Uber approves SoftBank deal, fake GPS app inflates Uber rider fares, thermonuclear grocery bombs

LXXXII

Uber's constrained problem.

The SoftBank-Uber-Travis drama may be winding down, with Uber over the weekend approving SoftBank's bid to take a multibillion-dollar stake in the company. SoftBank and investors Dragoneer and General Atlantic are expected to inject at least $1 billion into Uber at its current valuation of nearly $70 billion and also to buy up to $9 billion worth of Uber shares from existing investors at a price that remains to be seen but is almost certainly less than $70 billion. Because startup valuations come from crystal balls rather than traditional mathematics, Uber will still be worth $70 billion when all is said and done.

But enough with Uber's investor drama, that is not actually the constrained problem I want to talk about. Here is a working paper from John Horton at NYU Stern and two researchers at Uber Technologies Inc. arguing that it's pointless for Uber to raise fares because the market will relatively quickly return to an equilibrium where drivers aren't making any more per hour than they were before.

The logic goes like this: Imagine Uber normally charges $1 per minute and $1 per mile, and it increases that to $2 per minute and $2 per mile (these numbers are obviously made up). In the short term, drivers will earn a lot more, because, well, both rates have doubled. But over time, a couple other things happen. One, because Uber is suddenly a much better deal, drivers start working more hours. Two, because Uber is now more expensive, customer demand declines.

When supply (driver labor) goes up but demand (trip requests) goes down, there's less work to go around. And so even though drivers are getting paid more per trip, the overall amount they work—the study calls this "utilization"—falls, and after about 8 weeks their hourly earnings ("marginal revenue product") return to what they were before the fare increase.

"We find that when Uber raises the base fare in a city, the driver hourly earnings rate rises immediately, but then begins to decline shortly thereafter," the paper states. "The main reason is that driver utilization falls; drivers spend a smaller fraction of their working hours on trips with paying passengers when fares are higher." (Uber has made the opposite argument to defend fare cuts, saying lower rates boost customer demand, allowing drivers to increase their utilization and hourly earnings.)

Research papers published by Uber and its collaborators tend to talk about Uber like it's a perfect free market, at the mercy of the forces of supply and demand. They tend to ignore all the levers that Uber regularly pulls in making that market work the way it wants, from texts and promotional payments encouraging drivers to get on the road during busy periods to hyper-targeted "upfront" prices that customers agree to before booking a car. (This paper, for example, takes place in a pre-upfront pricing universe, where what the rider paid was still the base for what the company and driver earned on each trip.)

"I think that's fair," Horton said, when we chatted about his paper. "There's things they control completely, and there's things that they control subject to some constraints." What the customer gets charged for a ride, he says, "is basically 100% under their control, they decide." What a driver makes from an hour of driving "is affected by the choices they make, but ultimately the decisions of other drivers are going to matter." Uber "has a whole bunch of tools that shape what equilibrium emerges, but that doesn't mean that every equilibrium is possible. It's a constrained problem for them."

Fare play.

Elsewhere in Uber, here is a crazy Quartz story on drivers in Lagos using Lockito, an Android app that lets your phone follow a fake GPS itinerary, to inflate rider fares:

When a driver uses Lockito for an Uber trip he or she can have the fake GPS running (and calculating a fake fare) from the pickup point to the drop off location, before the passenger has even got into the car. When the real trip starts, the real GPS starts running and calculating the actual fare. But at the end of the journey the fares from both trips (real and fake) are tallied up as one fare which the unsuspecting rider pays.

Drivers tell my Quartz Africa colleague that they have turned to Lockito ("Locki") in response to the 40% fare cuts that Uber implemented in May. Working Uber econ papers notwithstanding, these drivers say lower rates have made it harder to meet weekly costs as a ride-hailing driver, which for many include renting a car from a private owner. One driver even claims that Uber knows about the Lockito trick and has purposefully done nothing, because inflated fares also increase its own profits. (Uber denies this.)

Lastly an update from New York: Uber shut down its subprime car leasing program after an internal audit of its "vehicle solutions" prompted by my investigation over the summer. The company will continue to partner with local car dealers to offer rentals to drivers, but with more oversight of what those dealers are up to. Uber is also ending its auto-deductions, a previously mandatory clause in lease and rental contracts that let it automatically deduct weekly payments from a driver's Uber earnings. Auto-deductions made the program more attractive to dealers taking on risky leases and also ensured that drivers would work for Uber before a competitor, because they needed to earn enough in Uber each week to make their car payment.

Thermonuclear grocery bombs.

What would you do if, having applied to Y Combinator, the prestigious Silicon Valley accelerator, you were rejected because, well, you missed the application deadline? If your answer is "nothing," "try again next year," or "sucks but that's really my fault!" you simply aren't thinking enough like a startup bro:

[Apoorva] Mehta launched [Instacart] in 2012 and applied to Y Combinator, the prestigious Silicon Valley accelerator that hatched giants like Airbnb and Dropbox. He was rejected because the application deadline had passed. Undeterred, Mehta used Instacart to deliver a six-pack of IPAs to a Y Combinator partner. Within 30 minutes, he was asked to come in for an interview and the next day was accepted into the program. Shortly after, he closed a seed investment round.

