I have an innate sense for crass commercial valuations, based largely on seeing too many. So my antennae where pulsing when I read this in the FT this afternoon:
[Google parent company] Alphabet is leading a new $1bn fundraising round in Lyft that values the Uber rival at $10bn, raising the stakes in the fierce competition between the San Francisco based transportation companies.
The investment values Lyft at a $10bn pre-money valuation, which is 45 per cent higher than its previous fundraising, which took place just six months ago.
First, this is not a transportation company. Lyft, like Uber, does not run cabs. It runs a taxi rank.
Second, no taxi rank has ever been worth $10 billion.
And if someone thinks it is then they have four things at the forefront of their minds.
The first is driving the competition out of the market.
The second is then screwing the consumer.
The third is screwing their staff.
And the fourth is then presenting the regulator with a fait accompli as they're hoping all other games will have been driven out of town and that way they'll earn hyper rents from their rank activities.
That's how you can make a fortune from a cab booking service.
And it stinks.
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Uber , Lyft, Amazon these are all putative if not actual monopolies ; it’s simply that their appearance to the customer belies the fact . In that sense they are a throwback to the gilded age that existed between the end of the Civil War in 1865 and the start of the First World War in 1914. The difference is that in the first gilded age the products and services were being created for the first time, but in the present case they are a type of asset stripping by taking what is a perfectly ordinary , well regulated business like the London Hackney Carriage and stripping away all the parts that make it decent for both sellers and buyers by the pretence that their is a free lunch for the buyer . It isn’t going to end well.
“And the fourth is then presenting the regulator with a fait accompli as they’re hoping all other games will have been driven out of town and that way they’ll earn hyper rents from their rank activities.” This also points at an interesting contradiction in capitalism, namely that companies do not like competitive markets (and also do not like taking risks). Which again highlights that companies need a strong government regulating them (it reminds me a bit of the relationship of parents and little children … we parents want our children to be creative and free and developing, but we cannot let them do everything they might want to do)
Alexander, how I agree with you. There are actually three “F” markets:
1) The allegedly “free”, which is in fact
2) The actually “fixed” (in favour of the rentiers), which should be replaced by
3) The “fair” market (to which I have referred in an earlier post of mine) where Government intervention and regulation ensures that there is a level playing field and “equality of bargaining power” between the large, over-might corporates and conglomerates, and the usually far more genuinely entrepreneurial SME’s
Quite. Presumably when cheap financing disappears and the sharemarket crashes funding for these businesses will be harder to come by?
Why?
That comes down to credit regulation and uk banking practice
Of course, those are the real problems
It seems that valuations are both a dream and a nightmare. Crawling along the edge of a straight razor, and surviving.
There is a sense that valuation methods have become unsound, and companies such as Google have become errand boys, sent by grocery clerks, to collect a bill.
In round numbers there are 13,000 yellow cabs in New York City and at their peak medallions changed hands for an eye-watering Dr Evil price of 1 million dollars. So just the combined value of those medallions was around 13billion USD until recently, and that’s just for one city, admittedly a big one.
It’s a big market, ride-sharing apps do seem to expand it – and the cut that the market thinks Lyft is likely to get could mean they are undervalued. There’s also the potential for the technology ( if it works ) to be incorporated into e-bikes and punting. Exciting times ahead imv.
No one can make enough money out of a taxi to pay a million for a licence
So I a right, they’re not worth a million
What someone pays and what something’s worth are not always the same thing
You really should do some economics
And please remember – because I know your source – Tim Worstall gets his economics wrong, most of the time
I remember reading that some taxi drivers in NYC can clear $100,000 a year including tips. Wouldn’t that make a $1m investment quite good?
Sort of 10% return which seems ok to me.
Although I understand that the arrival of Uber has put a dent in that. And I don’t think I would like to be a NYC taxi driver after watching that film.
It is a very confusing world.
But that’s not the return, is it? That’s because much of that sum is the price of labour – the taxi driver has to do long and anti-social hours to achieve this (if indeed they can). So this, plus the cost of their can (the return to capital) has to be deducted before the return to rent (the price for the medallion) is estimated. And that then looks paltry. Which is why the price has collapsed.
Hello Paul,
This is for you:
“Medallions now sell for a fraction of the record $1.3 million price in 2014, and in many cases, are worth far less than what their owners borrowed to buy them. Even if these owners sell their medallions, they still owe hundreds of thousands of dollars – far more than in many other cities where medallion prices were lower to begin with.”
https://www.nytimes.com/2017/09/10/nyregion/new-york-taxi-medallions-uber.html
BTW Most ‘digital disruptors’ don’t create anything new or provide content. They exploit the parasitic opportunity of controlling the customer interface at the content provider’s expense. The implications of that are not “exciting” they’re pathetic. Unless you are a naturally excitable kind of person I suppose.
