Is Uber worth $18bn?

James Ball, at The Guardian, thinks that Uber’s implicit $18bn valuation is “a nadir in tech insanity”. His case is that tech firms are overvalued because although investors know this, they always assume there are other “suckers” they can palm their securities off on. That is, they think the other guys are “behavioural” (falling prey to the sorts of biases detailed in behavioural economics and behavioural finance) but they themselves are rational. Ball is responsible for some very good and important work, but I think this particular piece would benefit from the application of some financial economics.

It’s always possible that prices are irrational. And because we can never test investors risk preference separately from the efficient markets hypothesis (the idea that markets accurately reflect preferences and expected outcomes) it’s very hard to work out if prices are off, or just incorporating some other factor (usually risk). This is called the joint hypothesis problem. But when there are two alternatives, there is a reason economists put rational expectations in their models—it’s a simpler, better explanation. Finding truly suggestive evidence of irrational price bubbles is the sort of thing that wins you a Nobel Prize not something that a casual onlooker could easily and confidently observe.

Ball might say that even if irrational pricing is rare because of the strong incentives against it in a normal market, there have certainly been episodes of it in the past. Quoting J.M. Keynes, he might say “markets can remain irrational much longer than you or I can remain liquid”. He might point to the 1999-2000 peak of what’s commonly described as the “dot com bubble”. But I urge Ball to consider a point raised in this email exchange between Ivo Welch and Eugene Fama:

How many Microsofts among Internet firms would it have taken to justify the high prices of 1999-2000?  I think there were reasonable beliefs at the time that the internet would revolutionize business and there would be many Microsoft-like success stories based on first-mover advantages in different industries.

Loughran and Ritter (2002, Why has IPO pricing changed over time) report that during 1999-2000 there are 803 IPOs with an average market cap of $1.46bn (Table 1).  576 of the IPOs are tech and internet-related (Table 2). I infer that their total market cap is about $840 billion, or about twice Microsoft’s valuation at that time.  Given expectations at that time about high tech and the business revolution to be generated by the internet, is it unreasonable that the equivalent of two Microsofts would eventually emerge from the tech and internet-related IPOs?

Has not the second wave of cyber firm success (FacebookGoogle, arguably Apple) been even more impressive than the first wave? It may well be only 25% or 10% likely that Uber turns out to be one of these behemoth firms, through network effects, first mover advantages, name-recognition or whatever—but even if the chance is small the potential rewards are huge.

But Ball may point out that even if this is true, in the (putatively) 90% likely scenario, of Uber being a failure, then all this capital is being wasted. It could be put in the projects he prefers: “green energy, modern manufacturing, or even staid-but-solid sectors like retail”. Even if rational expectations—the idea outcomes do not differ systematically (i.e. predictably) from predictions—and the efficient markets hypothesis are not violated, and risk-adjusted expected (private) returns are equal across industries, it might be that social returns from these staid-but-solid sectors are higher—after all, lots of capital is being apparently wasted when so much goes to Uber.

This does not obtain—from the prospects of society, Uber could deliver huge welfare gains. If it does turn out that Uber has enough in the way of network effects to generate returns justifying its price tag (or more) then it would have to create lots of value, by saving taxi-consumers serious money. If they are using less resources to create the same amount of goods, then they are making society better off. Since society is big and diversified, it can afford to be relatively risk neutral (at least compared to an individual), and take even 9-1 punts on the chance that one memorable, semi-established network might be a particularly good way of running a taxi market.

Unfare Competition

It’s not really a huge surprise that Brussels, the home of EU bureaucracy, has recently banned ‘cab app’ service Uber from the city. The Brussels court unashamedly declared the company “unfair market competition” to the town’s two (yes, two…) taxi companies, and drivers face a €100,000 fine if they use the app to pick up customers.

This isn’t a one-off, either; Uber’s had a bumpy ride from the start. Across the USA and Canada they’ve endured cease-and-desist letters, impounded cars, sting operations and suspended trading. Taxi drivers in Chicago are suing the city itself over them,  Berlin’s slapped on an injunction, and in France enraged taxi drivers are getting physical.

Uber hit London in Summer 2012. Given the range of ventures on the scene- Black cabs, mini cabs and fleets of Addison Lee, as well as apps like Kabee and Hailo – Uber’s operation should be uncontroversial. Not so. Instead, the Licensed Private Hire Car Association (LPCHA) has called upon TfL to ban cab app services for failing to conform to relevant legislation, citing , uninventively, public safety concerns.

