Read This………

A transportation expert takes Pando to task regarding their analysis of Uber, and Pando sees fit to publish his letter.

Basically, Pando has gone after Uber as being a bunch of Silicon Valley snake oil, and Hubert Horan believes that this is not true.

Specifically, notwithstanding their somewhat horrifying business practices, Amazon and eBay actually innovate, reducing the costs and increase the selection relative to brick and mortar alternatives, while Uber provides the exact same service as any taxi or limo service, while adding the "benefits" of price gouging and drivers who have not passed a background check:

The letter is fascinating, insightful, and critical. I don’t agree with his characterizations of some of my arguments; but I do agree with his own arguments and explanations in this letter, and more than that, I appreciate the time and serious effort Horan put into this letter to educate all of us. Few people in America have his decades-long industry perspective and his unique political insights on the politics of transportation, antitrust, markets, and tech. Here's the letter in full.

-Mark Ames

………

I agree that Convoy, which appears to be closely mimicking the Uber playbook, raises major issues that fully warrant the attention you’ve given it, and I am grateful for the effort and critical thinking that you and Pando have brought to these unicorn issues over the last several years. Apologies in advance if the tone of what follows seems excessively critical, but I have four major concerns based on my background in transport and regulatory economics: (A) I think the Convoy piece (as well as most previous Pando reporting on Uber) misses the critical point that neither company has an underlying business model linked to any rational evidence of sustainable competitive advantage, and you’ve misled readers by equating the Uber/Convoy models with companies like Amazon, and EBay, which did have plans based on solid economics; (B) You correctly noted that the investors behind Convoy (and Uber) are seeking quasi-monopolistic dominance (trying to build a rent-extractive “narrow in the stream”) but you failed to lay out for your readers the critical difference between driving thousands of less-efficient existing suppliers out of business because you’ve built an overwhelmingly better mousetrap, versus driving more efficient suppliers out of business using artificial market power; (C) You correctly note the already lean conditions in trucking, and it is quite reasonable to discuss Uber-type companies in a broader historical/political context. But I think you’ve improperly equated the politics and economic thinking behind Ford/Carter transportation deregulation with much more radical finance-driven changes 20-30 years later, and I think the 1970s points you raise aren’t critical to your readers’ understanding of Uber/Convoy; (D) I imagine that Pando doesn’t get many letters attacking its failure to fully appreciate the problem of Uber and Uber-type companies, but if one fails to focus on the complete lack of competitive economics, and the huge dependence on (eventually) exploiting artificial market power, then I think you end up seriously understating the damage these companies could impose on the rest of society.

