Driving for Uber Does Not Mean You Run A Startup

Driving for Uber Does Not Mean You Run A Startup

In the technology pyramid, more value is created at the top: the upstream level has more value than the downstream level. There are more participants in the downstream than the upstream. Companies that play at that upstream have accumulated more capabilities which help them solve key frictions in the market to be in those positions. Because they are fewer, they control pricing more efficiently, and earn better margins.

In the technology arena, many downstream players look for opportunities. In Airbnb, people rent their free spaces in their homes to strangers and make small money. Airbnb is the upstream participant while those renting their spaces are at the downstream players.  In Uber, people drive: Uber is the upstream player while the drivers make up the downstream.

I see Airbnb as a better opportunity, if you indeed have that space, than Uber. Why? Uber ties your time, which means when you are driving, that is the only thing you can be doing at that time. So, that is the job, at that moment. But in Airbnb, the money can be flowing even when you are busy pursuing other things: you do not need to be fully engaged to make that money.

Then, the economics do not really work for Uber in the long-term. Uber drivers will deal with the laws of supply and demand, and must reach price equilibrium point. That equilibrium point will never move to higher-paying drivers, in the long-term. In other words, over time, the value Uber creates for its drivers will drop, at individual level, even though it may be paying more collectively. This working paper explains:

Using a city-week panel of US ride-sharing markets created by Uber, we estimate the effects of sudden fare changes on market outcomes, focusing on the supply-side. We explore both the short-run dynamics of market adjustment, as well as the eventual long-run equilibrium. We find that the driver hourly earnings rate—essentially the market equilibrium wage—moves immediately in the same direction as a fare change, but that these effects are short-lived. The prevailing wage returns to its pre-change level within about 8 weeks. This return is achieved primarily through permanent changes in driver “utilization,” or the fraction of hours-worked that are spent transporting passengers. Our results imply that the driver supply of labor to ride-sharing markets is highly elastic, most likely because drivers face no quantity restrictions on how many hours to supply and new drivers face minimal barriers to entry.

But for Airbnb, you do not have that problem since you can continue doing whatever you are doing as it does not tie up your time. The Uber example is even clearer in this piece from QZ.

Here’s the logic: Imagine Uber normally charges $1 per minute and $1 per mile, and it increases that to $2 per minute and $2 per mile (these numbers are obviously made up). In the short term, drivers will earn a lot more, because, well, both rates have doubled. But over time, a couple things happen. One, because Uber suddenly lets them earn more, drivers work more hours. Two, because Uber is now more expensive, people order fewer Ubers.

That brings me to the discussion when Uber drivers in Lagos say they are running startups. I used some of them. I simply commended them for finding a way to take care of family. There was no need of going into deep argument or explanation. But ideally, there were not running any startup: there were small businesses. There is nothing wrong with that. We want people to go out and take care of families. It is free enterprise.

Anyone driving for Uber should not see himself or herself as running a startup since that business is not scalable from the drivers angle. You can only drive one car at a time. The business does not have the organic capability that can make it grow. But of course if you focus on buying cars and deploying many people to drive Uber for yourself, then you have a business, and you can be called an Uber-dependent startup.

But irrespective, market pricing equilibrium will make Uber drivers to struggle in making decent income, over time. When the rates for Uber drivers go up, more drivers will be available.  Those drivers can make good money, in the short term. But over time, riders will reduce the number of rides because fares are now high. When that happens, using dynamic pricing, Uber will have to reduce the rates for drivers to jumpstart more rides. That will push the price to low-price equilibrium. Unless during emergencies or special occasions, this equilibrium should hold up over long term, meaning that price will be low. So, driving for Uber means you must be open to go with low rates. It is not really the fault of Uber; rather, it is the high price elasticity of the product.


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