Free Ride

Bad people do bad things. I don't think anyone could argue with that. But if that's the reason bad things happen, we're helplessly waiting for the next bad person to do the next bad thing. What if there was a better question?

Scandal erupts. Villains are identified and punished. Everyone celebrates the system working as intended.

But that's only half the story.

The other half is what the system was doing before the collapse. What structural conditions made the outcome nearly unavoidable. Why the same structures keep appearing in different industries, different eras, and different organizations while we keep reaching for the same human explanations.

The Pattern Repeats doesn't exonerate the actors. The damage was real and the accountability was earned. It asks the harder question. What made this rational when it should have been unthinkable. And what does that tell us about where it's happening right now. The case studies are simplified to focus on the structure, the consequences are not.

This edition: When the price is the product

You already feel it. The established industry is corrupt and inefficient. It's overdue for a change. And sitting on the table in front of you is the first concept that might actually make that change happen.

There's only one problem.

It's currently operating in a regulatory gray area at best, and possibly illegal at worst.

But the regulations will catch up right? If you can get adoption fast enough then they'll have to.

But the speed of adoption is everything. And if people knew what it really cost, it would be slow. It's a genuinely better product but the price will make some users hesitate.

If you invest today, customers don't have to know what it really costs. Your investment could subsidize the cost of rides for years until the market can't help but give in and catch up.

Do you fund the disruptor?

Uber gave its first ride in the summer of 2010.

It felt like a revelation.

No more standing on a street corner trying to flag down a cab. No more meters that can't tell you what you're going to owe until you get to the destination.

Open an app and a car appears in minutes to take you exactly where you need to be for a clear price you can see before you ever get in the car. It was like having a private chauffeur in your pocket.

You'd expect it to come at a premium but it was pennies on the dollar when you compared it to the current taxi cab industry.

In 3 years it was operating in over 40 countries and in 5 short years from that first ride, it was worth an estimated $51 billion.

The price for the innovation felt too good to be true for consumers. That's because it was. In an analysis done in 2015, it was found that passengers only paid 41% of the actual cost of a trip using Uber. The other 59% was paid for using investor money to keep the price artificially low.

An interesting note is that 2015 was already well into the mass market adoption phase so it's likely that the subsidy in the early days was even more aggressive.

The concept was clear. Growth at all costs. Become such a large part of the daily life of millions of users that they can't not use the app anymore.

Between that first ride in 2010 and mid-2023, Uber had $31.5 billion dollars in operating losses.

Despite what they'd have you believe, this was not a company whose pricing reflected having found a more efficient method. It was a cash furnace that drove adoption through artificial pricing mechanisms.

While Uber was artificially lowering prices, the taxi cab industry had no way to respond. There were incredible inefficiencies in how taxi cabs were run and this is not a defense of the model. But the industry was subject to heavy regulations and an imposed scarcity that made it impossible to compete effectively. They weren't receiving billions in investor funds that would have allowed them to survive, let alone win, an artificial price war.

The medallion system was how cabs were run for decades. A medallion was an investment. They sold for hundreds of thousands of dollars, if not millions. But once you had one, it meant you had what felt like a guaranteed way to earn a livable wage and provide for your family.

The concept was so well established that banks would loan drivers the money to purchase the medallion against the value that medallion represented.

The limited number of available medallions was both their greatest strength and their Achilles heel. It created a cap on the number of drivers who could operate at any given time. This meant that the drivers who had one could earn a real living.

People would drive for years working and saving to get to the point that they could buy their own medallion. It was seen as a true pathway to economic stability.

Until it collapsed.

By 2018, a medallion that originally sold for $1 million was only worth $170,000. Between 2014 and 2018, the percentage of people hailing rides from cabs fell from 37% to just 6%. Simultaneously, the asset lost nearly all of its value and the income stream required to service the debt collapsed with it. The loan didn't move.

The golden ticket to economic stability for thousands of working class drivers became a lead weight overnight.

The artificial price war wasn't just about user experience or adoption.

It was designed to force hypergrowth.

Uber likely would have succeeded in the market based on the actual improvements offered in transportation. The ease of the app. The clear fee structure. The GPS tracking to know where your driver was and when they would arrive.

But they likely wouldn't have grown fast enough to outpace regulators.

Uber knew that they were operating unlicensed taxis in major cities like New York and LA. Kalanick's operating philosophy was what he called principled confrontation — a framing that makes clear he understood Uber was in direct conflict with existing regulations but believed the regulations were wrong, not Uber.

If they could capture the market fast enough, they could introduce a real political cost to any kind of regulatory enforcement. Regulators were essentially forced to accept the model and make concessions that allowed it to operate legally because true enforcement would have upset millions of users who had adopted the platform. And upsetting millions has historically had serious consequences for the politicians who were responsible for enforcing the rules.

The subsidy era allowed Uber to capture the lion's share of the transportation network and effectively ended the reign of taxi cabs in major urban centers.

But investors can't pour money in forever. Eventually, they expect a return on that investment.

That return was looming on the horizon.

The Uber IPO was scheduled for 2019. But an IPO requires disclosures. Before it can be listed, a company has to publish reporting that shows their profit and loss. And a company that's lost billions since its start with no clear pathway to become profitable doesn't inspire much public confidence.

So the subsidies had to go.

Between 2018 and 2021, the cost of fares nearly doubled, rising 92%. But the doubling didn't mean that drivers saw their earnings increase. Nearly all of it was attributable to platform fees that flowed directly to Uber. The gap between what the rider paid and what the driver earned got wider, but the money in that gap went straight to Uber.

When Uber officially IPO'd in 2019, the venture capital investors who had helped them artificially lower prices to make it impossible for the competition to survive saw some of the largest returns in venture capital history.

The IPO itself was considered a disappointment. Uber had hoped to hit a valuation of $120 billion but the actual market value landed at $82.4 billion.

Investors made fortunes on a company that had never turned a real profit and had incinerated billions to become the new incumbent.

The profits were captured by the business and the investors, the losses were passed to the public and drivers. Billions were made while the medallion system collapsed and the actual wage delivered to drivers is still heavily debated.

Were it not for investor money and heavy subsidies, Uber likely wouldn't have survived to IPO.

Since the end of the subsidy, the gap between an Uber ride and a traditional taxi trip has shrunk meaningfully and, in some markets, vanished entirely.

Nothing in life is free. The question we always have to ask ourselves is who's paying the cost and what happens when the money runs out?

Are there things in your life that are currently being subsidized that you wouldn't be willing to accept when the true bill comes due?