Disruption = Destruction

Disruption technology is zero sum while innovative technology tends not to be. The reason for this is very simple, people have a certain amount of money that they are willing to spend on something, so when a disruptor shows-up, even if their service is significantly cheaper than what it is replacing, people are not going to have more money to spend on it. They may, for example, take more rides, but they are not going to be spending MORE money than before.

After the disruptors have done their thing, the world is a little worse off and a few people have way more money.

My wife absolutely loves watching me rant about Uber. She says it’s remarkable to see someone get so animated and passionate / angry about something that has very little impact on them personally. Her’s and mine is a click-wirr stimulus response type thing. My brain receives “Uber” as input and I’m set off. There is a glance from her and she disengages her hearing and starts watching the one man outrage show. I think she finds it amusing.

In the interest of full disclosure, I actually think that Uber is a very good service. While I do not have my own account, the two times I have used the service with someone who does have been great. The first time, I happened to leave my cell phone in the car, and getting in contact with the driver was very simple – he ended-up coming back to the drop off location so I could get it back. The second time was a drive to the airport in Las Vegas and the driver didn’t say much of anything, which is great because the more expensive cab ride from the airport a few days before was polluted with the driver complaining about Uber and how they were ruining everything. Listen buddy, that’s my rant…

My problem is not with Uber specifically, it is with “disruption” technologies because they are creating a shittier world as they make a few people a lot of money. Disruption technologies are things that break the status quo or present a new way of doing an existing business that makes things easier or cheaper for the user.

They need to be contrasted with innovative technologies that alter the underlying way things get done. Disruption tech does the same thing but in a slightly different way, while innovation tech accomplishes the same goal using a completely different method. Phrased differently, innovation solves a problem in a new way. Disruptor tech solves a problem the same way as before except it uses slightly different pieces. If we think about the Luddites, their concern was that the loom was going to put them out of work because it was a machine that did the same job as the people. That is disruption. Outsourcing your textile manufacturing to a country that has lower cost labour is disruption. Innovation is creating a new fabric. Convincing people that they no longer need to wear clothes is innovation.

The key distinction here is that with disruption technology, things remain more or less the same and most people who are not directly involved in the area will never notice much of a difference. Sure, prices may change, availability may improve, quality may change and how they engage the area might be different, but at the end of the day, fabric is fabric regardless of how it is manufactured. With innovation, the lives of the people will change more dramatically. Prices, availability, quality and method of engagement will probably be completely different, but there is a very good chance that an area will disappear outright and a new one will begin to take over.

The printing press is a great example of innovation. Before the printing press, ideas / stories were passed along via two main methods – word of mouth or in handwritten books. Monks have been credited with being analogs to the printing press in that a room of them would listen to someone telling a story and each would write out by hand what they heard. This was slow, expensive and imprecise; although it tended to yield more consistent results than the word of mouth telling of a story from one person to the next. These technologies were less than ideal and each made possible and very likely a multitude of errors given that what each person wrote was not necessarily the same and every new listener was going to remember certain parts of a story with more clarity than others. The invention of the printing press was an innovation in the purest sense of the word because it dramatically improved upon the existing methods for capturing ideas / stories / words. Exact copies were now possible, and these copies could be made years and miles apart. This lowered the cost of books and increased their range of distribution. The monks were liberated from the task of transcription, for better or worse, and the story tellers could continue to do their thing so long as there was someone who was willing to listen to them. The key thing is that the monks and story tellers were not simply replaced by other monks and story tellers, they were replaced by something that was completely different and vastly superior.

The internal combustion engine is another example of innovation. It eliminated the reliance on animals for transportation and dramatically increased the load that people could move around the streets and roads. Farriers, blacksmiths, people who built buggies and others were disenfranchised by the creation of the gasoline engine and the subsequent creation of cars and trucks. While this was bad for them in the short term, the new market that was created by automobiles offered ample opportunity to retrain and return to work. There was also an induced demand created by cars and trucks, which resulted in an increase in productivity, jobs, transportation, and an ease in life.

