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Uber's story is actually very rational. When Uber started, we all thought it was a winner-takes-all market. The theory went something like this: 1. The more d

Uber's story is actually very rational. When Uber started, we all thought it was a winner-takes-all market. The theory went something like this: 1. The more drivers are on a given platform, the more value users will derive from the platform in the form of cheaper rides, shorter waits, etc. This will result in more riders. 2. The more riders are on a platform, the more value drivers will derive in the form of higher utilization and more overall income. 3. Therefore, all drivers and riders will naturally gravitate to the winning platform. It's a winner takes all market. QED. Honestly, at the time (and I'm old enough to remember that time), the theory made sense. But it was wrong. The reason the theory was wrong is that there is actually zero cost for drivers in having multiple apps open at the same time. The switching cost is zero (actually, it's negative--we'll get to that in a second). And so point (3) doesn't happen. The reason switching cost is negative is that it actually costs money to start driving (and to convince people to become drivers). People quit jobs, and get/fix cars, and invest in a bluetooth headset, whatever. So Uber was actually subsidizing every other platform's drivers. So instead of an extremely defensible market you end up with a race to the bottom, with no barriers to competition. While in retrospect the mistake and dynamics are obvious, at the time it seemed like a reasonable, risky, ambitious bet. At some point these dynamics became obvious to Uber, which is when they started investing in self driving cars (never gonna work), uber eats, etc.

clairity 5y ago
to be more precise, it's not that switching cost is zero, it's that the marginal cost of switching is small. the initial switch into ridehailing is a huge cost, particularly around opportunity costs, but adding another app is a relatively small difference. it's not negative though. you still have the cost of signing up, taking your car to get evaluated, getting trained, figuring out how/when to get paid, etc. it adds cognitive and accounting overhead, and you run into contention issues between the apps, creating negative rider feedback that you must balance against the increased income potential. i do agree generally that there is little defensibility in ridehailing, and that's why uber (and lyft) tried to employ its supplier power to create competitive advantage/barriers. for instance, uber eats wasn't an expansion so much as a flanking move to lock in drivers on uber by increasing utilization.
- eyeundersand 5y ago
  OP was probably referring to the switching costs in the case of competing apps (like Uber and Lyft), not the cost of leaving a job and driving for Uber.
Apocryphon 5y ago
Is there an infinite growth fallacy for economics? Because this business model sounds like it can assume infinite growth. In the same way both pyramid schemes do, and our economy as a whole does as well.
lhorie 5y ago
> So Uber was actually subsidizing every other platform's drivers My understanding is that with the exception of some very specific niche programs, all of those expenses are paid from the driver's pockets (since, as you recall, they're currently classified as independent contractors). Uber does have a few competitive advantages that IMHO haven't fully materialized yet: they're pretty much the only company in the space with wide global presence, while simultaneously being a big player in more than one vertical. From a driver perspective, it's kind of a no brainer to be on Uber and Lyft simultaneously if they want to maximize the rate at which they get rider requests, but there's no other platform currently where they can get riders and food deliveries and grocery deliveries. Similarly, no other company can tap into motorcyclists and truckers and who knows what other type of workers Uber can reach these days. The way I see Uber these days is similar to how I see McDonalds. McD is certainly not the only game in town when it comes to food (and it objectively isn't the best at it, by any measure), but its brand is recognizable worldwide and they're diversified in ways that you probably don't even realize (e.g. breakfast menus compete w/ Timmies in Canada and did you know Doraemon toy collectibles are popular in China?)
