« Willing the ends but not the means | Main | The weather/climate bias »

August 23, 2017

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Patrick Kirk

I'm far outside my comfort zone here and may be using the wrong terms. Uber runs at a loss so drivers can't set up a co-op as it would have to run at a bigger loss to survive. Same used be true for anyone who wants to compete against Amazon retail. Unless you are prepared to bleed red ink for a decade, you can't do take on the big platforms.

Surely this means that the brands are simply cash converted into competitive advantage? In these terms, is a brand build up over a period of years any different from a CNC machine in a factory which gives it an edge over rivals? Or have I missed something?

From Arse To Elbow

The cost of capital is at an all-time low. This is not just because of monetary policy since 2008 but because of the secular fall in the cost of capital goods since the late-1970s. Capital is increasingly surplus (i.e. in glut) not because of a shift to immaterial labour but because of the change in the composition of fixed capital itself, most notably the increase of software relative to hardware.

This has had two consequences. First, it has led to more promiscuous investment: "fail fast, fail often", as the Silicon Valley mantra has it. Second, it has shifted capital from productive to distributive activities, notably marketing and brand-building (the shift from tangible to intangible capital is a symptom of this). Uber is not just subsidising prices to wipe out the competition and prevent new entrants, it is consciously buying market share in the hope that it can eventually monetise its dominant position.

Uber's problem is that the strategy for monetisation keeps changing. First the app was meant to disrupt traditional taxi firms and allow both cheaper fares and profit (didn't happen); then monopoly would allow it to ratchet up prices (hasn't happened and isn't likely to); then expansion into mass transit and home deliveries would get it over the line into the black (improbable).

The latest (and probably last) iteration is that autonomous vehicles will allow Uber to dispense with drivers and their associated costs/profit-share, but this move would ironically require Uber, hitherto a capital-light firm with a lot of free cash, to become a fixed capital-heavy business with signficant debt (i.e. it must buy/lease lots of cars or else sell up and become a service front for an AV manufacturer).

Luis Enrique

I use twitter, I get something out of it and contribute content to it, in a very minor way. Why on earth is it egregious and parasitic for them to sell ads off the back of that?

a brand might not increase aggregate output (although one could quibble hear - didn't they originate as markers of quality when goods were often adulterated, hence increasing output?) but I don't think you can say the same of a platform that provides a service of connecting people in some sense.

I am not sure about this, but if there were lots competing Ubers (i.e. glorified taxi booking systems) then on any one platform I would be less likely to find a driver nearby, so less likely to use it, so a mutually beneficial trade does not take place*. If all drivers are on one platform, I am more likely to find one available nearby. That's a social good.

But this isn't a new phenomenon - same could be said about Autotrader or the classified ads in the local paper.

* don't infer from this I'm blind to Uber's faults

Hubert Horan

Not to dispute you main points but the Uber issues are much greater than implied, so don’t really fit the context here.
A completely laissez-faire taxi system cannot function in a sustainably economic manner for a large number of reasons; every past attempt at taxi deregulation reduced both profits and service levels. The classic post-1920s regulatory regime kinda-sorta balanced the needs of suppliers, drivers and customers but began collapsing when population/demographic shifts (suburbanization, urban employment losses) worsened conditions for all forms of urban transport. The big shift you’ve attributed to Uber actually occurred in the 70s/80s when the regulatory system was changed to strongly favor taxi owners over drivers.(largely via forcing drivers to become “independent contractors”). In New York the shift to contracting increased fleet owner income per shift by 72% and reduced driver incomes by 23%. Many cities had taxi cooperatives but if you rig the industry structure so that returns go disproportionately to capital (relative to risk) than the fleet owner/independent contractor model will quickly become dominant.
Uber takes this a bit further (drivers now provide the cars so ownership no longer actually provides the capital or takes risks but nonetheless demands a larger share of revenues) but the real Uber “innovation” is its $13 billion dollar investment base, expressly designed to fund the predatory competition needed to create a globally dominant company, despite the fact that Uber is much less efficient than the (not terribly good) taxi companies they have been driving out of business. This artificial market power isn’t designed to eliminate the competitive threat of co-ops (Co-ops have been uncompetitive for 40 years) but to eliminate the competitive threat from other groups of billionaires who might want to build their own exploitive, parasitic companies. Uber’s power does not stem from building a “powerful brand” that potential market entrants can’t match, but from its willingness to provide billions in subsidies for uneconomical fares and service levels.
All of these Uber economics are laid out in detail in a law journal article of mine that will be published in the next couple weeks, and can be found at. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933177
From Arse to Elbow’s comments clearly reflect a good understanding of Uber’s actual economics. Luis’ hypotheses about platform driven Uber efficiencies happens to be wrong. There is zero evidence that Uber achieves any significant gains in the revenue utilization of taxis over time. Uber does not use any of the methods other transport modes used to achieve these types of efficiency gains (such as improved airline load factors) and none of those gains had anything to do with platform network economies, or industry monopolization. If Luis was correct, Aeroflot (in USSR monopoly days) would have been the world’s most efficient airline.

