A Blog by Jonathan Low


Apr 21, 2019

What Ride Sharing IPOs Teach Us About 21st Century Economics

Lyft's stock has cratered since its IPO, but the early investors got out whole and interest in Uber's remains strong.

Eventually, these companies will raise rates - significantly - be acquired or go out of business. But in the interim, billions that could have been invested in longer term economically sustainable enterprises will have been wasted. JL

Umair Haque reports in Medium:

Uber and Lyft have been vehicles (bad pun fully intended) for a net transfer from venture capital, to consumers, taking VC money   and using to subsidize artificially cheap rides for people. As soon as the subsidy from venture capital runs out — shortly — prices are going to have to rise. Lyft’s stock a classic example of a pump-and-dump. At IPO, it was flogged to “dumb money." The stock soared  and then it crashed  because the smarter money only bet against it. When capitalism tries to solve problems it can’t — like transport for a nation — the result is a net waste and bad businesses
“Ride-sharing” companies are finally going public — hooray! Maybe not so fast — and I put it in quote because, well, nobody’s sharing anything: these are just markets for services, which is the key, really, to understanding their prospects.
What are those prospects, anyways? From the perspective of — wait a second. Let me ask you a tiny question. Why is America the only country in the rich world without a public transport network of any useful or real scale or scope? Are Uber and Lyft a viable answer to that problem? Have you ever wondered? OK — sorry for the interlude. I’ll come back to all that.
From the perspective of a business, the economics of ride-sharing are pretty simple to understand. So far, ride-sharing companies like Uber and Lyft have essentially been vehicles (bad pun fully intended) for a net transfer from venture capital, to consumers. In plain English, they’re taking VC money — and using to subsidize artificially cheap rides for people.
That’s a good deal for people. It’s why there was a kind of sudden, en masse rush to use these services. In London, for example, the price difference between a black cab, the ones famous around the world, and calling an Uber, is so vast it’s fairly ridiculous — you’ll save at least 50%, maybe 100%, of the fare.
Remember Crazy Eddie? Maybe not. I don’t, either. But he’s legendary, in b-school, still, for a certain kind of not-quite-innovation: prices so low they’re literally crazy. He was selling, in the 80s, if my baby memory serves, computers and hi-fi gear and electronics — at prices so low literally nobody could compete. And everybody wondered just how Crazy Eddie was pulling this off. What was his secret? Crazy Eddie, it turned out, was running a Ponzi scheme — laundering money here, skimming money there, stuffing it offshore there. He was essentially subsidizing those crazy low prices with all kinds of illicit capital.
In a way, that’s what’s happened with “ride-sharing.” VC has pumped so much money into these companies that an endless waterfall of low, low prices has rained down on joyous consumers. Uber’s raised $30 billion alone. Those are colossal sums — because they’re cash, not “value.” The result has been people choosing to Uber or Lyft without even thinking about it one the one side — why bother even taking the Metro or the Tube, when an Uber will cost you the same, as long as there two people?
But on the other side, these dismal economics have meant that these companies have not just struggled to profit — but have been forced to be bad actors. Uber’s the textbook example. Gaming both drivers and consumers — with weird, intrusive algorithms. Not giving much of a damn about what taxi drivers call abusive working conditions which have led to suicide and ruin. Flouting the law and bending the regulation. That’s not just because Uber’s led by Nietzsche-worshipping frat-bros. It’s also because it’s hard to make a profit in this industry, so companies have to resort to shady, below-the-belt, unseemly tactics.
As soon as the subsidy from venture capital runs out — which is shortly — prices are going to have to rise. Do you think a publicly traded company is going to want to run at a loss forever? Of course not. So the days of impossibly cheap ride-sharing are limited, my friends. Enjoy taking your Uber to the club while you can, champ.
The prospects for ride-sharing companies are dubious. Hence, Lyft’s stock a classic example of a pump-and-dump. At IPO, it was flogged to “dumb money” — those poor retired dentists and municipal funds and university endowments that idolize investment bankers, so they’ll literally buy any line of glittering BS they’re fed. The stock soared — and then it crashed — because the smarter money, which is people who really understand the economics above, wouldn’t buy it, but only bet against it. Bang! A classic tech IPO ending: a roar, then a whimper.
All that’s just as it should be. Capitalism’s working. But these are the limits of capitalism, too. Now let me talk about the macroeconomics, not just the microeconomics.
For a society to allocate capital to Ubers and Lyfts, if that society doesn’t already have working public transport, is a net waste. How do we know? Well, just think about what the economics above imply. If people ride-share less — much less, since they’re so price sensitive — when prices rise, that also means that public transport at those prices would have been a better solution, because it lasts, its equitable, its fair, it creates better jobs…an endless list of reasons.
Uber and Lyft and so on had to be heavily subsidized to achieve “mass market penetration.” But who reaped the gains? Well, who got rich off the IPO? Investment bankers and VCs. Consumers got an impossibly good deal — Crazy Eddie style — but it wasn’t to last. In all respects, society would have been far better off taking that capital — those billions invested in Uber and Lyft — and putting into any or all of the following: high speed trains, rail links, nice train stations, working metro systems, buses to them, and so forth.
Let me put that more clearly. Now that Uber and Lyft are going public, and prices rise, as the venture capital subsidy dries up — people are going to use it less. They’d have been better served by a proper investment. If we’d spent a hundred billion on high speed trains, they would have lasted more or less forever…everybody could have used them…a vast number of good jobs, from architects to builders to managers to conductors would have been created…and most crucially of all, that means the benefits of such an investment wouldn’t have been captured and internalized by the beancounters, the investment bankers and the VCs. Do you follow me a little bit? An investment in cutting edge public transport would have benefited everyone — not just the already rich.
