At first sight, a good idea from a big tech company to save the planet. But look more closely, and you see a very different lesson for startups
Last month, Uber announced that it has raised £30m ($38m) in London ‘to help Uber drivers switch to electric vehicles’ via a ‘clean-air fee’ of 15p (19c) a mile, added on to every journey in London. The news, no doubt assisted by the cleverly staged photo above when the fee was first announced, elicited a round of positive publicity from the London Times, Guardian, Standard, Metro and so on.
What could be better? A baddie company — one that almost lost its licence to operate in London, on the accusation that it didn’t meet the requirement to be ‘fit and proper’ to run a taxi service — turns a new leaf and starts thinking about the planet. And so thoughtful: cash builds up in an individual account, according to the Uber press release, so a driver who’s on the road for 40 hours a week can build up a balance of £3,000 ($3,800) in two years or £4,500 ($5,700) in three, which can then be put to replacing their existing car with a planet-friendly, green electric vehicle.
But if you look at a bit more closely, the policy seems puzzling. If you were Dara Khosrowshahi, who replaced the disgraced billionaire Travis Kalahnik as Uber’s CEO, why wouldn’t you set up a green levy in every city where you operate, not just London? Britain’s capital, after all, doesn’t appear on the list of the world’s 500 most polluted cities by particulates. And our carbon problem is global, not local.
Come to that, if you really cared about the environment, why wouldn’t you make a strategic shift away from carrying single passengers, and towards pooling? After all, Uber has been responsible for big increases in congestion in many cities, including New York and London, so that might right some of the damage it’s caused. Uber already has a pool product, but it could do lots more to promote it and make it attractive.
Pooling is a huge opportunity to benefit the world. Highway 101, running north-south from San Francisco through Silicon Valley, is extraordinarily congested with slow-moving traffic for many hours a day (which helps explain the high demand for Tesla’s limited self-driving technology). Lots of drivers are commuters with nearby starting points and nearby destinations. (Think of Apple’s 14,000-employee campus in Cupertino, which has a horrifying 11,000 parking spaces.) Increase net ridership from 1.1 to 2.2, and you could halve te cars, halve the emissions, and reduce travel times. Since carpooling is an information problem — nobody wants to be stranded at work with nobody to drive them home, and few people want to commit to fixed hours in advance or wait around for their ride— it’s a perfect opportunity for a startup to build network effects.
So why the clean-air fee in London instead?
Uber says that ‘every penny of the levy goes to helping drivers to upgrade into an electric vehicle as well as other clean air initiatives’. But note the detail: drivers, not driver, and also other clean-air initiatives. So it looks like Uber drivers in London who switch to a competitor risk losing the pot they’ve built up — a pot that is going to become more valuable as the city pushes minicabs (as private-hire cars are known in Britain) harder towards electric. To an economist, that switching cost is a beautiful example of vendor lock-in. So if Lyft opened up in London (US readers may not know that it’s not there now), Uber would have a great message to its drivers: Sure, join Lyft. Be our guest. But say goodbye to £4,500 if you do.
But there’s a bigger point. Who pays the clean-air levy? Why, the customers of course: it’s a price hike. And although some noticed what was going on and weren’t happy, Uber still managed to line up three environmental worthies to contribute complimentary quotes to its press release announcing it. So Uber has in effect succeeded in raising prices and getting positive publicity for it.
Success: raise prices and get positive publicity for it
At present, I’d say that Uber has a dominant position in its market in London. Gett and myTaxi are ride-hailing competitors, but they offer black cabs, which have high regulated prices, and and according to one study cost more than Uber unless it’s on 1.7x surge pricing or more. So although Uber has been spraying money into new cities to build scale, it’s in a position to exploit its market power in places like London, where it’s entrenched.
It’s also ironic to note the way that entrepreneurs have misunderstood Uber’s unit economics. Lots of other labour marketplaces followed its lead in settling on 20% as a reasonable ‘take rate’ — ie, the percentage of what customers pay that the platform keeps in return for introducing them to providers. TaskRabbit, for instance, started at 15%, then rose to 30%, then went back to 22.5% when you include a 7.5% buy-side commission, according to this analysis.
Yet Uber’s take rate is misleading. A TaskRabbit who paints your apartment or builds some Ikea furniture may need to bring their own screwdriver or paintbrush. But a driver needs a car, which all in (according to this analysis) costs about 50% of the total price that the passenger pays. That means if Uber takes 20%, that leaves the driver only 30% — so the company’s actual split of the 50% gross margin is 60% — way more than most labour marketplaces.
Even with those favourable economics, though, Uber has been discreetly increasing its take rate where it can. Although it cut take rates in competitive markets like Brazil, France, India and the Middle East, it raised them in mature markets and, more cleverly still, on the driver’s first 20 jobs each week in markets like San Francisco, where it was trying to stop them splitting their work between competing platforms.
