By Amber Hestla
One of the defining characteristics of the current world is that economic change unfolds faster than ever.
For thousands of years, the average person survived, eking out a living from farming or some specialized service that helped farmers, like blacksmithing. I’m simplifying a great deal, but this lifestyle remained unchanged for many people until the Industrial Revolution created jobs in factories at a scale that was unimaginable just decades earlier and large cities became the norm.
Large manufacturers drove the economy for more than 200 years until technology began replacing jobs in the second half of the 20th century. Over the past 30 years, the internet has further accelerated the pace of change, and now change is nearly constant.
One of the more recent changes has been what some call the “gig economy,” which has allowed Uber (UBER) and other on-demand service providers to flourish. Many of us have enjoyed the benefits of these companies, but the drawbacks of the gig economy might soon take center stage.
With Uber’s initial public offering (IPO) Friday morning, attention is turning to the company’s financial operations. Basically, Uber and other platforms take a portion of the revenue and pass on the rest to the individual providing the service. So far, Uber has been operating at a loss.
As a public company, Uber will be under pressure to deliver a profit — something its current business model doesn’t really allow for. For Uber to make a profit, the rides must be priced at their fair value. For years, Uber has delivered growth in revenue by keeping prices low. Losing money on each ride cannot be the business model for a publicly traded company.
Raising fares will drive away customers. That will also lower the amount of money drivers make, and the drivers are already complaining they don’t make enough. In fact, drivers are planning a strike the day before the IPO to call attention to their plight.
It’s interesting that driver pay is intended to be low. Surge pricing, a system that charges higher fares when the demand increases, is designed to increase the number of available drivers and lower the fares.
The entire business model of Uber and other on-demand companies requires them to keep prices low so customers will use the service. A small increase in fares will drive some customers away. I know many analysts disagree with me and believe somehow this model is going to force consumers to abandon car ownership so that only Uber drivers will own cars (until driverless vehicles take over).
Many of those analysts live in large cities. In the country, where I live, we need cars. (Or, more often than not, we need trucks.) I suspect the reality is that many people outside of cities will not give up their cars hoping a driver will be available when their sick child needs to get the doctor.
Uber’s IPO, in my opinion, is the beginning of the end of the short-lived gig economy, and that means a new model will need to be developed. This is important because it will lead to volatility in financial markets as venture capital funds suffer losses and need to raise capital by selling profitable companies.
Either way you slice it, I recommend staying away from the Uber IPO just as I did with Lyft (LYFT) about a month ago.
As I pointed out back then, we’re probably going to see a few over-hyped IPOs in the next few months. I’ll be ignoring all of them, and you should be, too.