Plane reading, Sept 30 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.  Plus recent news on Uber and on-demand/autonomous vehicles:


Economics and business in emerging markets

1. Alphaville, on China SOE "privatization" of a salt company is really just ownership by different SOEs
2. Alphaville, on bad debt in Indian banks - mostly in the highest areas of loan growth
3. Brad DeLong, narrating the Krugman/Hamilton debate on the likely impact of China slowdown on United States
4. NYTimes, on "India is the new China" for tech company investment/expansion due to mixture of untapped potential and openness to partnership

Economics and inequality

1. Brookings, on research showing that externally focused misbehavior in schools raises lifetime earnings even after accounting for negative impact on learning... but only for non-poverty students
2. Chris Blattman, on the astonishingly positive results from a Nigerian business plan competition that handed out about $60m worth of $50,000 prizes

Uber (Part 5) - Unit economics of food delivery

Relative to Uber's other challenges, food delivery seems like an expensive distraction unless their experiments in food delivery convince them to buy/partner with GrubHub.

A Sidecar blog post recently quoted Fred Smith, the CEO of FedEx:

“I think there’s just an urban mythology out there that an [on-demand delivery app] somehow changes the basic cost input of the logistics business or changes the patterns or the underlying business situation and that’s just not–that’s just incorrect. So great company, great concept [in reference to Uber], but I don’t think it’s…likely to be a major player in the logistics business”

The informative post then detailed the numbers behind Sidecar's multi-modal delivery system and posited that their system, when fully loaded, could deliver a package anywhere in the city for about $6.90 using San Francisco labor economics, less than half the cost of a FedEx $16 2-hour delivery:

• Cars can make 6 dropoffs/hour if they don't have to park and get out; drivers need to make about $22/hr 
• Bikers can make 4 dropoffs/hour and riders need to make about $19/hr
• Walkers need to make about $16/hr

UberEats appears to be pricing food delivery well below run-rate cost

Plane reading, Sept 23 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.  Plus recent news on Uber and on-demand/autonomous vehicles:


Economics and business in emerging markets

1. Christopher Balding, on "official" China growth data being multiples higher than any individual component - suggesting manipulation and falsification
2. Forbes, covering the growing concerns around Alibaba's fantastic numbers possibly being falsified (and governance structure)
3. Barry Ritholz, on McKinsey Global Institute (via HBS) data showing shifting center of gravity of corporate revenue towards emerging markets 

Leadership: You get what you're willing to follow

TED talks give me the willies.  Snarked Martin Robbins (back in 2012):

TED Talks are designed to make people feel good about themselves; to flatter them and make them feel clever and knowledgeable... People join for much the same reason they join societies like Mensa: it gives them a chance to label themselves part of an intellectual elite... TED’s slogan shouldn’t be ‘Ideas worth spreading’, it should be: ‘Ego worth paying for’.

One reason TED talks are so popular is that they activate people's tendencies to, as Jonathan Haidt says, "Follow the sacral"

People who worship the same idol can trust one another, work as a team and prevail over less cohesive groups. So if you want to understand politics, and especially our divisive culture wars, you must follow the sacredness.

Perhaps my response to inspiring speeches is unconsciously a bayesian inference similar to when women see a middle-aged guy driving a Porsche: he may a car buff, but all else equal it may be more likely to assume he's overcompensating.  (an unscientific UK polls suggests about 40% actually are overcompensating.  Possibly because it's sometimes an effective tactic)

(Note: I'm not a car guy, but driving a friend's 458 convertible on the Merritt parkway a few years ago helped me understand why he is.  His Porsche is for track use only)

If everything were really that awesome, the speaker shouldn't need to work so hard to convince me.

Uber (Part 4c) - The asymptotic limits of shared vehicle costs

This is a 6,700-word post, perhaps I should have drawn a half dozen pictures with captions instead.

