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Labor & Economy

Do Unicorns Play Monopoly? Ask Uber and Amazon

Dan Braun

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If you try to play Monopoly with a two year old, you will not win.

Sure, you may be better at buying up property, building hotels and following rules about when to pass Go – good on you. But when the two year old decides he’s playing a different game, like Throw the Entire Board at the Adult, that game and its goals will absolutely trump yours.

Disruption went from Silicon Valley buzzword to cliché years ago, but it persists as an operational goal for countless tech startups and their investors. (See Judith Shulevitz’s excellent 2013 exploration of the term.)

We still see such supercharged words as reinvent, reimagine and revolutionize as investors search for the next “unicorn” – the term for a startup valued at more than $1 billion.

But what if these unicorns are disrupting our world not just by throwing out old ways of doing things, but also because they aren’t bound by old-fashioned constraints like “making more money than they spend?”

 

The Company That Loses to Win

We can see that dynamic at work in Amazon, which last month became the world’s largest retailer (while more recently setting a new standard for bad press on corporate culture).

Matthew Yglesias notoriously referred to Amazon as a “charitable organization being run by elements of the investment community for the benefit of consumers.” Because investors seemed content with ongoing, massive losses, Amazon could continue to “[sell]  things to people at prices that seem impossible because it actually is impossible to make money that way.” 

To be fair, Amazon’s leap past Walmart as top retailer came after it surprised analysts by actually posting a profit this past quarter, but as recently as a year ago the company reported a $544 million operating loss in three months.

“Amazon is the company that loses to win,” tcarmody wrote in the Verge. Consumers benefit, at least in the short term, thanks to fanatical customer service and prices that are pushed lower and lower. But is the economy improved if competitors are put out of business not because they’re less efficient, but because they aren’t able to subsidize bargain pricing with capital from investors who don’t require profitability? Does the economy benefit when the behemoth muscles past smaller partner firms to steal their suppliers and envelop their business? What if jobs lost at competing firms are replaced by warehouse jobs that feel like prison and white collar jobs that require 80 hours a week and leave no room for family or health?

What happens when Amazon wins at its own game?  

 

Driving Out Competition

A younger example of the phenomenon is Uber. The transportation company told potential investors that it lost $470 million (over an unspecified time period), and documents leaked to Gawker earlier this summer showed a net loss of $160 million in just the first half of 2014.

An Uber rep’s statement to Business Insider following the leak channeled the company’s cocky persona: “Shock, horror, Uber makes a loss. This is hardly news and old news at that. The case of business 101: You raise money, you invest money, you grow (hopefully), you make a profit and that generates a return for investors.” 

Clearly much of the loss is due to Uber’s ultra-aggressive expansion into new cities and services. The model, albeit legally dubious, may be profitable in some of its markets. But there is overlap between operating and expansion costs, because some significant portion of the latter is price-related. As Carmel DeAmicis of the tech news site Re/code notes, “Uber in particular dumps a lot of cash: It subsidizes rides for passengers and offers huge signing bonuses for new drivers in order to build up both sides of its marketplace.” (Disruption alert: Re/code’s “aim is to reimagine tech journalism.”)

The core of Uber’s service is a well-designed app that connects riders to drivers, allowing Uber to compete on service and keep down wait times. But if Uber’s disruption of the industry were just based on its app, we would expect to see a competitive market emerge between alternatives like Uber and Lyft, and some taxi companies developing decent alternatives – as some have and more will have to. In addition to the app, Uber also makes use of a business model in which drivers are classified as contractors rather than employees, keeping its operating costs down and shifting risk to drivers, though leading to legal challenges. And finally, it has competed via undercutting opponents’ prices, often setting them significantly below the level of taxis.

Not all discounts amount to predatory pricing, of course, but when someone is using troves of investment cash to undercut their competitors while talking about putting everyone else out of business and ending an industry as we know it, they’re dancing over that line. And with the company having raised more than $5 billion in capital (on a $50 billion valuation), there is plenty more firepower for a price war.

The amount of threat from Uber’s success depends on the company’s endgame. If it were to continue to offer a well-designed platform and prices were kept to a certain level (as taxi prices often are through regulation), consumers could conceivably benefit (drivers are another matter). However this is a company, pursuing monopoly in multiple markets, that has shown no compunction about jacking up prices when it thinks the playing field is leaning that way.

On the other hand, if Uber is actually aiming to maximize profits, but happy to lose vast sums of money to grow at the expense of competitors, it is playing a different game whose goal is much closer to the legal definition of monopoly. Once the other players are largely swept aside and pricing needn’t be held down, the road to profit is clear. And that might not be a win for anyone else.

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