Keep this example in the back of your mind as you continue to read because it contains most of the positive things that innovation sets in motion and will be referenced again later when I talk about niche markets and hyper specialization.

I have no doubt that had I been around during the transition from horse to internal combustion engine, I would not have been ranting about it. While there were a few people who lost out, nearly everyone either recovered or received a boost in the quality of their life. Engines were not simply outsourced versions of horses, they were completely different things that required their own industry and infrastructure.

Now compare this to disruption technologies and the source of my outrage will become very clear. Political parties are a type of disruptive technology. At a simple level, consider liberalism and conservatism and assume that there are two political parties with one operating with one of these approaches. Assuming that there is a 50:50 chance between either party, half of the time will be spend being governed by liberal policies while the other half will be spend being governed by conservative policies. This polarity means that society will be, over time, somewhere in the middle. The swings back and forth will have the effect of stopping one set of policies and starting the other set, and vice-versa. This is disruptive, but it has a moderating effect and the longer it continues, the smaller the negative impact will be of the changes.

In this example, the politicians lose their jobs and some portion of the tax revenues will likely be reallocated away from some things and onto others. For the individual people who are involved, it will be tough, but they will adapt and hopefully get back on their feet quickly. The point is that a change in government is very much like a change in the colour of paint – the house remains the same, it just looks different.

A more relevant and destructive example is that of Uber. Uber is like one side of the two party system mentioned above. But unlike that example, Uber is brand new to the game and it now represents an alternative to the well established approach that has existed for a long time. This means that those who are already doing the jobs that Uber will replace have no history of dealing with change. Maybe some places had a second or third taxi company that represented competition for customers, but each company was held to the same rules in terms of regulation and each company was running effectively the same business model. While this wasn’t ideal, it worked and it offered a level of predictability to all of the players. The business owners knew what they were dealing with in terms of revenue and costs, and their drivers knew what they needed to do in order to keep their job and to grow their business / wealth. The government benefited from licensing fees and tax revenue. The riders benefited from knowing exactly what to expect when they took a taxi ride somewhere. While it wasn’t as good as driving your own car or being driven by a friend, the taxi industry satisfied a need and offered people the opportunity to get driven somewhere for a fee.

Along came smart phones, 4G / LTE, and someone with the motivation to see the world slightly different from the status quo. The idea is very simple in hindsight and could not have come to be without the advances in telecom and electronics manufacturing. But once everyone had the ability to remain connected to the Internet from anywhere via their own high powered handheld computer, the traditional taxi model becomes antiquated and revealed to be much less than optimal.

What is Uber? It is an app that facilitates connections between people while allowing for the location of each user to be recorded in real time. It isn’t a taxi company because it doesn’t have most of the things that a taxi company has. It is more akin to a parent who is going to pick you up from the party or bar and drive you somewhere for a fee, but instead of calling them to come and get you, you use a phone app. And unlike the taxi company, it is mostly decentralized having data centers and corporate headquarters in some city somewhere. There is no terminal or maintenance center for fixing the cars, and no office for the drivers and dispatch workers to go to. The dispatch step has been replaced with a computer program and algorithms to connect people who are requesting a ride to people who are offering a ride. The terminal and maintenance center has been eliminated because the drivers just go to where ever they go when it is time to get maintenance done. This means that Uber has much lower overhead than traditional taxi companies and fewer local employees performing support, maintenance and dispatch roles. These jobs evaporate and the lack of a physical office means that rent is not paid. While I am no fan of rent seeking behaviour, I am a fan of people having jobs and of the tax burden of a city being paid by as many people as possible. So the “technology” aspect of Uber has cost at least a few jobs and reduced tax revenue. However, this aspect of the company has allowed it to get out of, or away with not, collecting and paying tax on the rides, and for the drivers to avoid paying licensing and other regulatory fees. Income tax is also not collected or paid by the company for any of the people who are driving because they do not view them as employees. Added together these things amount to huge losses in terms of revenue for the city.

