Naked Capitalism recently ran a five-part series on the Uber business model. I can’t speak to the accuracy of the conclusions, but the arguments are striking and the series should go on the reading list of anyone interested in the gig economy and its implications for workers. According to the series, which is summarized in the fourth post, Uber’s business model consists of: predatory pricing, underwritten by venture capital, aimed at securing a monopoly position in the urban car service industry.
To unpack that a bit, the argument proceeds as follows:
- Uber is unprofitable. It has grown and succeeded to date by engaging in below-cost pricing and subsidizing that pricing scheme with $13 billion in venture capital investments. As the post put it: “Uber is a fundamentally unprofitable enterprise, with negative 140% profit margins.” And, “Uber’s ability to capture customers and drivers from incumbent operators is entirely due to predatory competition funded by massive investor subsidies – Uber passengers were only paying 41% of the costs of their trips, while competitors needed to charge passengers 100% of actual costs.”
- Far from the popular image of technology-enabled low-cost superstar, Uber is in fact “the industry’s high cost producer, with a significant cost disadvantage in every cost category except fuel and fees where no operator could achieve any advantage.”
- “Uber could never generate sustainable profits in a competitive market.”
- Accordingly, the only way that Uber will succeed in the long-run and, in fact, the essence of its business model is “the pursuit of monopoly power.” Thus,
“[f]rom its earliest days, Uber’s investors and managers have always recognized that investor returns would require global industry dominance, and the elimination (or effective nullification) of longstanding laws and regulations designed to protect competition, and to protect consumers from the risks of anti-competitive market power. This presumes that urban car services can be turned into a ‘winner-take-all-game,’ where the winner can earn sustainable rents once quasi-monopoly industry dominance has been achieved.
- Once Uber succeeds in securing monopoly power (or, “industry dominance”) it will exercise that power by: reducing driver pay to levels below those paid by traditional operators; requiring “anyone who might ever want a cab to carry Uber’s app;” and “imposing much higher prices for peak period[s] and low density neighborhood service” which would “effectively eliminate taxi service for a major segment of (mostly lower income) users.”
This is an important critique of the Uber business model which – if correct – should worry all of us.