Brad Stone’s The Upstarts

Today in the WSJ I review Brad Stone’s new book about Airbnb and Uber, The Upstarts. Here is one substantive bit:

upstartsInstead of thinking about how to protect the hotel and taxi industries, policy makers should be thinking about how to make it easier for the next Airbnb or Uber to compete. They could require, for instance, that key application program interfaces remain open to competitors, just as some utilities are required to allow alternative energy companies to send electricity through their networks.

Likewise, it’s not obvious that requiring Uber to contract with drivers as employees rather than as independent contractors is a good idea, even for the drivers. Lots of people are willing to drive for Uber, which suggests that Uber is providing drivers with opportunities superior to those that they can find elsewhere. The first rule of the regulator’s oath should be: “Do not destroy mutually profitable exchanges.” Banning the independent-contractor model could also make it harder for cash-strained startups to compete with Uber. Uber might even accept new regulations as a way of raising the costs of its rivals and locking in its monopoly. From upstart to rent-seeker in just seven years—the speed is astounding, but the arc is commonplace.

Read the whole thing.

Comments

Uber is now being targeted for a boycott because it would not waive surge pricing for rides to the anti-Trump airport protests.

I find it stunning how obviously anti-business for lack of a better word the left-leaning public behaves in the US. Notwithstanding significant levels of hypocrisy when doing so.

I'm not commenting on the righteousness of this particular boycott here, but tonnes of right-leaning groups, particularly those of a religious flavor, engage in boycotts when they don't like a company's perceived political stance. I really don't understand the criticism here - if people want to "vote with their dollars" what's your actual problem here?

Did you already forget "Starbucks removed Christmas from their cups because they hate Jesus"?

I don't know. To a first approximation, the right doesn't protest, doesn't boycott, and will scarcely talk to pollsters.

It's a weird dynamic and I'm not sure I understand it.

Nah, that's not true. There was the Tea-party, and there are frequently anti-Abortion protests. Plus I don't think it sounds very good to say it the way you did. Makes the right sound servile to say it doesn't protest or take any action.

You have to admit, the left protests far, far more frequently than the right.

Abortion is a good example, though, of where the right protests.

I don't know I don't keep score of such things - I don't personally find not protesting a particularly admirable trait though.

I didn't say it was admirable. In fact, I suspect it's distorting public views.

Dude, right-wingers don't protest much because most right-wingers are old, fat guys with like 27 hypertension medications prescriptions. They wouldn't last 10 minutes on the streets.

Actually, if you look into that case, it was one blogger who started it. Moving to a red cup for Xmas doesn't seem a big deal.

I suspect Starbucks was actually involved in starting it, because it lead to a ton of viral sharing. even the next year, there were parody shares, too.

Starbucks did that "let's talk about race" business, which I also think was designed ot get free publicity, and then dropped the next day...because it was a dumb idea.

Be very wary of these stories - companies are learning how to create memes and have them "organically" be shared, and politics is a great way to do that.

I thought Uber was boycotted because they did waive surge pricing at JFK, which was seen as strike breaking by some.

There are so many things the bien pensant are supposed to be indignant about these days, who can keep track of the reasons?

If that's true (and I will accept it ad arguendo), it's a bad move. The young people do like their Uber.

Surely it's being stoked by Lyft

That makes sense -- demand a pricing policy be changed by a private business because your politics need that (or perhaps don't really need it but want it).

People seem more focused on bitching than actually doing things

Of course, independent contractors don't receive the benefits of employees, including health insurance and retirement, the cost of which is shifted from the "employer" to the independent contractor and, more likely, the public. Why should the public (you and I) pay for a part of Uber's cost of doing business? I suppose the answer from Tabarrok is that neither the "employer" nor the public should pay, and simply ignore the reality that the "independent contractor" won't have health insurance or retirement. While Trump wishes to return America to the 1950s, others wish to return America to the 1930s. As for Airbnb, it's great. Until your neighbor's house or apartment is turned into a hotel.

In some cities the taxi industry has been deregulated for years and most drivers have to comply with a set of regulations but they are independent contractors and don't get any retirement or health benefits. New York has limited the taxi industry through the medallion system (and in the age of the Uber and Lyft the medallions are losing value pretty fast). It's unclear to me wither all the Yellow Cab drivers get benefits either. A lot of Uber drivers are part time. some are students and others have another job and are trying to augment their income.

