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  • This video is sponsored by Skillshare.

  • The first 200 people to use the link in the description get their first two months free.

  • Uber is the highest-valued private company in the world,

  • More than Airbnb, SpaceX, and Lyft combined.

  • Every day, 15 million rides are taken across 600 cities in 78 countries -

  • Everywhere from the Southern Tip of Africa to the tiny town of Gridley, California - home

  • of the Red Suspenders Festival, I'm sure you're familiar.

  • Uber is so successful because it's so convenient.

  • Open the app and choose a ride - standard, or luxury, or, in India, rickshaw.

  • Soon, even flying taxi.

  • Afterwards, you rate the driver, and they rate you.

  • 1 through 4 stars being the worst experience of your life.

  • And five stars, anywhere from Mostly Tolerable to Absolutely amazing.

  • I'm only slightly kidding: a 4.6 average can get a driver deactivated.

  • Still better than Netflix's thumbs up or down, which is 80% sure I'll like The Emoji

  • Movie,

  • To which, I say:

  • Finally, Uber calculates the price, it's really very simple:

  • Start with the regular base fare, add the per minute rate multiplied by time spent in

  • car, plus distance times the per mile rate, all of which depend on the city.

  • A $40 ride in Tokyo costs $1.62 in Cairo.

  • Then add the booking fee, and possibly airport, toll, cancellation, cleaning, and lost item

  • fees.

  • UNLESS there are too many riders and not enough drivers, in which case multiply by a surge

  • price,

  • 2, 3, or, on New Years Eve Two-Thousand-Eleven, seven times the normal price.

  • And as YoutUBERs have shown, algorithms can be manipulated:

  • If drivers log out at the same time, they create a shortage and trigger a surge.

  • Oh, it also uses machine learning to predict how much you're willing to pay based on

  • route,

  • so maybe don't call an Uber from the Burj Khalifa to The Bellagio, besides the fact

  • that youcan't.

  • Even despite this, Uber is almost always cheaper, faster, and easier.

  • It took the most outdated, inefficient industry,

  • sprinkled in something calledTechnology

  • and completely reinvented the wheel.

  • Oh, come on, you should know by now, there's always a twist

  • In the 1930's, The Great Depressionhappened.

  • It wasn't great, but it was depressing.

  • Every fourth American was unemployed and desperate for work.

  • Especially low-skill, low barrier-to-entry jobs,

  • But, YouTube hadn't been invented, so, they drove taxis - lots and lots of taxis.

  • Meanwhile, fewer people could afford a ride.

  • And, as I was taught by a monopoly educating me about the danger of monopolies, When this

  • line goes up, and this ones goes down, prices fall and drivers get angry.

  • Like, violent protests in the street angry.

  • So New York City wrote the Haas Act.

  • Now, to legally operate a taxi, you'd need one of 17,000 licenses called medallions.

  • But 81 years later, with a million more people, it's only 13,000.

  • You can see the problem.

  • The number of medallions issued is more political than it is practical.

  • Before, extreme competition made prices unsustainably low.

  • Good for riders, bad for drivers.

  • And then, the pendulum reversed - too little competition made taxis expensive and inefficient

  • - bad for riders, good for drivers.

  • One medallion, the right to operate a single taxi, was once worth over a million dollars.

  • But advice like this hasn't aged so well.

  • Because: Uber happened.

  • Its drivers flood the market by not requiring medallions, draining their value.

  • High competition, low prices, and angry calls for regulation - Sound familiar?

  • This time, we aren't in an economic depression, but many households are, which means lots

  • of drivers.

  • For you and I, Uber is revolutionary - the low prices of last century plus the magic

  • of these things.

  • And for drivers, well, yes and no

  • If you ask Uber what the average driver makes an hour, they point you to this study: $19.19.

  • Another says 21.

  • Not too bad - unless, you look under the hood.

  • What they don't include are the car, its depreciation, maintenance, gas, and some of

  • the insurance.

  • Adjust for these and things aren't so rosy -

  • This study estimates the median hourly profit is eight fifty five before taxes,

  • less than minimum wage for 54% of drivers.

  • 8% actually lose money.

  • You might say: But Uber is supplementary - a quick way to make extra cash between jobs.

  • And, that's mostly true, about 60% have another primary income.

