Not-com bubble? Or just simple math?

 In Business Strategy

**This article was originally published on LinkedIn**

I believe The Atlantic gets it completely wrong in this article by Derek Thompson. Thompson all but ignores the fact that investors aren’t so much interested in what you sell as how profitable selling it actually is.

I, for one, am reassured. It’s about time cooler (dare I say more mature?) heads prevailed.

Uber is a wonderful illustration. I challenge you to describe what exactly is so innovative about calling up a dispatcher to request that a total stranger in a car pick you up at point A and drop you off at point B in exchange for a pre-arranged fee?

In reality – nothing. It’s called a taxi service and just because Uber refuses to be defined by an industry definition (should we call them industry-fluid?) doesn’t mean it isn’t one.

Oh but it’s different! I can hear the rumble of dismissive dissent already. OK – let’s look at it economically:

Uber drivers are “independent contractors”.

Uber drivers use their own vehicles at their own expense in order to provide a much needed service for a fee set by their ’employer’. This means that Uber drivers in Canada who work steadily can expect to generate $16 to $26 per hour. Let’s split the difference and call it $21/hour. You can expect to generate $3,510 @ $21 per driving hour. Of course, that’s before overhead and expenses.

What expenses? So glad you asked!

  • You need some sort of vehicle. Lets assume a favourable lease with payments around $450 a month, before tax.
  • Insurance – will vary across the country, but let’s call it $200 a month on average for an urban centre and vehicle being driven for work purposes.
  • Maintenance – all those extra kilometres are going to take a toll. I’m going to use $200/m based on two oil changes and one brake replacement annually, plus a few minor service items like alternators, transmissions, spark plugs.
  • Fuel. So they say a driver will typically do two trips per hour and work 30 hours per week. Assume an average rate of speed of 40 km/hr (city driving) and you’re looking at 1200 Km a week. Or 120 litres of gas assuming you get around 10L/100Km. Even at $1.25/litre that’s $150 a week – or a whopping $675 every month!
  • Cleaning. If you’ve ever picked up an inebriated youth from a bar, you know what I’m saying here. Let’s throw in $50 a month to keep your place of business smelling sweet.
  • Miscellaneous Admin – you’ll need to do some paperwork, vacuum the darn car, take time away from driving to handle maintenance appointments and the like. Add 5 hours per week for these mundane but unavoidable tasks. You’re really working 35 hours a week – just sayin’.

Add all that up – to be a full time Uber driver in Canada will cost you somewhere in the neighbourhood of $1,575 per month in expenses, leaving you with just $1,935 per month in gross income. Or, effectively $12.29 per hour worked.

Side note: the average cab driver in Canada makes $19 per hour. So, Uber is effectively buying labour at a 32% discount.

This is where it gets really fun:

  • You are self-employed, so you are required to pay BOTH the employer and employee portion of your EI and CPP. Together that will amount to about 5% of your income. Deduct $100.
  • You don’t have any health benefits, so you’ll probably want to jump on an insurance plan. Let’s assume you’re single and healthy, and cap that at $100 a month.
  • Income tax. Fortunately for you, you’re in a lower income bracket so you’ll only pay about 25% of your income over basic living deductions. Let’s call it $3600 a year to make the math easy. That’s another $300 off the top of your income.

After deducting business expenses and income taxes, you’re left with roughly $1,435 a month to live on.

You’re better off at Starbucks

By comparison, work 35 hours a week in Starbucks for $14.50 per hour and you’ll earn gross income of $2,283.75. Starbucks will pony up for your health benefits after 3 months time and they pay the employer share of CPP and EI. Even if they only pay 50% of your benefits, your deductions likely amount to less than $500 a month. You’ll go home with $1,783.75 – $348 more than the Uber driver, more than enough to cover both a bus pas and a car sharing service like Car 2Go or Evo if you really must drive. And you won’t have to risk your life in constant city traffic to do it.

Is there a problem with the cost and availability of taxis in major cities? Yep.

Could Uber solve that? In the short term, possibly.

In the long term, simple economics will drive up the price.

As governments acclimatize to the “sharing economy” mindset, our laws and licensing structures will adapt. Many cities are already requiring drivers to have higher qualifications and meet more rigid standards. Business licenses will likely follow. Along with other red-tape designed to keep commuters safe.

And THAT is what’s driving (pun intended) lower valuations for some sharing economy IPOs. The business’ competitive edge is convenience and price. Neither are sustainable over the long term.

  • Uber wins on convenience only because of apathy by the taxi industry combined with some government restrictions keeping supply below demand. Note that a too-low supply also artificially drives up prices on the meter. Both those things will be forced to change simply by Uber’s entry into a market.
  • Uber wins on price by paying bare-minimum wages and is already facing upward pressure on what many deem unfair labour practises. This will push Uber’s cost up while taxi rates are being dragged down, evening out the price difference.

The cracks are already showing.

The not-com burst is not as simple as the companies Thompson flags not being “pure tech”. Their business models are missing the key ingredient investors look for – a reliable and sustainable path to profit.

A combination of greed and financial desperation does not a good investment prospect make. Somebody is guaranteed to lose their shirt in these scenarios; the only question is who.

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