I should add ‘or a follower of Tim Worstall’, who inspired these comments. He wrote four blog about me yesterday.
Yes, as noted elsewhere, Tim seems to have a problem understanding the standard economic indicators for full employment and capacity as well as the ‘infinite wants’ assumption that is inherent in the concept of ‘scarcity’.
On the upside he seems to regard you as a subject of some considerable importance which is interesting and a mixed blessing of sorts I suppose.
I’ve kep him amused for years, which is, I suppose, some sort of service to a very small part of humanity
“no taxi rank has ever been worth $10 billion.”
“In 2013, some {NYC taxi] medallions sold for more than $1.3 million. …There are currently 13,587 yellow-taxi medallions in the Big Apple ” NY Times 5 Apr 2017
13,587 * $1.3 million = ?
But that’s rent, as I said
Cassandra,
Your question: “13,587 * $1.3 million = ?”
Your answer:
“Just as homeowners faced ruin when housing markets sank, struggling cab owners in Chicago, Boston, San Francisco and other cities are now facing foreclosure and bankruptcy. Many took out loans to pay for taxi medallions, counting on business that has instead nose-dived amid fierce competition. They are falling behind on loan payments, being turned away by lenders and stand to lose not only the medallions that are their livelihoods but also their homes and savings.”
“Nowhere is the crisis more dire than in New York, which has the largest taxi fleet in the country. Medallions now sell for a fraction of the record $1.3 million price in 2014”
“In August alone, 12 of the 21 medallion sales were part of foreclosures; the prices of all the sales ranged from $150,000 to $450,000 per medallion.”
https://www.nytimes.com/2017/09/10/nyregion/new-york-taxi-medallions-uber.html
That’s what happens whene there is a new, disruptive element that for a one not (and it will only be a moment) creates something that looks like a market: the rental return of super normal profits disappears
But in this case the new entrant clearly wants to re-establish the barriers – that’s they only at the price can be justified
So that aim, as I said, is not to run taxis but to extract a rent from the taxi rank
Its the Friends Reunited syndrome.
Bought for £175 million in 2005
Sold for £25 million in 2009
Handed back to original owners.
Closed 2016
http://archive.is/eqtpw
Its not the $10 billion for Lyft that’s most ridiculous, it is the current $68 billion valuation that has been cited for Uber.
According to Reuters: “Uber has started releasing limited quarterly financial data, and in May (2017) reported a loss of $708 million for the first quarter, down from $991 million in the fourth quarter”(of 2016).
As I see it there are 2 key questions:
1. Are Uber, Lyft and others of their kind engaged in attempt at predatory pricing? and
2. Could they succeed in that attempt?
The answer to the first question would seem to be probably, yes and the 2nd question probably no. For those who are unaware, predatory pricing is illegal and it occurs when a firm charges a price that is below cost with the intention of forcing rival firms out of business. The idea is to become dominant or establish a monopoly thereafter.
That is what Richard Murphy is effectively suggesting and there is evidence to support this conclusion. Reuters once again:
“Uber has raised about $15 billion in funding since 2010, enabling it to discount fares and dole out bonuses to drivers that have at times exceeded $1,000. In 2015, Uber passengers were paying only 41 percent of the actual cost of their trips”
Uber’s “strategy was built on the assumption that Uber could achieve a dominant position in many big cities quickly and eventually raise prices.”
https://www.reuters.com/article/us-uber-profitability/true-price-of-an-uber-ride-in-question-as-investors-assess-firms-value-idUSKCN1B3103
So, can they do that? I don’t think so. Monopolies occur in a variety of situations. Sometimes with exclusive state license, a unique product or advantage, or a patent. More frequently it involves mass economies of scale involving big infrastructure and supply chains. Uber has none of those things nor do its rivals and there are no economies of scale in linking a local passenger to a local driver. If they do achieve dominance and start raising prices they will find that their advantage will soon evaporate. The taxi industry is highly contestable. There is nothing to stop rival firms (global, local or national) from coming back and competing against them.
I am sure predatory pricing is the aim: it is the only explanation of the valuations (appear from irrationality that appears prevalent). And I agree, it will not last.
Which makes the argument ‘it’s worth what someone has paid for it’ even more amusing. As if price paid when there is imperfect information is the same as value….
Oh well, some will never learn economics
“Oh well, some will never learn economics”
Never a truer word spoken in jest. Bang on.