Benefits are part of compensation, not some kind of manna from heaven. Like wages, they are earned by workers.

because that's not a cost of doing business. Rather, much of healthcare is a "public good" (hospitals don't turn away people who show up at the ER, and that cost gets shifted to the taxpayer). The fact that many other employers get economies of scale discounts which they pass on to their employees, doesn't mean its actually a business expense.

As to retirement--you use money in retirement, which they are giving you, vis a vis, they are helping you retire.

The principle of non-destruction of mutually-beneficial exchanges would suggest that laws banning prostitution, and enforcing a minimum wage, should be repealed. Some (all?) libertarians believe that. Others believe prostitution degrades morality, self-worth, whatever, and that minimum wage law protects workers from exploitation. A principle for regulators should be to work with as light a touch as necessary, but we have a lot of interventions in statute and in administrative rule thought to be for the greater good.

If one were serious about moving to electric vehicles then all subsidies, tax breaks, etc would go to have e.v.'s be used by Uber, Lyft, etc...subsidies should be awarded per mile, not per car...Any economist could figure this out.

The problem with this is that Uber and Lyft don't use cars. They use drivers who use their own cars.

Über asked Tesla for half a million self-driving cars by 2020.

The drivers will be gone soon.

Is Tesla able to produce "self-driving" cars that don't need a driver?

That's the goal.

Similar to the eventual disappearance of drivers, this Vanity Fair story is an interesting take on the eventual disappearance of Hollywood and actors.

http://www.vanityfair.com/news/2017/01/why-hollywood-as-we-know-it-is-already-over

One special effects guy is quoted as saying movie graphics will be indistinguishable from reality by 2022.

And the oscar for best avatar goes to ....

'The first rule of the regulator’s oath should be: “Do not destroy mutually profitable exchanges.”'

What a thought. This isn't even the fifth of sixth rule.

In some cities, like NYC, so-called policy-makers are encumbered by the facts that the municipalities strictly limit entry and collect revenues from the taxi industry by requiring taxi cab owners/operators to buy medallions. Uber-type concerns run in unfair competition/opposition to the cities and medallion taxi operators.

Economists could be interested in studying price movements in the secondary medallion market.

From time to time, my wife and I have a discussion about medallions: what about the medallion holders? In NYC, the cost of a medallion was just a cost of doing business (and protecting the taxi monopoly). Once you pull the rug out by allowing Uber and Lyft, etc., what is fair for the medallion owners? It would be far too costly for the city to buy them out even if the buyout price were far lower than the current market price. OTOH, the owner did get the monopoly "privileges" that the medallion granted.

Crazy thought: Uber should offer them stock for their medallions.

My issue with Uber and Airbnb is that the existing firms are still required to follow the regulations. While these regulations give them a monopoly, that monopoly comes at a cost. It's just like the way online retailers don't collect sales tax. Brick-and-mortar retailers must and are arrested for theft if they don't.

Except Uber does a better job regulating customer service than the regulator does.

Is it a bit soon for the victory lap of Uber and AirBnB?

Uber is still subsidizing ride's prices to gain market share. Uber may have had 2016 loses around 3 billion on a net revenue of 5.5 billion. AirBnB became profitable for 1st time on 2016. Only caveat is "profitable" means before discounting interest, taxes and amortization. https://www.bloomberg.com/news/articles/2017-01-26/airbnb-enters-the-land-of-profitability

Perhaps I'm wrong analyzing a predictions book as a history book. As a predictions book, it's perfectly fine. As a history book, it's too soon.

I don't think your intuition is wrong, but I think that the business models of "the upstarts" are much more flexible than those of their traditional competitors. AirBnB can effectively build more hotels in peak traffic areas (Super Bowl, conventions, etc.), charge higher rates, and then close down after the event. Hotels cannot do that. Someone above also raised a good point that perhaps most taxi companies aren't paying benefits/retirement.

Uber's subsidizing of prices is part of a price war with competitors. It is pretty difficult to imagine a world in which there isn't at least one profitable ride-sharing service. Costs are minimal while there is clearly a demand for their service. If they can start convincing elderly people in the inner-ring suburbs to give up their cars and rely on ride sharing services, that could be a significant source of future profit (a win-win-win for everyone, really). Naturally, markets like these are going to take a few years to mature.