- elbasti 5y ago
  Uber was incentivizing new drivers—in the form of artificially high payments and losing money on rides. This would have been fine if the market were winner takes all, but it turns out that it wasn't, so in a way they ended up subsidizing their competition.
phphphphp 5y ago
People (in the hand-wavey aggregate but also specifically in tech media, on Hacker News etc.) have been describing Uber as destined to fail and built on a foundation of vc-subsidised-rides since... 2012? 2013? 2011? Uber's rational narrative fell apart when their "earn $100k a year driving for Uber!" myth fell apart, and that was... a year after launch? https://www.reuters.com/article/us-uber-ftc/uber-to-pay-20-million-to-settle-u-s-claims-it-misled-drivers-idUSKBN15334C https://www.reuters.com/article/us-uber-ftc/uber-to-pay-20-m...
- elbasti 5y ago
  Yes, but "people" also used the same arguments to describe the failure of facebook, snapchat, airbnb, amazon, etc. A sort of unsophisticated "these businesses are stupid/illegal/throwing money away" bearishness. The reason those bears were wrong was because fb, snap, and airbnb are network-effects businesses. If ride-sharing had turned out to be a network-effect service as well, the bears would have lost. I don't remember any arguments back then talking about why Uber was not a network effects business. And it's actually quite subtle! For example, why did AirBnB win? On the surface homesharing seems VERY similar to ridesharing and yet it's behaved very differently as a bushiness and has not been a race to the bottom.
  - pessimizer 5y ago
    > Yes, but "people" also used the same arguments to describe the failure of facebook, snapchat, airbnb, amazon, etc. A sort of unsophisticated "these businesses are stupid/illegal/throwing money away" bearishness. Those are entirely different arguments about unrelated companies. You seem to be saying that people have said negative things about things, therefore nothing important was being said about Uber. Virtually every critic I've ever heard commenting about Uber as a business is exactly the one you have painted as having been unthinkable.
  - pnutjam 5y ago
    Because you need a big investment to home-share. Poor people can't get into it. It's a smaller market.
  - 5y ago
kfarr 5y ago
With all due respect, those who operated in the passenger transportation industry before (taxis, towncars, etc.) already knew this was a horrible business (read: low margin) with extremely high liabilities.
- stepbeek 5y ago
  I feel like I bump into this a lot in the tech world (especially the highly funded) and I’m not sure what the fallacy is called. There are existing industries with smart people with a wealth of experience. A tech company comes along and claims superiority by virtue of deductive reasoning. But they pay almost zero heed to the inductive reasoning of the incumbents and have to repeat their mistakes - this time with an app. I never understood why Uber would win. All it was going to take was an uber-like app that existing companies could pay for and their primary (non-funding) advantage was gone. Otherwise they’re a normal cab company with all that entails.
  - pessimizer 5y ago
    Because it's actually a spell being cast over investors. You say you never understood why Uber would win, but I'd say that everyone who was actually involved with Uber has won - they've walked away with personal fortunes. In the end, the company is dumped on the public, and then it doesn't matter how the story ultimately turns out.
    - kfarr 5y ago
      A certain class of people have won, not the company, and definitely not the drivers.
- deleted 5y ago
  [deleted]
spywaregorilla 5y ago
I don't think this is right. It seems likely that driverless cars was the tech vision from the beginning and it later became clear that they would run out of money years before that became viable.
lupire 5y ago
> The reason the theory was wrong is that there is actually zero cost for drivers in having multiple apps open at the same time. You think no one noticed that when they gave Uber a $billion investment?

