One of the confusing aspects of the tech industry is that from a distance all the companies can seem the same. They use apps, have similar design styles, are based in hip urban centers, and strangely have millions of dollars without making any money. In part, this series is meant to shed light on the diversity of companies that make up this vague category, and what their differences mean in practice. The companies in this article could be confused with others, but are a category of their own: Peer to Peer – also known as “platform companies”.
These are companies that put themselves between consumers and suppliers in order to take a cut of the profits. In some cases, where customers and suppliers have a hard time finding each other, these businesses can be useful, and similar services have always existed (I.e. a gas station). However, many companies find that inserting themselves between customers and suppliers is profitable whether it is useful or not.
Creative Destruction of Your Neighborhood
Airbnb is a successful example of Silicon Valley “creative destruction,” the idea that if you move quickly and ignore rules you can build something huge and profitable. In this case, Airbnb is notorious for creating a network of unlicensed and illegally rented apartments. In previous years as much as 56% of the offers in Basque Country operated outside of the law, yet Airbnb doesn’t take any serious action.
Basque Country is not alone: In Barcelona, almost half of its listings are illegal and in New York City as much as 72% of reservations. How can such a well-known and wealthy company get away with blatantly breaking the law? This is where the “platform” part of the business model becomes convenient. Airbnb can legally argue that it is not responsible for listings on its site, as it just connects people.
The other main benefit is that you don’t need to invest much money in your service. If Mercedes wants to build a car, it must own a factory and hire hundreds of employees, creating huge fixed costs that make growth complicated. Airbnb simply has a website. Each new purchase on their platform is more money and growth, with few costs.
In Airbnb’s case, the problem is that the company is widely successful, and therefore widely destructive. There was a real interest after the 2008 financial crisis for cheaper travel options, and growing interest in having experiences that seem more “authentic”. After pulling together a website, the company could just sit back and watch their 10-15% commissions roll in. Little more than a website and a willingness to destroy entire neighborhoods across the world has become a $35 billion dollar company.
Creative Destruction of Common Sense
Uber says it is worth around $100 billion, and even Wallapop, a company that charges nothing for its service, was valued at half a billion dollars before merging with another $1 billion company called Letgo. Like the subscription model, these companies create the image of success by wildly spending their millions in venture capital. Yet, Uber lost $5.2 billion in a single financial quarter this year and $4 billion in 2018. Many think the company may never become profitable. A recent entry into the Spanish market, Lime, is valued at over a $1 billion, yet the company appears to lose money on each scooter it leaves on a public sidewalk.
What these companies have in common is simple: they have a product that loses money and they are attempting to monopolize a niche industry. The idea was simple: offer low prices using venture capital to drive out the competition, then hike prices once a monopoly is established.
The problem is that these companies can’t effectively make monopolies, or even significant network effects. Airbnb runs on trust: if you want to stay in a stranger’s home in a random place on the globe, they are the only company today with enough trust and listings. Like Facebook, as long as they keep purchasing would-be competitors they will continue to be the only game in town. On the other hand, if Uber ever becomes the only ride-hailing app and increases prices, people will go back to walking, taking public transit, or biking. If it pays its drivers less, it will find itself without cars. Lime is in the same boat, as both of these services mainly replace walking, not taxi rides. Even Glovo can only charge restaurants so much until they decide they can just hire their own delivery driver.
When these wanna-be monopolies eventually fail is when their true impact will be felt, as we pick up the pieces of a destroyed transportation industry behind them.
Creative Destruction of Politics
Seen from this peer-to-peer viewpoint, many confusing aspects of these companies become rational. Uber can’t pay its employees a real wage and Airbnb can’t afford regulation. Facebook can’t get rid of fake news or stop fomenting political extremism because it is an intermediary between advertisers and public attention. The more controversy, the more attention, and therefore the more value. This is why after publicly stating (again) that Facebook will combat fake news there were €40,000 of fake news advertised for the PP this past October. This is why there were more divisive political ads on Facebook last November than in any other election, and why Vox spent ~€430,000 to promote their Twitter account. This is how these two companies, basically a few social media sites, are worth over $200 billion.
Don’t ask why Facebook promotes fake news, why Twitter allows hate speech, or why Youtube promotes conspiracy theory videos. The answer is simple: profit. Similarly, don’t ask why Airbnb can’t regulate its platform to better prevent scams or illegal listings. If half of the listings in Basque Country are illegal, that’s half of their income. Unsurprisingly, their profits are more important than your neighborhood. These companies can’t reform themselves to be less evil; it’s part of their business model.
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