“Such A Model Does Not Increase The Size Of The Market”: Why Uber, Delivery Services And Other Project Intermediaries Will Never Go In Profit

Partner Asha Labs SEIA Paboda published on Medium column about why companies like Uber, Lyft, Postmates, and others will be difficult to make a profit, no matter how large they become. Edition vc.ru publishes an adapted translation notes. In 1860, the Pony Express delivered mail between St. Joseph Missouri and Sacramento California.

The company transported the first inaugural address of Lincoln from Nebraska to California in seven days and 17 hours at 200 horses. This delivery was the fastest for the company and for the world as a whole. The job the company hired couriers who weighed no more than 125 pounds (56 kilograms) — to avoid overloading the horses. One of the couriers told me that he took a job in the Pony Express at the age of 11 years.

Postal service Pony Express lasted 19 months. During this time, the business lost about $200 thousand. “The financial loss crippled the business, but destroyed the company the advent of the transcontinental Telegraph. The company managed to deliver 35 thousand items, but it killed the new technology — which was nothing like the horses and is much cheaper”.

In 2017, the business promises the users to deliver them something — food, restaurant meals, car — faster than the old technology. Such startups Uber, Lyft, Postmates, Instacart, do not speak of their own resources (in the case of Pony Express, it was a horse, in the case of Uber or Lyft — cars), and provide users with only the technology. “They are only brokers that are disguised as service providers”. The Pony Express possessed all the resources necessary for the delivery of mail, and fully controlled their cost — but still ruined.

“Taxi drivers and shops own the physical assets and make them. But companies like Uber and Instacart are on the market and the “eat” part of the proceeds under the guise of convenience for customers. They increase the comfort of use of the services, but do not increase the market,” writes Abode.

For example, the service Instacart delivers products to customers from nearby stores. It will not increase the revenue of shopping — usually buyers book through the app, all the same as they usually are. Moreover, the shop is losing revenue as it loses income from spontaneous purchases that many people make in supermarkets, seeing something on the shelf.

Such acquisitions bring significant stores of money, and they would not want to lose them. According to the author, the situations in which such services can benefit both clients and sellers — when they increase the client base or the frequency of use of services. But services like Uber or Postmates do not.

“Uber was integrated into the cash flow, but not increase it. And thats the reason for the dispute Travis Kalanick with one of the drivers. To increase revenue, companies need to get on the road more cars. The more machines, the fewer trips they make — because of increased competition. The income of the drivers is reduced, and the income of the Uber — no,” he explains.

Many believe that such companies, which are growing exponentially, adding more assets, in some way will be able to ensure its profitability. This misconception. They reduce everyones contribution to the creation of common value, without reducing the cost of maintaining the resources. “The company not owning the resources, I believe that to ensure the profitability will help them to grow rapidly and capture a growing part of the market.

Instacart need more buyers — because those already using the service, promote frequency of purchases, despite the increased convenience. Would you buy in the store more often, if you can do it online. It is unlikely,” explains the author. Same is the situation of the services for the ordering of food from restaurants.

Companies are trying to quickly scale the business, go into new cities and countries, but together with this grow and the cost of its maintenance. “They look at Amazon, and thats another mistake.”. FedEx and UPS, says Abode remain niche companies, because scaling does not create additional value. Therefore, these services do not seek to replace the largest delivery service in the US — state mail — although they have such opportunity.

But the mail delivers shipments at the lowest price, and get her a niche means to spend money on the provision of resources, not increasing profits. According to the author, to make the model of delivery is possible only in two ways: “For a long time representatives of the it industry blamed for Amazon is that the company does that is losing money.

Amazon is also the broker, the company did not own most resources and money could only taking a Commission of sales. The service grew rapidly, but were losing money,” — says the author of the note. But then Amazon started to sell the existing resources sellers — logistics and warehouses. With the creation of cloud platform Amazon Web Services, the company has carried the same model to a new market.

“Companies like Uber dont offer the owners of the assets of such opportunities. Bye.”. Uber is trying to repeat this principle, offering drivers car leasing. “And while the brokerage business model will not be the only part of the business, these companies will continue to lose investors funds”.

The problem is not the speed of horses or development of technology. The problem is that the brokerage model does not increase the size of the market. In any one or more of the players will be forced to leave the market and customers and not owners of resources.

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