Has The On-Demand Craze Created A Bubble?
Has the on-demand economy created a bubble that may burst? Let’s take a look.
On-demand apps have been a hot-bed for investment for a few years now, and it’s easy to see why. Sector leaders like Uber, Airbnb, Postmates, and Task Rabbit have gone from previously-nonexistent services to household names in a very short time. Investors, assuming that the future of the service economy is on-demand, have gotten in—and big time.
Too Much Too Fast?
According to Crunchbase, the amount of investment that ploughed into on-demand startups providing services in the areas of travel, tourism and food delivery is well over $20 billion. However, proliferation of these kinds of companies and the amount of money invested is leading many in the Silicon Valley space to wonder if the on-demand economy is a bubble that’s about to burst.
Bubble Believers
Of course, predicting bubbles in the tech sector is a bit of a hobby for many people. At any given point of the tech sector’s history, you can find people to argue that we’re in a bubble. But the evidence for the bubble that the on-demand economy is in specifically is a bit more concrete.
As Quartz recently wrote:
“Just because massive companies like Airbnb are finding success in the travel sector doesn’t mean that on-demand delivery of goods and services in other areas has been solved. Other than ride sharing, lodging, and food delivery, mass-market adoption for on-demand uses is shaky at best. (In fact, we’re not even sure if the on-demand economy is technically legal.) Instead, venture capital is fueling the space and essentially subsidizing services. But VC money does not make your company invincible, and you can only finance growth through venture money for so long—even Uber and Lyft are burning through a ton of cash.”
What Quartz points at is that much of the problem with the on-demand economy is threefold; it has to do with funding structure, customer retention issues, and legality. So what does that mean? Here is a closer look at each of these issues:
Burn Rate Business
Even the most successful example of the on-demand economy, Uber, is not yet profitable. While it is expanding and has the public perception of being successful, it is churning through money from investors. Wired recently reported that the company “continues to struggle for profitability with third-quarter losses reportedly $800 million on net revenues of $1.7 billion.” Uber’s woes point to the wider reality: even if the idea has users, the profit margin from usership isn’t necessarily high enough to sustain a business model on its own. Thus, once investor confidence dwindles the funding will probably dry up too.
Legality
As Quartz intimated above, there are still major problems regarding the legality around on-demand companies including the two leaders: Uber and Airbnb. Uber has limited growth prospects due to the backlash of certain localities and Airbnb is increasingly facing restrictions in many of the cities in which it operates. Furthermore, as on-demand economy workers get increasingly fed up with the terms of their employment, these companies may find it harder to maintain the “hands off” approach that allows them to benefit from 1099 workers, or independent contractors. Case in point: in the UK, “Uber has agreed to grant its drivers sick pay and injury cover as it faces intense scrutiny over employment rights under the gig economy.”
Frequency of Use
Some on-demand products are a good idea, but simply don’t offer a service that customers need to use often enough to create a profitable company. A good example is Luxe, which is an on-demand valet service. While the extremely wealthy may find this useful, for others this would be a massive extravagance. Thus, there simply isn’t the userbase available to sustain a thriving business that is not dependent on investor cash.
So if there is an on-demand bubble, who will survive it bursting? Quartz summed it up best: “The services that survive will focus on locking in customer and suppliers, objective outcomes (such as getting from point A to point B), a high frequency of use (you need food every day, for example), and services where automation can eventually help play a role to bring down costs.”