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Passing Risk….. Good for Wall Street, but is it Good for the economy?

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For better or worse, we’re in the era of the “sharing economy”. Hilariously chronicled in this Portlandia sketch, it seems like one can rent anything these days from dresses (renttherunway), to homes (Airbnb) to one’s car (Uber).
 
I often wonder why Airbnb and Uber are lumped together. From the outside, they both appear to have similar business models, but Uber’s takes a vastly different approach by seeking to control the entire process, from onboarding of drivers to point of sale.
If we look at different business models over the years, we’ve witnessed the rise of the corporation in the first half of the twentieth century (Standard Oil, General Electric, IBM). These businesses sought to control all aspects of the business from production, distribution and sales. The second half of the 20th century introduced the franchise model. The best example is McDonalds, where both the corporation and the individual proprietor shared risk. This allowed fast food restaurants, hotel chains and insurance carriers to scale quickly. By the end of the 20th century, we started seeing businesses like eBay and Craigslist match buyers and sellers together to create a new distribution of commerce, disrupting an industry, such as the classified section of newspapers. In the second decade of the 21st century, we’re seeing this model scale with a wide variety of disruptive technologies from Airbnb (Lodging), Yelp/Tripadvisor (Travel Reviews); but by far the biggest disruptive technology today is Uber.
Not only is Uber disrupting the Taxi/Livery market, it seeks to control both ends of spectrum by setting the rates for drivers, as well as what buyers are willing to pay for rides.  This leads me to ask, are businesses who pass risk to others “good for the economy”
This is not just limited to Uber, as there are other noteworthy examples:
Motion Picture Industry:
– Most of the Academy Award nominations were produced by independent production companies, not major Hollywood Studios
–  The vast majority of tabasco plants are grown outside the Tabasco plantation in Louisiana.
– 97% of chickens are produced via contract farms
– FedEx is moving away from the contractor model, which might foreshadow a necessary direction for Uber
Cosmetics
– MaryKay and Avon have employed independent contractors for years
Remove from consideration the driverless cars which may or may not be coming by 2040 (Silicon Valley thinks this will be widely adapted, but so did the US Government with the Metric System in the 1970’s and I don’t see anyone buying a liter of gas in this country.)
There’s an extensive amount of risk with UBER’s business model to sustain profitability. It is estimated most drivers who start are not there by years end. This dramatic turnover looks more like Amway or Avon. This is a HUGE issue for UBER. If passengers cannot find a ride quickly, theywill go to other services. The arbitrary approach UBER is taking to keep their drivers, which according to a reporter at City Paper, you’re fired if you don’t maintain a 4.6 Rating, plus there’s no way for a driver to dispute their ratings with Uber or a third party will only hurt their ability to scale. Also, with recent cash infusions from Carl Icahn at Lyft as well as other car sharing services starting to secure funding; this is going to get very competitive.
So what’s in UBER’s immediate Future? Fantastic Investment or Folly?
Clearly, UBER is engaging in unrivaled scalability; no other player can match this at the moment. However, unlike other tech companies, like Facebook, the cost to switch services is very cheap.
Here’s a snapshot of Uber’s competition and the unexpected winners:
Lyft
Sidecar
Livery and Taxi Services (Yes traditional livery services and taxis will adapt)
The dominant winner in the battle may oddly not be UBER, or for that matter, any company. The winners will probably be the drivers themselves. Remember, people buy from whom they trust and the best drivers will be rewarded for good work. I equate this to the human equivalent of a strong YELP/Tripadvisor review. The community will decide who’s good and those drivers who benefit from that will decide where they want to work.
That makes UBER more like Century 21 or Coldwell Banker than a tech company. All they’re doing is connecting buyers and sellers. If they don’t have good drivers, their business will fail.
Furthermore, I think there are a good number of folks who see the need for a ride as a commodity. They’re not going to care if it’s UBER, Lyft or a Taxi – they simply need to get to their destination as quickly and cheaply as possible. That’s why I think you’ll see an app that will layer all these services on top of each other (think a taxi version of Kayak). Drivers are all using Lyft, Uber and Sidecar at the same time to find the best deal? Why can’t consumers select their service similarly?
In the short term, passing risk might sound like a very attractive business plan. However, given that UBER doesn’t own cars and relies on drivers to get customers from point A to point B, there’s a serious flaw here. They’re not so much creating a new means of transportation, but rather they are changing the way we interact with it. Furthermore, their arrogance and negative publicity may have crossed a line both with their customers and the general perception of the company.
In the long-term, it seems like the UBER risk model may be a nasty headache for Wall Street, one paved with lawsuits and lost shareholder value.
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Written by Derek Reese

August 3, 2015 at 12:16 am

Posted in Uncategorized

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