The Blog

  • March 24, 2016
  • Lost in translation

    An illustration picture shows the logo of car-sharing service app Uber on a smartphone next to the picture of an official German taxi sign in Frankfurt, September 15, 2014. A Frankfurt high court will hold a hearing on a recent lawsuit brought against Uberpop by Taxi Deutschland on Tuesday.  San Francisco-based Uber, which allows users to summon taxi-like services on their smartphones, offers two main services, Uber, its classic low-cost, limousine pick-up service, and Uberpop, a newer ride-sharing service, which connects private drivers to passengers - an established practice in Germany that nonetheless operates in a legal grey area of rules governing commercial transportation. The company has faced regulatory scrutiny and court injunctions from its early days, even as it has expanded rapidly into roughly 150 cities around the world.   REUTERS/Kai Pfaffenbach (GERMANY - Tags: BUSINESS EMPLOYMENT CRIME LAW TRANSPORT)

    There’s an interesting piece in the New York Times today by Farhadd Manjoo that dissects the Über business model and concludes that it might be good for Über but it doesn’t translate well to other services like home delivery for restaurants, supermarkets, and more. It turns out just slapping the “as a service” or similar tag on a business doesn’t always turn out well, if your idea of business and profits are tightly aligned.

    While the players are new, this is really an old story of technological disruption and insufficient homework that has led to impressive valuations, big series B awards, and another bubble that seems set to pop. Let’s look at disruption first.

    As you know, Über, the ride hailing service, enables anyone to be a driver for pay by subscribing to Über’s dispatch service. Customers seek rides through the dispatch and dispatch sends a car. It seems simple and for anyone who’s ever climbed into the back seat of a conventional cab, long overdue. Über cars are cleaner, prices are lower, and you might begin to think, “Why doesn’t everything I consume come this way?”

    As it turns out, there are good reasons everything is not yet a service and a lot comes down to economies of scale, the idea that if it costs X to make something called Y then making Y times a big number should only cost X times a much smaller number. In other words the marginal cost of making 100 extra widgets might drop to the cost of raw materials and not the cost of all the R&D that went into widget number 1. There is a great deal of logic to this and we live in a society that proves it.

    The article makes it clear that Über’s disruption depended on several factors in the taxi industry it disrupts like erratic pricing models, sub-optimal service, a fixed market so that during peak demand periods like rain storms it’s just about impossible to find a cab.

    But when you try to translate this model to services you get into trouble. Services don’t gain the same amount from economies of scale in part because if you are providing a service to one customer, chances are good that you can’t provide the same service at the same time to someone else. That’s what’s happening in many other fields trying out the service model a la Über.

    As with the manufacturing model though, there’s a great deal below the water line that makes the service possible, in fact it’s the same stuff, with a bit more automation perhaps, that conventional taxi companies need to provide including a dispatch service and tangibles like mechanics, all of whom must be paid. The taxi model collects enough money to support all this infrastructure. The service model doesn’t. So for instance the customer pays less in many instances for an Über ride than for a taxi. But from the smaller revenues that a driver collects, those same externalities still must be paid.

    I am not out to trash Über because I have used them before, usually on someone else’s nickel and will continue to. But if you’re wondering where some of the anger and populist sentiment of this election season is coming from, it’s things like this new services or gig economy. Cabs might be a long way from perfect but the industry has found a way though medallions and regulation to prevent a service oversupply that would put pressure on fares and make driving a cab financially unrewarding. You don’t have the same protection as an Über driver.

    The point of the Times article is that there are many areas in the economy that at first look like great opportunities to apply the Über business model. But increasingly entrepreneurs that enter these new markets are coming to the conclusion that the Über moment was special and the disruption of the taxi industry doesn’t spread easily to other sectors.

    Published: 2 years ago


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