Reading all of this Uber come across as renegade cowboys, tearing through cities kidnapping passengers. Reality is far more boring.

Uber’s critics deem them an unlicensed taxi company (or as per the Chicago lawsuit, an ‘unlawful transportation provider’), who blatantly violate regulations. In actual fact, Uber are a new kind of entity: an app-based, ‘logistical’ intermediary. They use GPS to connect passengers with self-employed (and in the UK, licensed) drivers, and handle payment through a registered card. Their trick is that in only ‘matching up’ independent drivers with riders, they don’t count as a taxi operator.

Additionally, in the UK private hire vehicles can’t ply for trade like registered taxis and must be booked in advance. It seems that a rider requesting a pickup through Uber counts as a booking, allowing a nearby driver to accept a request and be there in minutes. In these ways it does seem that Uber and other like it have thrown away the rulebook, but only because they’ve been ingenious enough to innovate around it. Uber’s model also brings other innovations too, such as price discrimination through ‘surge’ pricing, truly flexible work for drivers, and a highly responsive rating system of both drivers and passengers.

There’s no wonder that incumbent players are worried. But it’s sad, if not surprising, that anti-Uber sentiment comes not from governments angry at rulebreaking but businesses threatened by fresh thinking.

State intervention imposes huge costs and barriers to entry on the taxi industry (think of London cabbie’s ‘The Knowledge’, fixed taxi fares, and America, where taxi medallions have sold for over $1m) - scuppering competition and innovation. Reform of the industry with its often cozy cartels is long overdue.

Companies like Uber show other firms how they can improve their game. In fairness there is an argument for ‘leveling the playing field’; it’s not one actors want to use. When Uber works around (or even flouts) a jurisdiction’s regulation, other players can use Uber’s success as evidence that restrictions are superfluous to providing a good service, and therefore unfair on them.

Instead of demanding more relaxed regulation, however, incumbent actors have decided which side their bread is buttered, and would rather keep the status quo than improve their service. Instead of competing, they cling to the regulatory chains binding them and wail for others to be shackled by them too. They might cry the cry of public safety, but it’s the safety of their market share which they’re really concerned about.

Sadly, vested interests have had far too much success in this area. Where Uber hasn’t been banned completely, lawmakers have often caved in and introduced new restrictions. Frequently, this doesn’t stop protestors. And it isn’t just Uber who has such woes. Companies with similarly innovative models such as AirBnb and Aereo have also faced an uphill struggle of acceptance.

TfL should disregard LPCHA’s demands. It certainly isn’t up to the government to protect old industries and vested interests, but sadly so many other cities clamping down on Uber adds false weight to their claims. It’s beyond obvious that consumers, not regulators, and certainly not business rivals should be the judge of an effective (and safe) service. That said, the fact that cab app services are making so many competitors uncomfortable is a pretty good indicator that they’re doing something right.

Edapt in Education

Michael Gove’s battle against  “the blob” rumbles on. Not only is he in the firing line over Ofsted appointments, but the NUT is set to announce the date for more teaching strikes on Friday. Cue the cheers of solidarity from some sources, and lofty dismissals of leftist militarism from others.

Though the saint-sinner dichotomy makes for easy reporting, the real relationship between teachers, politics and the unions is more interesting. Despite falling membership across other sectors, teaching remains a highly unionized profession. Teachers also report high levels of satisfaction with their union experience. Despite this, turnout for voting on industrial action is often low, and 44% teachers told a LKMco study that the right to strike isn’t important to them.

Instead, the most frequently-given reason by teachers for union membership is access to legal advice and support. With 1 in 4 teachers experiencing a false allegation at some point in their career, the expertise and advice a union offers in times of dispute is also cited as the most valuable service they provide.

Given the structure of employment law and the difficult nature of dealing with children, it is no wonder that teachers value this support. However, there’s no reason why affordable expert advice should have to be bundled with a political agenda. Indeed, a quarter of teachers said that they’d rather not belong to a union if a good alternative existed. At a CMRE seminar last week John Roberts outlined the model of his company Edapt, a for-profit, teaching union alternative established in 2011. Edapt offers the legal advice and representation teachers seek, without engagement in political bargaining and lobbying. Instead of trading blows with governments they can focus on delivering quality employment support to their members. Many members approached Edpat with a pre-existing issue and unsatisfied with their union’s response, whilst Roberts boasts of Edapt’s 99% satisfaction rate.