Jim

Brands increase economic activity by providing a guarantee of quality before you actually purchase and consume the product/service. Without that every transaction becomes a potential landmine - if I can't know if a can of Heinz beans is actually a can of Heinz beans but maybe a can of god knows what produced by some rip off merchant, am I more or less likely to buy a can of beans?

And no-one can expand their business based on their honesty or level of service, because they can control no brand that signals it. If my shop only sells genuine foodstuffs of the highest quality, with no knockoffs, I will eventually get a reputation for that in my location, purely by word of mouth. But then someone else can start another store in the next town under my name and sell poor products and ruin my reputation. Heck he could do it in the same town, and I wouldn't be able to stop him.

How is this good for economic growth? A system that actively encourages ripping off other peoples good ideas and reputations?

D

We should do something similar to patents, where people that start an online platform can only benefit from the monopoly created for so long.

Maybe...

Luis Enrique

Hubert, I could easily believe Uber fails to deliver the aggregate efficiency gains I outlined, although other two-sided market platforms might. But I really don'ts think Aeroflot is the right counterpoint, other than perhaps the usual economies of scale which are easily wiped out by monopoly pricing, there is no sense in which having a single airline serves me better, in the same way as having a single online auction, with largest possible pool of buyers and sellers, serves me better.

Of course that doesn't necessarily mean these natural monopolies with network effects actually do serve me well. That depends on how they exploit their pricing power. I forget the reference but I read something about how regulating these massive network monopolies is the greatest ignored economic problem of our time. I can believe it.

Luis Enrique

And another thing Hubert, is utilisation really the metric we want? Suppose utilisation is like a zero profit condition, in the sense that new drivers enter until the level of utilisation reaches some minimum where new drivers no longer want to enter and/or existing drivers exit. Same goes for standard minicab business. But suppose the extra convenience of Uber caused users to substitute away from other forms of transportation, and consider themselves better off for having done so, and the total number of drivers rises. I'm not going to make any strong claims about welfare because the distributional effects of that could be considered negative, but there's a case for aggregate efficiency gain despite no change in car utilisation.

Nick Drew

@"is intangible capital a social good or just a private one? Traditional machines are a social good; they increase aggregate output. But this is not so true of intangible capital. Coca-Cola’s brand is certainly an asset for Coca-Cola shareholders (and workers). But it’s a liability for Pepsi"

Oh, come on - that's a very literal and physically-focused view of a capital asset. If one brand is a liability for a competing firm, why is one firm's machinery not also a liability for a competing firm? That's not a thought that occurs to accountants (or anyone else). Coke and Pepsi, both alike, have brands and processing plants - all of which will appear on balance sheets.

There's nothing new about the eternal tension between the content-providers and the A&R men, if that's what's at the root of all this confusion. The content providers (in all spheres) are always trying to disintermediate the A&R men, sometimes enlisting new technology to do so, sometimes (temporarily) gaining the upper hand. But it's just a cyclical struggle; and sometimes the new tech favours A&R (temporarily)

I think you are slipping into Paul Mason's attempt to devise "post-capitalism" - based on a rather excitable & flaky view of how to account for new technology (in both senses of 'account'), and a rather implausible vision of how capital no longer counts at all ...

The comments to this entry are closed.

blogs I like

Why S&M?

Blog powered by Typepad