In that way, “investments” like Uber and Lyft aren’t really. I take Ubers all the time, sure. Does that make me a hypocrite? Not really — it just means I’m taking the free money VCs are throwing at me. But I still support public transport more, because I know it would be better for everyone in the end. It would be an investment that yields real, lasting returns for everyone — instead of more money for those who need it least, at the expense of those who have it least (the drivers of “ride-sharing” services.”
Uber and Lyft are, in other words, examples of a weird, bizarre, singularly American phenomenon. Americans refuse flatly to invest in each other — the toxic legacy of centuries of supremacy, hatred, slavery. “I won’t pay for their schools and hospitals! They’re lazy, dirty, subhumans!” And not their transport, either. But the result of this vacuum of public investment is that the only thing left to provide what should be public goods is capitalism.
But capitalists have no incentive to provide public goods at a decent quality — no reason, nor any expertise. Their interest is in maximizing profit. But the very point of a public good — a school, a hospital, or a high speed train line — is that it doesn’t maximize profit. It breaks even — and maximizing eudaimonia, human outcomes. The school maximizes intelligence and trust. The hospital, longevity and happiness. The rail line, mobility. All these things are falling in America today, catastrophically, rapidly, spectacularly, precisely because capitalists are charging Americans through the nose — but only delivering low-quality, artificially scarce version of the public goods which should be cheap, abundant, and ubiquitous. Why does having a kid “cost” $50,000 — when it’s literally free across the border in Canada?
Now, it’s not a zero-sum game. A country as rich as America can easily have Uber, Lyft, and high-speed trains and gleaming new train stations. Why doesn’t it? Because, weirdly, capitalism has conditioned Americans to think in zero-sum terms — you shouldn’t have public transport, because then you’ll have less private transport. That’s not true — it’s just foolish to think so. Berlin and London have plenty of ride-shares — but they also have fantastic public transport. Public goods and capitalism aren’t mutually exclusive — but capitalism wants you to think so, so it has less competition. Hence, Americans never really invest in lasting infrastructure or systems or institutions anymore.
The story of Uber and Lyft going public is an object lesson in the limitations of capitalism. When capitalism tries to solve problems it can’t really solve — like transport for a nation — the result is a net waste for society, and bad businesses, to boot. Unsustainable ones, ones that don’t last, ones that struggle by definition, ones that have to resort to shadier tactics to prop up profit margins. Sure, capitalism has a place in society — of course it does, only a fool would say it doesn’t. But it’s place isn’t providing things like hospitals, schools, retirement, or transport. Those things people must give each other — precisely so that profits aren’t maximized, which means people are just trying to get one over on one another. The job of public goods isn’t maximizing profit, but maximizing real social returns, real wealth, so that happiness, meaning, and worth are maximized.
Hence, America’s great mistake — one of them — at least — is that Americans rely on capitalism alone to solve problems public goods can address much, much better. Why would a profit-maximizing capitalist ever want to increase your longevity, happiness, or intelligence — instead of selling you the lowest-common denominator, at the highest possible price? Hence, all those qualities of life are plummeting like a rock in America — a classic, textbook result of trying to use private capital to solve problems of public goods. American economics, thinking, I often say, is Soviet in this way: it stubbornly refuses to see the reality before its eyes.
The result of malinvesting in Ubers and Lyfts instead of high speed trains and gleaming new train stations is that Americans never really build, have, share, or enjoy the infrastructure for a better lives. Their hospitals are decrepit and closing, and so are their schools. Violence runs amok, and democracy is in tatters. Capitalism invests in things which yield short-term returns — but never for the long-run — like Uber and Lyft — it’s quite happy to pump-and-dump them and move. And move on to the next thing to pump-and-dump. But it’s society left holding the bag, not just in the sense of “falling share prices”, but in the sense of never having built decent, enduring, lasting public goods.
And so Americans lack all the things Europeans and Canadians take for granted — public institutions, retirement systems, cutting edge hospitals, gleaming schools fully of happy kids not pretend dying in “active shooter drills”. And the more that Americans think of Ubers and Lyfts as substitutes for true public transport — the more this bizarre situation of a rich country full of poor people and a powerful full of powerless ones will go on.
Hence, America’s the only rich country in the world without a national public transport network. And no, Amtrak doesn’t count — as much as I love it (and I do, trains are great) — it doesn’t go to 99% of the towns in America. Don’t you think that’s funny? Terrible? Weird? I do. Hence, Americans think that you “need” a car. It’s true — you do. But only because capitalism has created an artificial need, subsidized it so that it can be sold, and then moved on the next one. It’s not a recipe for a happy place — or for a good business, my friends.
Even if we are fans of capitalism — as I am — we must ask it to do better than all this. It shouldn’t be trying to solve problems better solved in other ways. It should be taking on the great and pressing challenges of tomorrow. You don’t use a a fire extinguisher to rest your feet on, while your house is burning down. And if you did, my friends, the world would probably laugh in amazement.


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