That is from this Forbes profile of Mehta and his grocery delivery startup, Instacart, which is reportedly thriving in the wake of the Amazon-Whole Foods deal. Instacart, five years old and valued at $3.4 billion, has spent the last year or so positioning itself as the delivery service that can help the average American grocer stave off an inevitable online onslaught. After Amazon announced plans to purchase Whole Foods, "every major grocery retailer in the country was calling us," Mehta tells Forbes. "It was really like a thermonuclear bomb against the entire grocery industry."

Should Instacart do well in the long run, you can bet that story of how Mehta wrangled his way into Y Combinator will become the stuff of startup legend. It has all the ingredients venture capitalists love. Mehta failed (fast), hustled, demonstrated product-market-fit with some beer and bro-y swagger, and overcame that failure. Never mind that his delivery of alcohol almost certainly wasn't legal, or that he missed the deadline to apply to the accelerator in the first place. Silicon Valley has never had much respect for rules (see: Uber, Theranos, Zenefits) so why should it care about its own? Deadlines are made to be disrupted.

Elsewhere, Postmates is also getting into grocery, with a service that, in another display of bravado, is called Postmates Fresh. (Amazon's grocery delivery service, launched in 2007, is AmazonFresh.) Postmates Fresh charges $3.99 for 30-minute delivery on each order, or $9.99 a month, undercutting its competitors. AmazonFresh costs $14.99 a month on top of a normal $99 Prime subscription, for a total of $279 a year. Deliveries under $50 come with a $9.99 fee. Instacart costs $5.99 to $7.99 per delivery plus a service fee, or $149 a year for Instacart Express, a membership that provides free delivery on orders of $35 or less.

Postmates has said it will be profitable by 2018 (previously 2016, 2017). It seems unlikely to get there by subsidizing grocery delivery, a notoriously tricky, low-margin business that has confounded even Amazon. Postmates CEO Bastian Lehmann is betting on low prices and millennial-friendly branding to make his company stand out. "Our customers are millennials, and it's not clear that millennials want their fresh food from a website that sells their parents sneakers," he says, and I am honestly not sure which e-commerce site he is trying to talk about.

The end of equity compensation.

People in Silicon Valley are worried about a proposed change in the US Senate tax reform bill that would tax stock options and restricted stock units (RSUs) as they vest rather than when they're exercised or the underlying shares released. The provision "would be the end of equity compensation in startups as we know it," writes venture capitalist Fred Wilson.

The obvious problem with startup employees being taxed when their options vest but aren't exercised is that those options aren't worth the sort of money you can actually pay taxes with. To quote Wilson again, "You can't spend it, you can't save it, you can't invest it. Because you don't have it yet." The concern is that the model proposed in the Senate bill would break the startup model by forcing companies to shift their compensation away from equity and toward normal salaries and bonuses. That would be a strain on cash-strapped startups that can't compete with the likes of Facebook and Google on salary but traditionally have attracted talent by offering a stake in the company itself.

Here is Simpson Thacher & Bartlett attorney Greg Grogan in Axios: "For startup employees, this is equivalent to the government taxing a lottery ticket because the first two ping pong balls match your ticket. Employees will owe taxes on 'potential' value on the vesting date of their options before they know whether the option will ever really be worth anything and before there is any cash available to pay taxes. Maybe next, Congress will tax us when Zillow says our home value has increased."

That said the current tax model for equity isn't perfect either. One of the problems with startups taking longer to go public is that their employees can feel locked in by stock options, because they only have so much time to exercise them if they leave and doing so could mean being hit by a huge tax bill. Airbnb in June 2016 planned a secondary stock sale precisely for this reason, to help employees cash out and deflate internal pressure for an IPO.

Other stuff.

Shervin Pishevar arrested, never charged, over alleged rape. Steve Jurvetson ousted over alleged sexual harassment. Justin Caldbeck attempts a comeback. Amazon scales back Amazon Fresh. Amazon consolidates retail and delivery operations. CVS plans free same-day pharmacy delivery. Hertz says ride-hailing is profitable for its business. Uber Needs Obamacare to Work Just as Much as Trump Wants It to Fail. Lyft plans office in Manhattan. Lyft COO to quit by end of year. Lyft could claim one-third of US ride-hailing market in 2017. San Francisco tests ride-hailing pickup spots. Lyft opens first international city, Toronto. Lyft hires Uber pricing guru. Terrible passenger steals tips from Uber driver. Uber's new cultural norms. Fasten exposed data on up to 1 million riders. Via tapped for public transit in two US cities. Growth slows for Airbnb. Seattle lawmakers approve Airbnb tax. Hyatt CEO says Airbnb has helped the company grow. Uber Elevate promo video. Airbnb for boat charters. Masayoshi Son, unicorn veterinarian. Woman Sends 'Cowards' Cake to Postmates After Being Banned From Site. World's most prolific Airbnb host has 881 properties and earns £11.9m a year. "And we were like, 'Oh my gosh, it's gonna hit us, it's gonna hit us!' and then, it hit us!"