Marketplace Fees Under Pressure: Uber Settles With Drivers, Again

Uber headed off a class action lawsuit by 2,000 New York-area drivers this week, with a promise to pay $3 million to end a dispute over the fees it imposes on those drivers. It is evidence that marketplaces will see more pressure to lower fees in order to retain workers. 

The ridesharing company has settled many similar suits and appears headed for many more settlements. We think the underlying signals point to a decline in the advantage marketplaces had over workers which allowed fees of up to 30 percent to be deducted from fares.

On-demand companies should be prepared to thrive on margins similar to retailers, such as Amazon and WalMart. Where a 25 percent or greater fee is deducted from a driver’s or a housekeeper’s earnings today, the on-demand market his headed for a sub-10 percent fee structure over the next decade.

Two factors will accelerate this trend:

1.) As purpose-specific marketplaces mature, such as ridesharing,  workers will diversify their listings, making themselves available on many systems. This is true of Uber and Lyft drivers, who typically use both apps simultaneously to get work. This means workers will be arbitraging work opportunities across many marketplaces. Purpose-specific markets will respond by consolidating related markets, which presents significant brand challenges. “Uber” has become a verb denoting ridesharing, but not housecleaning; It would have a very difficult time extending its brand into home-services. Price is the manageable factor in consolidating markets.

2.) Information efficiency favors the consumer, not the marketplace. As more data is applied to the problem of anticipating demand, consumers and workers alike will move to low-cost marketplaces in pursuit of better prices and pay rates. These twin demands put the marketplace in a lurch. In order to lower consumer costs while retaining an attractive workforce, the marketplace must lower its fees charged to those workers. 

As workers diversify, marketplace providers will compete for labor supply, lowering their fees charged to workers who focus on their service categories. Likewise, consumers will embrace marketplace brands that solve many in-home and on-demand needs,  leading to greater optimization within those marketplaces and lower fees charged to workers.

 

Didi diversifies with Bluegogo

Here’s the problem with building a purpose-specific marketplace, such as a consumer mobility platform like Uber, Lyft, or Didi Chuxing: Once the platform is saturated, it’s necessary to diversify. In the case of China’s Didi Chuxing, the ridesharing company is adding management of a bike-sharing service, moving into an adjacent, though painful, market with its platform.

Didi customers will get access to Bluegogo bikes in Chinese markets. Didi is taking a chance with Bluegogo since the company has already failed. In fact, all Didi is doing is acquiring Bluegogo’s abandoned bike inventory, hoping to earn back the cost by increasing revenues from existing customers.

As on-demand evolves, the apparently explicit delineation (rides on demand versus, for example, housecleaning) between one consumer market and another will become a barrier to expansion. Markets are more efficient when they include many products and services than in any dedicated marketplace. Early leaders in transportation may find that adding any non-mobility service proves difficult.

Didi customers may consider taking a bike instead of a ride. But not all those customers will be interested in bike options, so expansion into bike-sharing could produce little incremental additional spending by Didi customers.

The Cryptocoin Boom Could Choke Off On-Demand Services

Jon Evans at TechCrunch raises a troubling issue with cryptocurrencies: They are so popular that the underlying blockchain technology has failed to deliver low-cost transactions at scale.  The coins that have generated vast fortunes, such as the $59 billion in wealth Ripple XRP co-founder Chris Larsen realized on the rapid run-up of the currency he created, are swamping the blockchain infrastructure. Evans writes:

As a result, entire categories of cryptocurrency experimentation and innovation are on hold until the bubble bursts, or until / unless Ethereum finds a way to scale such that transaction fees plummet. Oh, people can still write and deploy code. But nobody will use it. Curious would-be users will be repelled by the nontrivial expense of mere experimentation, never mind ongoing usage.

The problem is not the coins, but the demands on the blockchain that supports BitCoin, Ripple, Ethereum and other currencies. A distributed ledger, blockchain allows the public recording of transactions. The promise of blockchain and cryptocurrencies was low- or no-cost transaction fees. Evans notes that the average fee for an Ethereum transaction is now $2.50. Every transaction, whether it is worth $0.01 or $1 million. Great news for cryptocurrency traders, perhaps, but bad news for developers.

At $2.50 per transaction, Ethereum is priced too high to support micro-transactions and less cost-effective than a credit card for values of less than $85. On-demand transactions, such as paying $5 for a meal delivery or $20 for an hour of a homecleaner’s work, are not feasible at $2.50 per.

Blockchain’s primary value proposition, after its anonymity, is low-cost recordkeeping and transaction processing. The cryptocurrency bubble is a disaster for platform marketplaces and developers of distributed logistics and transaction systems. High costs in blockchain cut off a promising direction for developers and business architects for the foreseeable future.

The article is worth a read, especially if you are bullish on blockchain as a platform for software development.