Picking up on the same theme as the newsletter last week, we have been reading ‘Road to Nowhere: What Silicon Valley Gets Wrong about the Future of Transportation’, the new book by Paris Marx, host of the Tech Won't Save Us podcast, with interest. You can listen/read our interview with Marx here.
'Road to Nowhere' explores Uber's business model in depth, comparing it with Amazon, a company that had shown the 'growth-before-profits' strategy could work. Uber's attempt to pull off the same trick in private car hire came up against a pretty fundamental road block.
"As Amazon grew, it took advantage of economies of scale to ensure that as its business expanded it was able to make its fulfillment and logistics operations more efficient and reduce the costs of picking, packing, and delivering an order," Marx explains. "But Uber cannot replicate those cost savings through growth. As Hubert Horan explained, about 85% of the cost of an urban car service comes from drivers, vehicles, and fuel, and they are not costs that fall as a company grows, especially when Uber requires each driver to maintain their own vehicle instead of managing a vehicle fleet."
While outsourcing the car and the insurance to the driver seems like a winner as far as profitability goes, the problem is that it means the company has no control over costs in what is part of the core unit economics of driving a cab. As we are now seeing with the rising price of fuel, insurance and cars, if the core costs rise enough, it forces drivers to either give up on driving for Uber or alternatively the company has to raise pay, which eats into its returns.
Marx goes on to explain that Uber also had additional expenses relative to a traditional taxi cab firm, including highly-paid executives, expensive HQs all over the world, a big tech team of highly paid engineers, and, until recently, a research and development unit that "burned hundreds of millions of dollars a year on autonomous vehicles, flying cars, and other pie-in-the-sky ideas that brought no returns". When we put this whole picture together, we begin to see why Uber has struggled to reach profitability.
That none of the company's major investors, which included major players in Silicon Valley including Google executives, could foresee these problems is remarkable, but Marx believes that Uber has usefully served another purpose altogether.
"Even if Uber doesn’t turn a profit at the end of the day, there’s a lot of other capitalists who have also benefited from what Uber has done in chipping away at taxi regulations but also labour regulations in many countries and jurisdictions," Marx told us in our interview. "And I’d say it’s not just an Uber thing. If you look at what many of these tech companies have done – Amazon for example – what many of their innovations entail, it really is to find ways to reduce the power of workers, to enhance the role of exploitative management practices, to ensure workers are paid less, and so forth."
While Silicon Valley may promise tech futures for the greater good of all, the real world effects of their ventures in reducing workers' power has a very long history indeed in capitalist economies.
Ben Wray, Gig Economy Project co-ordinator