Among the arguments for Uber's current valuation is its option potential as the global platform for dispatching fleet-owned replacements for personally owned vehicles (POVs).  In this vision of the future, these fleet vehicles may or may not be owned by Uber.

This view is inconsistent with my understanding of operating economics.  Conventional wisdom makes several errors that artificially inflate the breakeven mileage of POV retention:

• Mis-classifying variable expenses as fixed, particularly insurance and depreciation
• Not penalizing fleet vehicles for higher variable costs
• Insurance is 2-3x higher due to higher liability limits and cancellation requirements
• Empty mileage penalty while repositioning of 10-90%
• Comparing apples/oranges car types (size, amenities, autonomy, and/or regulatory environment)

As a result, the limits of shared cost savings for Honda Civic-type fleet vehicles are much smaller than widely assumed - the POV breakeven today is less than 100 miles/month with minimally paid drivers, and about 500 miles/month with autonomous vehicles.  Even if autonomy eliminates insurance requirements, the breakeven for an autonomous Civic is about 1,000 miles/month - less if Uber retains any platform margin.

Near-term POV replacement by driven fleet vehicles is likely to be caused by external one-time variable cost avoidance such as parking fees and hassle factors rather than increased capital utilization of the vehicles.  This distinction makes a difference - for Uber, for car owners, for city planners.

Plane reading, Sept 16 2015

Expert takes worth reading on economics, technology, and other interesting topics from the last week.  Plus recent news on Uber and on-demand/autonomous vehicles:


Economics of politics

1. Princeton's Woodrow Wilson School, on the "natural" mechanisms by which income inequality is increased economies develop.  Related, evidence shows that the so-called "wage gap" rise 1978-present is "virtually all" driven by top company out-performance inter-firm rather than intra-firm social issues such as CEO pay.  The implication is that many existing programs to counter inequality are ineffective at best, and counterproductive at worst.
2. Brad DeLong, on how the above is misunderstood (or ignored) by politicians including Hillary Clinton
3. Mark Thoma, on research showing how the topic of inequality may be increasing political polarization by moving Democrats to left, replacing moderate Democrats with Republicans.  Result is more liberal Democratic party but more conservative legislature overall
4. Scott Alexander, a book review of "Manufacturing Consent" by Noam Chomsky and Edward Herman exploring how and why both the left and right believe the media is biased against them

Executable strategy: Sweat more in peace, bleed less in war

Tolstoy famously opens "Anna Karenina" by stating that

"Happy families are all alike; every unhappy family is unhappy in its own way."

Peter Thiel ended on this theme in his September 2014 WSJ article "Competition is for losers"

Business is the opposite.  All happy companies are different: Each one earns a monopoly by solving a unique problem.  All failed companies are the same: They failed to escape competition.

Go read Peter's thoughtful essay.  Then come back and I'll build on what Peter said by turning it back on itself:

• Happy companies are all alike: they solve problems for their customers in a way that leaves enough leftover for themselves
• Unhappy companies are all unhappy in their own way: They are solving customer problems in ways that fail to ensure value accrues to the company in a sustainable way - sometimes by taking too little, other times by taking so much it provokes a reaction that leaves it with net less

This post is in three parts at a general level, and finishes with a coda looking at the financialization of taxi medallions that seems relevant and timely - and a bit fun given our Uber conversation.

Like many of my other posts, it could probably have been broken into several pieces if I had the time to make it shorter.

Plane reading, Sept 9 2015

Expert takes worth reading on economics, technology, and other human interest topics from the last week.  Plus recent news on Uber/on-demand/autonomy:


Economics

1. BloombergBusiness, on China shutting down its (world largest) stock futures market to stop what is currently a $5 trillion market drop
2. Tim Taylor, on Economic Theory vs Policy Advice: "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."
3. EquitableGrowth, on sins of comission vs omission in U.S. financial system "functioning as designed"
4. David Colander, reflecting on Gordon Tullock (in memorium) and the value of out-of-sync temperaments and viewpoints

Uber (Part 2a) - Intuition building for "multi-sided markets" with "network effects"

If you're new to our Uber conversation, it begins here.  This post is out of order.

