon on this blog for its pioneering understanding of platforms, so let's hope that both Amazon and Uber can create platforms that are fair to drivers as well as its customers.

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Mr Y Aslam, Mr J Farrar and Others -V- Uber (Courts and Tribunals Judiciary, 28 October 2016)

Sarah Butler, Uber driver tells MPs: I work 90 hours but still need to claim benefits (Guardian, 6 February 2017)

Tom Espiner and Daniel Thomas, What does Uber employment ruling mean? (BBC News, 28 October 2016)

David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets (Yale Journal on Regulation, Vol 20 Issue 2, 2003). Multisided Platforms, Dynamic Competition and the Assessment of Market Power for Internet-Based Firms (CPI Antitrust Chronicle, May 2016)

Sam Knight, How Uber Conquered London (Guardian, 27 April 2016)

Kitty Knowles, 10 of the biggest complaints about Uber – from Uber drivers (The Memo, 5 November 2015)

Barry Levine, Uber opens up its API – and creates a new platform (VentureBeat, 20 August 2014)

John McDermott, I've done the (real) math: No way an Uber driver makes minimum wage (We Are Mel, 17 May 2016)

Hilary Osborne, Uber loses right to classify UK drivers as self-employed (Guardian, 28 October 2016)

Aaron Smith, Gig Work, Online Selling and Home Sharing (Pew Research Center, 17 November 2016)

Ciro Spedaliere, How to start a multi-sided platform (30 June 2015)

Amazon drivers 'work illegal hours' (BBC News, 11 November 2016)

See further discussion with @wimrampen and others on Storify: Uber Mathematics - A Discussion


Related Posts
Uber Mathematics 2 (Dec 2016) Uber Mathematics 3 (Dec 2016)
Uber's Defeat Device and Denial of Service (March 2017)



Updated 6 February 2017. Reformatted 18 July 2022