Then there’s driver tips. Until 2016, Uber’s view on tipping, explained in a Medium post, was clear: it’s ‘not included, nor is it expected or required. In fact riders tell us that one of the things they like most about Uber is that it’s hassle-free. And that’s how we intend to keep it.’
The no-tip policy was one of Uber’s USPs when it first launched. Anyone who doubts that just needs to sample the experience of being driven into New York in a yellow cab in bad condition with loud radio, poor AC, and a rude and unhelpful driver who nevertheless expects to get 20% on top of the base fare and toll.
Three years later, that’s all gone. Tipping is not merely allowed by Uber, but strongly encouraged via nudges in the app, where you’re pressured to give a driver rating before booking your next ride, and shown an optional tip when you do. As you’d expect, this was one change that did actually make Uber drivers happy, given how many of them make poor net earnings from their work. But again, it’s at the expense of customers: a disguised price hike, which allows Uber to maintain or increase its take rate without taking the blame for it.
Hey presto, driver revolt averted; zero cost to the company
Consider one final example: surge pricing itself. Surge is based on an interesting insight: in a rain storm, when twenty people want a ride for every available cab, the decision about who gets the car will be random. So the person trying to catch a flight, or the woman in labour heading for the hospital, has no opportunity to get priority. Price is generally a reasonable mechanism for deciding how resources are allocated.
But once surge pricing is in the hands of an opaque platform with a dominant position, it presents lots of opportunities for hidden price increases. Who outside Uber really knows what the balance of supply and demand for rides is in downtown Manhattan on a Saturday night? Who knows whether the spikes are higher in Austin than Albuquerque? Surge pricing, in short, provides a useful cover for arbitrary price increases that are hard, if not impossible, to detect.
What’s the lesson for startups here? It’s about monopoly. When you have a monopoly, or a dominant market share, you have control over your prices and your margins. You’re not stuck in the purgatory bazaar of perfect competition, where profits are driven down to zero and new companies keen entering the industry as old ones give up and exit. So if you’re building a business, it’s fine to start with low prices, discounts and promotions — as long as you can see a path to changing everything later.
Monopolies aren’t good for consumers. Once they’re in place, they stifle innovation, strangling at birth or gradually overhauling the competitors who might provide a better service. Think of how Microsoft leveraged its crappy Windows operating system to favour its copycat Excel product over Lotus, the company that created the first spreadsheet. Think of Google search results.
But for investors, monopolies are terrific. So if you want to raise venture capital, show your VCs a route to a dominant position. Show how, when you achieve scale, you can prevent competitors from entering your market — globally if possible, but city by city if necessary — and how that will translate into higher profits and hene greater company value.
This isn’t news, of course. It’s the guiding principle of the pharma industry, where the government deliberately awards 21-year monopolies in the form of patents to encourage research into new drugs. Patents themselves have been public policy since 1421, when the city of Florence gave the architect Filippo Brunelleschi a three-ear monopoly over a clever new barge equipped with hoisting gear to carry large chunks of marble up the river Arno.
But achieving a non-patent monopoly needs to be done with subtlety. Peter Thiel argues forcefully for trying to build monopolies in his book Zero to One, and proposes three simple steps to success: start small and monopolise; then scale; but don’t disrupt. I’d go further: don’t boast, either. Don’t reveal to the world the high market share that allows you to control prices. Define your market as widely as you can, in order to make your company seem less threatening. Put out press releases showing your cars covered in plants.
One final thought. What I’ve written above is for entrepreneurs, but there’s a lesson here for governments and regulators, too. We’re reminded by the recent behaviour of Facebook that just because a company is new or young doesn’t mean its provider is not-evil. So regulators need to be swift and proactive in identifying markets where one company is heading towards a dominant position. And they need to especially active in markets where the competitors, like private-hire or minicab firms, are too small and too poor to pay good lawyers to make their case for them.
I’m Tim, and these articles come from my work coaching Series A and B CEOs backed by VC firms in Europe, America and Asia. Since 2013, I’ve run a seed fund out of London that invests in SAAS, platforms, marketplaces and tools. I’ve backed 50 companies, sat on 19 boards, founded a startup, and taken it to an IPO on the NASDAQ. Before that, I worked for The Economist and the Financial Times and wrote business books.
About this publication
This is one in a series of blog posts covering nine of the most important skills I’ve seen in founders who successfully scale their companies. If you’d like to read more of them, please follow; if you’d like to review a copy of my forthcoming book, let me know in a comment or DM. And if you think you know a CEO who might find these ideas valuable, please give a few claps or share:)