Obvioulsly, this model would not be for everyone. Many teachers still consider collective bargaining an essential tool, and Edapt is small fry compared to the unions. Not all teachers are comfortable playing politics, however, and inter-union competition for members can encourage more politically aggressive strategies. Recent strikes have polarised teachers, with Edapt growing most quickly around times of industrial action. Further strike action could lead to another surge of teachers uncomfortable or simply exasperated with their union’s actions.

No matter what causes people to join Edapt, political neutrality is crucial for its long-term success. It’s ironic that eschewing sector politics can look ideological, but a ‘non-union’ is easily seen as an ‘anti-union’. Gove might have made this mistake himself in inviting Edapt to reform discussions last year. And, tellingly, his endorsement of the Edapt as a ‘wonderful organization’ actively lost them members.

Time will tell just how successful union alternatives can be. If Edapt can prove that it isn’t ideologically driven and its focus is right, the model might have relevance in other sectors and across countries. With only 25% UK workforce unionised, there might be scope to offer services to people who wouldn’t have considered joining a union. Either way, with 48 hours of tube strikes starting tonight, I bet TfL wishes that there were more union alternatives within public transport.

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Technology, Privacy and Innovation in 2014

Prediction lists for the coming year are always revealing, though perhaps more of the current public mood than the future. A write-up of the tech trends for 2014 by Fast Company’s design blog is hardly controversial, but what is interesting is how the areas they’ve chosen highlight the existence of two wider and seemingly divergent technological trends. This apparent conflict in the way technology is heading is far from problematic. On the contrary, it shows our success in adapting and experimenting with new ideas and in response to shifts in the social and political context, without the need for any central guidance.

One thing clear from Fast Company’s list is that 2014 will bring a continued increase in the volume and depth of the personal data we create. Things like Google Glass, the ‘quantified self’, hyperpersonalised online experiences and the interconnectivity of theInternet of Things all create new reasons and mechanisms for data capture. This in turn increases the value of our data to ourselves, the companies with access to it and, in some situations, the state.

However, the article also predicts that 2014 will see increasing concerns over cyber-privacy and a movement towards greater digital anonymity. Users will increasingly chose to control their own data and how this is profited from, whilst we will begin to discover the joy of ‘disconnecting’ from the digital world and see the creation of intentional blackspots.

The fact that we seem to be embracing deeper technological integration yet simultaneously finding ways to mitigate and avoid its consequences is certainly interesting. Does this show that we’ve raced forward too fast and are trying to claw back a space we’re realising we’ve lost? It’s perhaps possible that this is the case, but far from giving us cause for concern the two-track path we’re seeing shows the ability of consumers and the tech sector to adapt over time, and in turn gives some hints on the optimal tech policy.

Continue Reading…

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The net migration cap is hurting Britain

This morning’s Guardian carries a letter by the ASI, the Institute of Economic Affairs, the Institute of Directors, the Centre for Policy Studies, the Entrepreneurs Network and Conservatives for Liberty, on why we oppose the government’s migration cap. I wrote about why more free marketeers should care about immigration recently — we’re lucky that the UK’s foremost free market think tanks do.

The government’s net migration cap is hurting Britain’s economic recovery and long-term fiscal health. It can take around three months for a business to apply for a visa for a prospective employee, a significant unseen cost of the cap, and international firms may prefer to base themselves in countries where they can bring in staff from abroad more easily than they can in the UK.

Entrepreneurship is being affected, too: more than a quarter of Silicon Roundabout startup founders are foreign-born, and more than half of tech startups in California’s Silicon Valley are founded by immigrants. The cap on immigration is a cap on the innovative industries Britain needs to thrive.

According to the Office for Budget Responsibility, without net immigration of at least 260,000 people per annum, public debt will approach 100% of GDP by 2060 as we struggle to pay for a ballooning pensions and healthcare bill. Countless studies have shown immigrants create jobs, raise natives’ real wages and even boost productivity.

Public concerns about benefits tourism are legitimate but are better addressed by reforms that restrict access to the welfare state. The migration cap does not discriminate between the small number of would-be welfare tourists and the many people who would like to work productively to create a better life for themselves and their families. The cap is hurting Britain and should be scrapped.

Sam Bowman, Research director, Adam Smith Institute,

Mark Littlewood, Director general, Institute of Economic Affairs,

Simon Walker, Director general, Institute of Directors,

Ryan Bourne, Head of economic research, Centre for Policy Studies,

Philip Salter, Director, The Entrepreneurs Network,

Thomas Stringer, Director, Conservatives for Liberty.