………

1. You’ve improperly equated the Uber/Convoy and Amazon/EBay business models—one is based on legitimate /competitive economics; the other isn’t. Your post said that even if it’s not Convoy, “it’s safe to assume that sometime soon, tech will transform and restructure the $749 billion trucking sector” in a similar way to Uber and taxis, Amazon and booksellers, and EBay and newspaper classifieds. This totally misses a critical distinction-- Amazon/EBay type business models were based on powerful competitive advantages over the businesses they were seeking to supplant while the Uber (and apparently Convoy) models seek to “disrupt” an industry with economics that are actually worse than existing competitors. Despite other issues, Amazon could offer consumers much wider choices than they ever had before, eliminated all of the costs of retailing, achieved huge warehousing and distribution efficiencies and clearly had scale economies that no traditional competitor could match. On the other hand, the Uber business model (software/brand company plus its “independent” contractors) fails each of these efficiency/competitive/technological tests. Uber isn’t transforming the consumer product—it offers the exact same service as traditional taxi/limo operators. Uber—even a future, more mature Uber-- will have much higher driver, insurance, training, ownership and maintenance costs. The massive subsidies that create the appearance that Uber offers better/cheaper service are not sustainable. Since the mature Uber won’t be able to produce urban car service at significantly lower cost, there are no welfare gains from increased service or lower prices. There is no evidence that a reasonably well run taxi/limo company has bloated costs that cry out for new market entrants, and there’s ample evidence (dirty cars, horribly paid drivers) that industry costs are already extremely lean. Even Uber’s vaunted app is irrelevant to competitive economics. The ordering/pricing aspects of the app are a tiny piece of total costs, they don’t drive any big network economies, and apps can easily be copied. The app actually illustrates a serious Uber structural disadvantage. The economic key to any transportation company is the ability to balance supply (i.e. assets) against volatile demand in the medium/longer term. Thus profits depend on managers with long experience dealing with complex markets, and with sophisticated tools for capital planning and shorter-term price/supply adjustments. Airlines, railroads and shipping companies use some of the most advanced management systems anywhere in the private sector. Yellow Cab isn’t in the same league, but has managers with serious fleet management capabilities, and dispatchers who understand all the idiosyncrasies of local demand patterns (factory night shifts, conventions, bar/restaurant patterns). Uber has an app that ignores the both vehicle management, and market demand forecasting, has no local market knowledge and simply reacts to short-term car requests. Any urban transport operator faces much tougher economics than freight or intercity passenger operators, because there’s no way to reduce costs by smoothing demand peaks. Airline revenue management can massively reduce capital costs by getting price sensitive people to not fly on Friday afternoon. The Long Island Railroad has had peak/off-peak pricing for a hundred years, but rush hour is still rush hour, and the LIRR suffers with the cost of hundreds of cars that only get used ten hours a week. Surge pricing will not get anyone to shift their Saturday night out to fill empty cabs midday Tuesday, and there’s nothing else in the Uber model that addresses any of these fundamental problems with the economics of urban transport. Given the vastly greater complexity of trucking, the idea that a company with a software app could produce new efficiencies great enough to drive most existing trucking companies out of business seems too ludicrous to take seriously. As you clearly point out, there is lots of historical evidence that the last few decades of competition have already made existing operators pretty efficient. Unlike urban car services, trucking includes lots of companies (UPS, JB Hunt) with incredibly advanced industrial engineering capabilities. Anyone who thinks that there are tens of billions worth of trucking efficiencies out there—efficiencies that absolutely no one anywhere in the trucking industry could see—and that these billions can be generated by a scheduling app, but will be so huge that they’ll totally disrupt a$749 billion industry---is either delusional or willfully dishonest.

Uber-type companies need to be understood as a radical departure from Amazon/EBay type models. Instead of displacing competitors through actual efficiencies, or by creating entirely new markets, its model is entirely based on getting the world to believe that it will inevitably dominate the entire industry. This requires aggressively suppressing any discussion of empirical economic evidence (which would undermine its case) and emphasizing the factors driving inevitability--the brilliance of its early stage investors, the ruthlessness of management, and the raw political power of the company’s wealthy supporters. PR is a component of every start-up; at Amazon/EBay it played a supporting role and relied heavily on economic evidence of competitive strengths, but at Uber PR is the heart of the plan, and replaces the need to figure out how to provide much better service at much lower cost. As with 97% of Uber’s media coverage, the Fortune and Bloomberg pieces you cited totally avoided any discussion of competitive economics and tried to pass off its faithful repetition of Convoy’s “industry disruption is inevitable” PR theme as “news reporting”. But by equating the Amazon and Uber approaches you’ve fallen into the same trap. You’ve failed to tell your readers that there are no competitive economics behind the “inevitability” claim, and you’ve helped spread their “our valuation is legitimate because we’ll produce huge economic value just like Amazon and EBay” PR claim.

Read the rest.

While my (and Mark Ames') point have made the point that Uber is designed to succeed by fobbing off many of its costs onto its employees and society, in doing so, we had ceded that Uber had in some way a built a better mousetrap.

He argues that it's all an exercise in PR where the real business is to create a monopoly, or oligopoly, model where they sit astride the market extracting rents.

No wonder Wall Street loves Uber.