So, does Uber has enough cash to burn until markets stop being irrational?

Its a price war, not speculatively shorting a market. Uber sets the prices.

Think about it. They could raise them tomorrow if they would like.

If uber can't compete vs. Lyft, then Uber will die off.

Have you seen the stickers? So many cars have them now. Very surprising.

As Harun says, market rationality is not the issue here. If Uber runs out of money before it is able to raise prices, that just means Lyft's market share will be that much larger. The cost of running a service like Uber's is minimal and there are plenty of places in the world where traditional taxi service is poor or non-existent so I don't think the underlying business model is ever going away.

Uber's going out of business.

Its like bloody Enron-and THIS is an economics site?

http://www.nakedcapitalism.com/2017/01/can-uber-ever-deliver-part-six-bleak-pl-performance-while-stephen-levitt-makes-indefensible-claims.html

Bloody hell!

Why so angry? It's possible to communicate the idea in a better way, like this guy quoting another book: https://twitter.com/JimRoyalPhD/status/826551994114535425

Uber changes the narrative every time profits don't arrive:

" a) Uber has a nice business as a status product (Uber Black, circa 2010), b) Uber Black may not be profitable, but Uber will displace taxis and be hugely profitable because of technology-driven efficiencies (UberX: 2014-2015), c) UberX may not be profitable,but Uber is a logistics company and will rewrite the rules of delivery (UberEats, 2013-2015). d) UberPool may not be profitable, but when Uber displaces car ownership the scale of the market will make it profitable (2016), e) Uber with drivers may not be profitable but driverless cars will make Uber profitable (2014-until today), f) Driverless cars may not be profitable but Uber is looking into flying vehicles (2016)".

Funny thing: Ricardo mentioned narrative d): if only those old people in the suburbs sold their cars and use Uber.

Any new idea from Uber CEO needs to be written and the end of this list and assess them all together. Perhaps the business model is viable, but every day with out profits since 2011 the Uber brand is losing. It may be a good business model but the CEO's decisions may not be optimal. Yahoo was huge too but great profits according to expectations never arrived.

Uber, lyft, airbnb, etsy, care.com etc are any of them profitable?

I think everyone knows that the employee independent contractor issue for Uber drivers is just a political effort by the incumbents to restrict competition. In my experience in NYC Uber drivers tend to be part time workers, immigrants, on their way to something else -- the young Bangladeshi guy working on a film about the their civil war, the young Nigerian guy finished with his masters degree and hoping for a special ed position with the New York school system, the young Tajik working on a computer science degree, etc. Though some are career people and their reasons typically are working for yourself and setting your own hours and the better class of customer. One of my favorites was the young Chinese woman in Sing who said she liked to drive for a few hours after dropping her kids off at school so she had a few extra dollars in her pocket.

In Sacramento, my drivers have been white middle-aged guys.

But, from the number of uber and lyft car stickers, there are a lot more people driving than I would have ever imagined.

‘The first rule of the regulator’s oath should be: “Do not destroy mutually profitable exchanges.”’

While this should be a consideration of regulators, it should not be the first rule. Surely as economists we have heard of externalities, and recognize that a mutually beneficial exchange might not be socially beneficial. And surely we recall the Edgeworth Box that we teach undergrads, and know that what is a mutually beneficial exchange is determined in large part by the initial endowments. And surely we know these initial endowments are determined in part (in significant part) by previous decisions by "regulators".

So, it is not all clear that the first rule (or second or any rule) would b to prevent mutually beneficial exchanges. If this was the first rule, what role would there be for regulators?

WTBS, I am not sure that requiring Uber to employ its drivers is a good idea.

What does this tell me that I don't already know? We've all read a million articles variously gushing or fretting about the rise of companies like Uber, Airbnb, and the "gig economy" in general. We've all read a million takes on "disruption" - what's this got that those don't?

Insights from regulatory theory?

Do we really want to encourage killer companies? And how many deaths do AirBnB and Uber actually deserve credit for, really?

"Likewise, it’s not obvious that requiring Uber to contract with drivers as employees rather than as independent contractors is a good idea, even for the drivers. Lots of people are willing to drive for Uber,"

If we change the setting here to professors and tenure does the same hold?

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