Airbnb and DoorDash IPOs leave gig economy issues unresolved

The gig economy — aka the sharing economy — has been one of the most important online phenomena of the decade. This week it also made a loud splash on Wall Street, as the stock market listings of delivery company DoorDash and home rental company Airbnb met a euphoric reception.

But for a sector that is already getting long in the tooth, there are a surprising number of unresolved questions. Of particular interest this week: Are these good businesses? And, as their sometimes deleterious impact on society prompts a backlash, will they make good businesses in future?

This is an important transitional moment. Following last year’s initial public offerings of ride-hailing companies Uber and Lyft, the main exemplars of this new style of online marketplace are now on the public markets.

It’s hard to argue with the gig economy’s impact. In the year before they went public, the four companies generated more than $100bn worth of rides, deliveries and home rentals between them (though some bookings have fallen back during the pandemic).

Using apps to organise informal markets has undoubtedly resulted in important new forms of competition and unleashed extra resources in the economy. That includes giving more people scope to participate in a part-time labour force (this is the “gig” part of it) and extending the use of assets like private cars and homes (the “sharing” part).

But that has not translated into profits. Even the flattering financial metric these companies prefer to be judged by — adjusted earnings before interest, taxes, depreciation and amortisation — showed all four to be lossmaking in the 12 months leading up to their listings, with some $3.3bn in red ink between them.

So are their business models half-baked, or just half-evolved?

While Airbnb has a solid gross margin above 80 per cent, the pre-IPO range of 45-57 per cent for the other three shows how much their supposedly “lightweight” marketplace models are weighed down with the costs of trying to generate demand.

These include the subsidies that have been lavished on consumers during vicious battles for market share. This may not have generated clear financial returns for shareholders, but it has undoubtedly generated consumer benefits. For many people, getting a ride whenever you want or ordering a meal from a smartphone are now just part of everyday life.

Regulation will undoubtedly increase costs further and limit the companies’ room for manoeuvre. The benefits of labour market arbitrage — paying lower costs for informal workers — are likely to erode as the political heat intensifies. Meanwhile, city authorities are starting to realise that it may not be in their residents’ best interests if the streets are full of empty ride-share cars, apartments are unavailable for rent to local workers, and restaurants close down because of excessive fees charged by delivery companies.

The stock market has a way of exerting discipline. Even if the current euphoria rewards profitless IPO candidates, the pressure will build to hone their business models. Uber’s stock price has more than tripled since its low point in March but it is still not above making sensible financial decisions. This week, it gave up on its expensive in-house attempts to develop autonomous driving and flying cars.

There are two obvious avenues to get to profitability. Consolidation has already swept through the ride-sharing and delivery apps, and there is more to come. Survivors will be in a better position to raise prices.

The other avenue is to exercise their power as intermediaries to squeeze more for themselves out of the value chain. The history of the internet has been one of ceaseless disintermediation and reintermediation. That is, of newcomers cutting out old businesses to supposedly “free” consumers, before inserting themselves as the new bottlenecks. As they aggregate consumer orders, mobile apps are starting to find themselves in a powerful position.

This may not be a welcome development for some providers of services that are being sucked into the gig economy’s orbit. Restaurants, for example, have come to rely on online ordering and deliveries during the pandemic. But if a handful of apps comes to represent a significant share of their sales — and if those apps have the power to redirect customers to other meal providers offering better terms — the results could be painful.

For investors in the newly public gig sector, it looks like being a work in progress for some time to come.

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