  • Plus, unlike taxis, who are even legally required to wear black socks in LA, with Uber, you

  • have some freedom.

  • But the reason people don't drive more might only be they can't.

  • Because Uber considers its drivers not employees, but independent contractors.

  • Employees are entitled to minimum wage, gas reimbursement, overtime, breaks, collective

  • bargaining, paid leave, and health insurance,

  • Which would cost the company about 4 billion dollars a year.

  • So they're extremely careful to call driverspartners”, and itself, not a transportation

  • company, but a “platform” -

  • Simply connecting riders to drivers, who decide when to work, what to wear, and so on.

  • But, Uber controls the prices.

  • And that's the catch - if drivers are just independent businesses, Uber setting their

  • fares could be considered price fixing.

  • So, which are they?

  • That depends on who you ask and when, and the answer will shape the future of the industry.

  • But something doesn't add up, The golden age for drivers came from regulating competition,

  • the same regulation Uber spends millions of dollars fighting.

  • Going back to the days of high competition and low prices.

  • Butwhy?

  • If Uber takes a cut from drivers, their interests should be the same.

  • Regulation, of course, slows its growth, but there's also another reason:

  • Drivers compete - but Uber makes the same commission regardless of who picks you up.

  • Uber makes more money with more drivers.

  • But drivers want the opposite - less competition.

  • They look like other platform-vendor relationships - Amazon and its sellers, Apple and app developers,

  • Both of which need their vendors - if YouTube leaves the app store, Apple can't replace

  • it.

  • But drivers are drivers - Uber needs them - but no one in particular; they're disposable.

  • Something like 96% stop driving for the company in their first year.

  • The two seem economically intertwined, but as long as Uber can find more drivers, they

  • can keep fares unsustainably competitive with rivals.

  • The real winners of the Haas Act weren't cabdrivers, who couldn't afford million

  • dollar medallions, but their owners.

  • Instead of drivers giving away their first $100 a day to rent a medallion, now it's

  • 25% all day.

  • For many drivers, it's still a very welcome and useful opportunity, but it isn't quite

  • the groundbreaking revolution promised.

  • And it may not last

  • On paper, Uber has the perfect business model:

  • Its huge network of drivers dominate the globe,

  • but it need not buy a single car or gallon of fuel.

  • All perk, and no work.

  • Something thousands of startups desperately try to emulate.

  • Most of which belong on Flopstarter, with products like the TIMELESS watch, which

  • doesn't tell the time.

  • So how did Uber lose four and a half billion dollars last year?

  • That's 12 million dollars a day!

  • Many startups sacrifice profit for growth, But Uber is nine years old.

  • Facebook made money after two.

  • The company's biggest problem may not be its legality, or controversy although there's

  • plenty of that, but basic holes in its business model.

  • The magic of so many companies is the network effect.

  • Every new customer makes it that much easier to get another.

  • You join Facebook because Steve is on it, Kim joins Facebook because you are, and so

  • on.

  • For Uber though, this is only regional.

  • More drivers in New York does nothing for Beijing.

  • In fact, it failed in all of China.

  • Every city is a new chicken-and-egg problem:

  • Drivers need riders before they'll drive, and riders need drivers before they'll ride,

  • I do not like them, Sam-I-Am.

  • I do not like green eggs and - oh.

  • This helps keep prices low, and profits, nonexistent.

  • It's inescapable and leaves only one path for Uber: self-driving cars.

  • Remove the driver, remove the money-eating machine.

  • But it means competing with the technology of Google and the auto-expertise of GM.

  • Either it'll transform into one of the biggest transportation companies in the world, or,

  • it'll be the end of the road.

  • It plans to go public next year.

  • which'll be fascinating to watch, doubly so if you understand the basics of the stock

  • market.

  • A great way to learn is with Skillshare.

  • This course explains investing, starting with the basics.

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  • It pays to invest in yourself today so you can be a good investor tomorrow.

  • Maybe you're inspired to start your own business, or just see what it's like,

  • Classes like this one cover how an idea becomes a business, and how you can get into the entrepreneur

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  • Thanks to Skillshare for supporting this show, and to you for listening.

  • Oh by the way - I hope you like the new logo as much as I do.

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This video is sponsored by Skillshare.

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The Economics of Uber

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