This is not a great situation, but it would only be so bad if Uber as a company was making money, but it isn’t. In fact, it is hemorrhaging money, which is odd given that the cost of doing business should be lower than for a traditional taxi company. They connect riders with drivers, determine the price of the ride and then take their cut of 25% of the fare price. They get an interest free loan for the period of time between when a ride is completed and when they pay the driver (their week runs Monday 4am to the following Monday at 3:59AM). And in-spite of these things, they have lost an average of around 5.4 millions US dollars per day since they started operating and something north of $20 million a day in 2019.

NOTE, it is kind of tough to get exact and up-to-date numbers for the company, but 2019 estimates are coming in at a loss of $8.5 billion. Q2 2019 losses were 5.2 billion of which $3.9 billion US is linked to IPO costs in the form of shares. Q4 losses should be in the neighbourhood of $1.2 billion, or around $13 million per day.

Let that sink in, if such a thing is even possible. The company plans on losing half a billion dollars this quarter after losing 5.2 billion last quarter. The company is on track to lose more than 6 billion dollars this year and in the nine years that it has existed it has spent more than 10 billion.

What the hell?

Who is making money if not the company, the newly unemployed traditional taxi workers, or the government? It’s kind of hard to say but the best guess would be any one who works for the Uber corporation and their associated vendors / service providers, the people who drive for them, and anyone who makes money maintaining their private cars. Traditional taxi drivers are making less, and many have had to supplement their work by driving for Uber or Lift.

The riders are seeing a value in it though as evident by their adoption of Uber as a form of transportation and the decrease in use of taxis. However, the evidence that Uber is cheaper than traditional taxis is not conclusive. At off-peak times and in some cities you will pay less for an Uber ride, but in other cities and during peak times it may be less expensive to take a traditional cab. That being said, many people do prefer Uber and use it exclusively. For them, it is a better option than traditional taxis and they are more than willing to continue to use it.

It’s worth saying that their app is very good and it makes things a lot easier for riders. It also seems to make things easy for the driver as well. Both of these are good, and the fact that it is easy for the drivers is important because most of their drivers are NOT professional drivers meaning they do not come from traditional taxi companies. There is a good chance that your Uber driver will have a full time job and will only work a few hours each day to generate some extra money. This is an important fact to consider given how difficult it is to generate a decent income driving for one of the ride share companies. The pay is okay if you have a full time job elsewhere, but as a source of full time pay most people cannot make it work. It is also a job that does not have any security or much recourse in the event someone levels an untrue accusation against a driver. The company is free to deactivate any driver or users account at will and has no obligation to get to the bottom of any disputes.

Did / do traditional taxi companies have a problem that a lack of any real competition allowed to continue? Yes, some of their drivers were less than respectful and would not get off the phone when they were driving. Some of them were rude and some of them didn’t seem to like people very much. But many of them were and are first rate professionals who care about their customers, their cars, and their profession. Getting a cab could be problematic from time to time, particularly during busy times, and the notion of having to talk to someone on the phone to request a ride is outdated and no longer necessary. People who travel a lot needed to know the phone number of the local taxi company, which is easy enough to do, but represents an extra step that an Uber account eliminates. The location feature of Uber also takes care of the open loop associated with wondering when the cab would arrive – it’ll be about 10 minutes doesn’t do much to quell the uncertainty of not knowing something. And maybe the price of a cab ride was higher than it should have been.

The fact of the matter is that Uber does, on the face of it, fill a need that its users believe they have. The traditional taxi companies didn’t seem to do much to address the concerns and instill loyalty in their customers, so when something else came along, people were willing to try it out and finding it to be a better experience completely jump ship. This is the nature of progress and the passage of time. Without adequate competition people lose their taste for blood and stop bringing their A game.

