Nobody Understands Uber

Build Software, Not Infrastructure

Uber likely gets more press than any other startup. In a column yesterday, tech journalist Farhard Manjoo referred to it as the “hypersuccessful granddaddy of on-demand apps.” He then tried to explain how its business model has not translated very well into other areas, from on-demand parking (Luxe), to groceries (Instacart), to chef-cooked meals (Munchery). Like most commentators, he missed a key distinction in business models: Uber built an app while these other on-demand startups have built infrastructures.

App development is cheap and there is close to zero additional cost for each new user. Infrastructures are expensive and every new customer comes with added cost.

There were black cars and taxis in cities long before there was Uber. The company’s initial innovation was hail-by-app, not car-by-app. Uber’s software replaced the process of calling a cab company to request a car. While this shift was a huge improvement from the customer’s perspective, the infrastructure to make Uber happen—with the exception of location-aware smartphones—had existed for decades.

“How do you feel about surge pricing?”

By contrast, Luxe, Instacart, Munchery, and many others ended up building infrastructures; employees—or independent contractors—had to be trained to do new tasks, buildings had to be leased, and deals had to be negotiated with existing businesses. In Uber’s case, large numbers of livery cars had been driving other people around for a century. By contrast, a stranger meeting you on the street to park your car, or reading your grocery list and then picking out the correct items, required training people to do novel activities. Preparing food in a centralized warehouse, chilling it, and then shipping it required both training workers and renting real estate.

At first, each of these companies seems to have a non-digital equivalent: valets are sort of like Luxe, housekeepers sometimes pick up groceries, and takeout restaurants of course exist. However, the essential difference is that Luxe, Instacart, and Munchery do not—and cannot—take advantage of these existing services. Luxe cannot contract with a fancy restaurant’s valet, Instacart cannot hire someone else’s housekeeper to deliver your groceries, and Munchery cannot pay a restaurant to make another chef’s food. So what do they do instead? Build and maintain expensive infrastructure: they hire people and lease commercial space.

Consider the other big success story in the on-demand industry. It has been so successful and consistent in its strategy that you hardly hear about it anymore except when someone tries to challenge its near-monopoly. I am referring to Seamless/Grubhub. Just like Uber, Seamless is a software company. The infrastructure (i.e., takeout restaurants) had existed for decades before Seamless, providing delivery to customers who placed their orders with a phone call. With Seamless, customers found ordering by computer or smartphone more convenient, but the basic real world system was already there.

It’s looking like a Seamless kind of night.

So where does that leave us? Are on-demand companies dead? Of course not. If customers find them convenient, they may be willing to pay a premium for their services. However, customers have to be willing to pay not just for the service the app provides, but for the infrastructure on which they are built. This difference will continue to make these services feel like luxuries rather than necessities.

Alternatively, when entrepreneurs look at the world, they can look for ways that technology can make existing infrastructure more useful or meaningful for customers. They can follow in the footsteps of Uber and Seamless and be software companies first and only add infrastructure when the metaphorical low-hanging fruit has been eaten.

My company, Shophood, is aspiring to do just that. Our iPhone app allows its users to browse and search over 200,000 products in over 250 independent retail stores in New York City. We take advantage of the mobile platform by focusing on location: products and stores are sorted by their distance from you.

Now available on Shophood

Most importantly, we are starting with the amazing community of shops available in urban areas. Like taxis and restaurants, they have been here—making the city an amazing place to live—for decades. We are bringing them into the smartphone age, making their inventories accessible to you in the palm of your hand. We have not hired independent contractors, leased a warehouse, or trained people to do some strange new task. We do not think we are particularly good at that stuff, but we love building software and we love independent stores. If that makes sense to you, check out our app and take a look at the future of shopping.

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