clairity 5y ago

to be more precise, it's not that switching cost is zero, it's that the marginal cost of switching is small. the initial switch into ridehailing is a huge cost, particularly around opportunity costs, but adding another app is a relatively small difference. it's not negative though. you still have the cost of signing up, taking your car to get evaluated, getting trained, figuring out how/when to get paid, etc. it adds cognitive and accounting overhead, and you run into contention issues between the apps, creating negative rider feedback that you must balance against the increased income potential. i do agree generally that there is little defensibility in ridehailing, and that's why uber (and lyft) tried to employ its supplier power to create competitive advantage/barriers. for instance, uber eats wasn't an expansion so much as a flanking move to lock in drivers on uber by increasing utilization.

eyeundersand 5y ago
OP was probably referring to the switching costs in the case of competing apps (like Uber and Lyft), not the cost of leaving a job and driving for Uber.

Apocryphon 5y ago

Is there an infinite growth fallacy for economics? Because this business model sounds like it can assume infinite growth. In the same way both pyramid schemes do, and our economy as a whole does as well.

lhorie 5y ago

> So Uber was actually subsidizing every other platform's drivers My understanding is that with the exception of some very specific niche programs, all of those expenses are paid from the driver's pockets (since, as you recall, they're currently classified as independent contractors). Uber does have a few competitive advantages that IMHO haven't fully materialized yet: they're pretty much the only company in the space with wide global presence, while simultaneously being a big player in more than one vertical. From a driver perspective, it's kind of a no brainer to be on Uber and Lyft simultaneously if they want to maximize the rate at which they get rider requests, but there's no other platform currently where they can get riders and food deliveries and grocery deliveries. Similarly, no other company can tap into motorcyclists and truckers and who knows what other type of workers Uber can reach these days. The way I see Uber these days is similar to how I see McDonalds. McD is certainly not the only game in town when it comes to food (and it objectively isn't the best at it, by any measure), but its brand is recognizable worldwide and they're diversified in ways that you probably don't even realize (e.g. breakfast menus compete w/ Timmies in Canada and did you know Doraemon toy collectibles are popular in China?)

elbasti 5y ago
Uber was incentivizing new drivers—in the form of artificially high payments and losing money on rides. This would have been fine if the market were winner takes all, but it turns out that it wasn't, so in a way they ended up subsidizing their competition.

phphphphp 5y ago

People (in the hand-wavey aggregate but also specifically in tech media, on Hacker News etc.) have been describing Uber as destined to fail and built on a foundation of vc-subsidised-rides since... 2012? 2013? 2011? Uber's rational narrative fell apart when their "earn $100k a year driving for Uber!" myth fell apart, and that was... a year after launch? https://www.reuters.com/article/us-uber-ftc/uber-to-pay-20-million-to-settle-u-s-claims-it-misled-drivers-idUSKBN15334C https://www.reuters.com/article/us-uber-ftc/uber-to-pay-20-m...

elbasti 5y ago
Yes, but "people" also used the same arguments to describe the failure of facebook, snapchat, airbnb, amazon, etc. A sort of unsophisticated "these businesses are stupid/illegal/throwing money away" bearishness. The reason those bears were wrong was because fb, snap, and airbnb are network-effects businesses. If ride-sharing had turned out to be a network-effect service as well, the bears would have lost. I don't remember any arguments back then talking about why Uber was not a network effects business. And it's actually quite subtle! For example, why did AirBnB win? On the surface homesharing seems VERY similar to ridesharing and yet it's behaved very differently as a bushiness and has not been a race to the bottom.
- pessimizer 5y ago
  > Yes, but "people" also used the same arguments to describe the failure of facebook, snapchat, airbnb, amazon, etc. A sort of unsophisticated "these businesses are stupid/illegal/throwing money away" bearishness. Those are entirely different arguments about unrelated companies. You seem to be saying that people have said negative things about things, therefore nothing important was being said about Uber. Virtually every critic I've ever heard commenting about Uber as a business is exactly the one you have painted as having been unthinkable.
- pnutjam 5y ago
  Because you need a big investment to home-share. Poor people can't get into it. It's a smaller market.
- 5y ago

kfarr 5y ago

With all due respect, those who operated in the passenger transportation industry before (taxis, towncars, etc.) already knew this was a horrible business (read: low margin) with extremely high liabilities.

stepbeek 5y ago
I feel like I bump into this a lot in the tech world (especially the highly funded) and I’m not sure what the fallacy is called. There are existing industries with smart people with a wealth of experience. A tech company comes along and claims superiority by virtue of deductive reasoning. But they pay almost zero heed to the inductive reasoning of the incumbents and have to repeat their mistakes - this time with an app. I never understood why Uber would win. All it was going to take was an uber-like app that existing companies could pay for and their primary (non-funding) advantage was gone. Otherwise they’re a normal cab company with all that entails.
- pessimizer 5y ago
  Because it's actually a spell being cast over investors. You say you never understood why Uber would win, but I'd say that everyone who was actually involved with Uber has won - they've walked away with personal fortunes. In the end, the company is dumped on the public, and then it doesn't matter how the story ultimately turns out.
  - kfarr 5y ago
    A certain class of people have won, not the company, and definitely not the drivers.
deleted 5y ago
[deleted]

spywaregorilla 5y ago

I don't think this is right. It seems likely that driverless cars was the tech vision from the beginning and it later became clear that they would run out of money years before that became viable.

lupire 5y ago

> The reason the theory was wrong is that there is actually zero cost for drivers in having multiple apps open at the same time. You think no one noticed that when they gave Uber a $billion investment?