The problem with this has to do with weathering the storm while making the needed changes to win back customers. Traditional taxi companies do not have the bank roll that Uber does. Most are small businesses with thin margins that do more in the realm of keeping a few people employed vs. generating a lot of profit or wealth for their owners. They were also asked to pay a lot of business tax and their employees paid a substantial amount of income tax, along with whatever regulatory fees the local government was asking them to pay. The service they were delivering is not the same as the one that Uber is delivering and, as a consequence, it cost them a lot more money to remain in business. Yes, Uber identified the business that taxi companies SHOULD be doing – that of connecting those who need a ride with those who have room in their car and a willingness to drive people from point A to point B – but when they arrive in a city they are offering a ride share service and NOT a traditional taxi service. And they have deep pockets and have been able to lose money, an average of a billion US dollars per year, and not go under.

This is why they are considered a disruptor and it is why I really do not like the outcome they are causing to happen.

They are losing money, they are pushing traditional taxi drivers, workers and companies out of the business, the jobs they are creating are not the same as the ones they caused to be eliminated, and the only people who seem to be benefiting are the riders, the moonlighter who doesn’t need a full time job and the initial shareholders who have seen their initial investment jump in value. This is a big problem for those who are negatively impacted and a potential problem for riders in the future.

Without the bank roll to keep going, traditional taxi companies will start to cut cost in an attempt to stay in business. This means that their drivers will get paid less and the service quality may begin to drop (here I’m thinking about the driver from the Las Vegas airport complaining the entire way about how Uber and the local government were screwing him over as opposed to making the day of two people who were visiting one of the coolest yet strangest cities in North America). After some period of time, the company will close its doors leaving Uber and other ride share companies to service the city. This means fewer jobs and less tax revenue.

But now that Uber is a publicly traded company, they have a fiduciary duty to their shareholders to maximize profits. In an area in which they have no competition to keep prices inline and no government regulation to dictate the price they get to charge, they WILL increase their rates. This will mean that it will begin to become more expensive to take an Uber ride.

The end result for successful disruption technologies is less choice, higher prices, and lost revenue / income for people and, in the case of Uber, cities. Since the city doesn’t suffer a loss in revenue, it means higher taxes for those who live in the city and for the businesses that are located there.

Travis Kalanick, one of the founders of the company, has done very well. While he no longer works for Uber and wasn’t their leader during their IPO, he was given 117.5 million shares that he has begun to sell. The IPO price was around $47, the lowest the price has been since then was $25.58, and today it is trading around $37. He is a billionaire and will, in all likelihood, never have to think about having a need for money again.

So what?

Disruption technology is zero sum while innovative technology tends not to be. The reason for this is very simple, people have a certain amount of money that they are willing to spend on something, so when a disruptor shows-up, even if their service is significantly cheaper than what it is replacing, people are not going to have more money to spend on it. They may, for example, take more rides, but they are not going to be spending MORE money than before. But this doesn’t actually apply to Uber because the cost of the rides is not significantly lower. People have made the decision to pay someone to drive them somewhere so they are simply choosing who to give the same amount of money to.

The reason why innovative technologies tend not to be zero sum is because of induced demand. There will be a lot of people who lose out initially, but the new technology changes things in such a way that it ends up lifting almost all of these people up and then above where they were before.

This means that there are going to be a lot of people on the losing end of ride sharing. It begins with the traditional taxi drivers, moves onto the taxi companies and municipal governments, and will eventually begin to negatively impact us, the customer or end user. The winners are few in numbers, with the biggest being the early investors and the people who own shares in the company, assuming that it ever reaches the point of paying a dividend.

This topic is going to grow in importance over the next few years as AI, 5G, and acceptance of the gig economy make it possible for technology to do a job, or a portion of the job, that is currently performed by a human being. It is entirely possible that one day in the future your Uber driver will be a Medical doctor or lawyer who has seen the majority of their work transitioned over to an app or other piece of technology.

NOTE: This article was written towards the end of 2019 and reviewed during the first few months of 2020.

Leave a Reply

Your email address will not be published.