- 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.