On Sept 3rd, Wired covered NYC's launch of a "Technical Advisory Group" tasked with developing recommendations on how regulations should evolve to consider on-demand ride services.  Uber reportedly has a seat at that table, as does Venture Capitalist Fred Wilson and academics from NYU and Columbia, among others.

The TAG's recommendations will serve as input to new regulations in NYC, which are likely to cascade influence to other global cities facing the same situation.

Below, I offer a framework from a 2006 Harvard Business Review article to explore why I believe Uber is as much a "regulatory arbitrage" story as it is a "sharing economy" story.  Among my half-dozen recommendations made (so far) has been that Uber should consider pushing to close the regulatory loophole behind them while they're big and competitors aren't.

This is because I believe Uber is in a market that may be fundamentally unwinnable, at least in the manner/value in which Uber appears to be trying to win it today.  In brief, the on-demand ride market has significant network effects on both sides of the transaction, but it isn't really a multi-sided market.

To help readers understand my broader framework for Uber's strategic imperatives (now re-labeled as Part 2b), I'll attempt to make my intuition more explicit.  Sometimes intuition is helpful - if the problem is framed correctly.  Other times, the right answer is counter-intuitive.

One benefit from being this explicit (pedantic?) is because it's not clear that I know enough about the topic to see what I'm missing.  Perhaps it's me, not the (private) market valuing Uber, that's mistaken.  My background in economic analysis and algorithms is stronger than many people's, but I'm not an expert in any particular area.*

Here's Uber investor and board member Bill Gurley explaining Uber's pricing mechanism and business model in early 2014, if you want a quick primer on how Uber works.  My conversation below focuses entirely on the peer-to-peer model of UberX.

Uber (Part 4b) - The limits of cost savings from electric vehicles

In Uber (Part 4a), we discussed the expert consensus that the on-demand ride industry is headed towards marginal cost pricing, with or without autonomy.

Autonomy could help Uber in the long-term, by enabling it to capture the revenue currently allocated to the drivers.  In next week's Part 4c, we'll look at the overall vehicle cost curves and discuss how the run-rate economics of Uber will likely impact individually owned cars in the medium- and long-term.

Today, I want to consider only marginal cost pricing in the short term, from the driver's perspective.  Since drivers can still make money in a marginal pricing environment if their costs are cheaper than the marginal cost supplier, they should be using low-cost cars, probably electric powered.  If/when drivers are replaced by Uber-owned vehicles (driven or autonomous), these should also be electric.

The fuel cost savings of electric vehicles are real, however the environmental benefits are much less than I used to believe.  Electric vehicles will also have savings from reduced maintenance costs, and a potentially longer life-cycle would also impact mileage-based vehicle depreciation.

At the end of today's post we'll examine the economics of a recent Uber ride I took: outside of surge pricing, it does not appear to pay to be an Uber driver in Pittsburgh unless Uber is still offering extra driver incentives.

Switching to a cheap electric vehicle instead of an E-class Mercedes would help my driver, but doesn't seem like enough to keep me driving (if I were him).  On the other hand, if my trip were representative of the average Uber passenger, and I made it ~3-4 times each month, Uber's $50b valuation begins to look aggressively achievable.

Plane reading - Sept 3, 2015

Expert takes on interesting topics of the last week, an innumerate baker's dozen:

1. Paul Krugman, discussing Baker's piece on clay tablets illustrating trade "law of gravity" held even thousands of years ago (click through to read Baker)
2. Christopher Balding, debunking the China GDP debunker debunkers
3. Tyler Cowen, offering a simple primer for understanding China's downturn
4. Fred Wilson, stating that a clear strategic plan, communicated well, is more effective at people retention than compensation