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Uber isn't limited by the taxi market: It's limited by the Electronic Thumb market
With apologies to Douglas Adams*
Worstall @ the Weekend We've had a look before at that valuation of Uber at $40k bar** and mulled over whether it makes any sense or not. And there's a little snippet of news out that shows that there might be more substance to it than most of us tend to think there is. It could, of course it could, still be just an absurdly over-hyped product of frenzied finance but if this number is true then maybe not.
Uber is now on a pace to make $500 million a year in revenue in the San Francisco market alone, according to CEO Travis Kalanick. …. larger than the taxi industry, which Kalanick claims only brings in $140 million a year in SF.
This is of course the gross revenue of each of these modes of transport, not the share accruing to Uber or to taxi firms themselves. Most notably this includes what the drivers earn. But that is a startling pair of numbers to be going on with. In two ways, one to explain that valuation of Uber and the other to show the diminution of human wealth from the system of taxi regulation (and or lack of a decent method of hailing a cab).
Both of these come from the same point. Uber's revenue seems to be larger, a multiple of, the perceived market for those services they offer before their arrival. The company isn't, therefore - and obviously assuming that these numbers are anywhere near correct - just pushing the extant firms out of the market and colonising it for itself. They are expanding the market. This means, obviously enough, that Uber's valuation is not bounded by the size of the extant market for taxi services. It's bounded by whatever the size of the market is after its own entry into the market. How much more riding around in cars do we all want to do if it's simple, cheap and easy? Or at least easier than before?
Depending on who you believe the UK taxi market is some £3 billion (not including business and tourists) to £9 billion (including limos n'all). If some new entrant were simply to gobble that up then that's obviously the limit to whatever value can be ascribed to that new entrant. And we'd also not say that there's been any very interesting change in the economy or its size. Overall if might be a bit cheaper, say, and thus the economy grows by however much we collectively save and thus have to spend on other things. But there's no great step change going on, no massive leap in what we do, how we do it nor the economic value of it all.
However, if this new technology leads to us consuming more of this riding around in cars service then we are seeing a real economic change. We're substituting perhaps from public transport, from private cars, or possibly even substituting away from immobility. And this is a distinct increase in wealth.
Yes, I know, only manufacturing (or to the real purists, agriculture) produces “real wealth”. But that's not the way an economist sees it. Any satisfaction of a human desire is wealth. You like Facebitch, you've got more Facebitch available to you? You're richer, QED. You want more riding around in cars? You're able to ride around in cars more? You're richer. And, to complete the logical loop, if you do go and ride around in cars more that's because you want to and it makes you richer. It's a satisfaction of one of your desires.
At which point, of course, Uber's valuation might still be crazed lunacy but it's not bounded by the extant size of the riding around in cars market.
Which leaves us with one other observation to make. Well, two in fact. The first being all that lefty argle barble that Oxfam is pushing about how the 1% own everything. But economics is not a zero sum game, the economy is not limited as to size in any fixed sense. It is possible to grow an economy and we do that by finding out ways to satisfy human desires. Any human desire: sure, we only count that part of it that is monetised into GDP but so what, someone with another desire satisfied is someone who is wealthier. The second is that we've been prevented, in part, from enjoying this wealth by the way in which the riding around in cars market was previously regulated.
Not entirely, of course, as there is that technological advance element to it, the smartphone (and this speaks directly to how the inventors of stuff don't get all the benefits of their invention. Apple, arguably, invented the smartphone but the company's not getting most of the benefits that Uber is, nor those that Uber customers are getting). But some amount of this new wealth that Uber is uncovering is wealth that didn't exist because of the way in which the previous technology, taxis, was regulated. Most especially, limited in most places as to the volume of people who were allowed to offer the service.
Regulations really do have costs and usually those costs are in things we don't see, things that don't happen, as a result of said regulations. ®
*Fans of the Hitchhikers' Guide to the Galaxy will no doubt recall the Electronic Thumb, a small device used to hitch lifts aboard passing starships much as one might hail a passing Uber chaffeur with the aid of one's smartphone. Had Douglas Adams been able to see into the near future of real-world earth technology, he might have chosen to subsume the functions of the Thumb and its companion Sens-o-Matic into some sort of converged sub-etha communications handset. This might also - of course - have furnished a handy means of accessing the eponymous Guide.
**”Bar” is City dealing room slang for million. Alert El Reg's Special Measurement Units Office!