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Several weeks ago, I needed a ride home after a few late-night drinks about two miles from my home in Washington, D.C. I opened the Uber app and entered my address. When the price on the screen appeared, I assumed I had entered the wrong street, and possibly the wrong condition. I carefully retyped. But the same price appeared on the screen: $50.
It’s scandalousI thought; $50 for a 10 minute ride? Then I continued to think. Aren’t gas prices and inflation near half-century highs? Isn’t the labor market so tight that low-paid workers change jobs at historic rates? Aren’t nominal wages growing the fastest for the kind of workers most likely to drive for Uber? Yes, yes and yes.
But something beyond rising energy and labor costs led to this surprising price. With markets falling and interest rates rising, money-losing start-ups and tech companies are changing the way they do business. In a recent letter to employees, Uber CEO Dara Khosrowshahi said the company needs to “make sure our unit economy works before we get big.” It’s the GM’s word: We gave Derek a nice discount for a while, but the party’s over and now it’s costing him $50 to get home.
Over the past decade, people like me — young, urban, professional — have struck a love-match with Uber, Uber-for-X clones, and all that mosaic of urban gear in travel, delivery, food and retail that vaguely claimed to be tech companies. Almost every time you or me ordered a pizza or called a taxi, the company behind this app lost money. Indeed, these start-ups, backed by venture capital, were paying us, the consumers, to buy their products.
It was as if Silicon Valley had made a secret pact to subsidize the lifestyles of urban Millennials. As I pointed out three years ago, if you’ve woken up on a Casper mattress, worked with a Peloton, Ubered at a WeWork, ordered on DoorDash for lunch, taken a Lyft home, and ordered dinner via Postmates only to realize your partner had already started a Blue Apron meal, your household has, in one day, interacted with eight unprofitable businesses that have collectively lost approximately $15 billion in one year.
These start-ups were not nonprofits, charities, or state-run socialist enterprises. Eventually they had to do capitalism and make a profit. But for years it had a strange meaning for them to not be profitable. With interest rates close to zero, many investors were eager to put their money in long-term bets. If they could enter the bottom floor of the next Amazon, it would be the one in a million bet that would cover all other losses. So they encouraged startup founders to grow aggressively, even if that meant wasting a ton of money on new consumers to grow their total user base.
Consider this simplified example. Let’s say the ingredient, labor, and transportation costs for a pizza delivery in New York average $20. If a business charges $25 for the average delivery in NYC, it will make a profit. But if a start-up charges $10 for the same thing, it will lose money but get a plot more pizza orders. More pizza orders means more total customers, which means more overall revenue. This arrangement is tailor-made for a low rate environment, in which investors are more attracted to long-term growth than short-term profit. As long as money was cheap and Silicon Valley figured the next consumer tech company to take over the world was one round away from funding, the best way for a start-up to make money venture capitalists was to lose money acquiring a gazillion clients.
I call this arrangement the millennium consumer subsidy. Now the grant ends. Rising interest rates turned off the tap on money-losing start-ups, which, combined with energy inflation and rising wages for low-income workers, forced Uber, Lyft and all others to make their services more expensive. Meanwhile, global supply chains have been unable to meet domestic consumer demand, meaning delivery times for key items such as furniture and kitchen equipment have dropped from “three to five days” to “between this fall and the heat death of the universe.” That means higher prices, higher margins, fewer discounts and longer wait times for a microgeneration of yuppies accustomed to low prices and instant deliveries. The golden age of on-demand urban tech reductions is coming to an end.
I must point out that the old ways were made possible by an era of weaker demand and weaker labor markets, which was not a winning combination for most workers. A lot of people were driving an Uber or delivering Thai food because they didn’t have competing jobs that would clearly pay more per week. Today, job openings are historically plentiful and nominal wages are rising fastest for low-income workers. This virtuous adjustment resulted in higher Uber and DoorDash prices.
This is not the end of the story. With inflation raging, the Federal Reserve will continue to raise interest rates several times over the next six months and could tip the US economy into a recession. If that happens, oil prices will likely fall and rising unemployment could put more Uber drivers back on the road. At that point, carpool prices would fall again.
But the heavily discounted prices of the 2010s aren’t coming back. The millennium consumer subsidy is over, and for the foreseeable future, subway residents will have to live the old way: paying what things really cost.