Charting the Digital Economy: Part II

The Sharing EconomyIn our previous blog The METISfiles argued that charting the Dutch digital economy should be done in a much broader context than just measuring end-user value of digital products and services. But new digital services based on the principle of sharing, as practiced for instance by Uber, Lyft, AirBNB, Taskrabbit, SpullenDelen or Thuisafgehaald, pose a challenge in sizing the digital opportunity: are these really economic activities and if so how can we actually measure them since most of these activities are difficult to record through our conventional sources such as the chamber of commerce, fiscal authorities or our bureau of national statistics. More in particular, if we look at the example of Uber, the popular taxi app that is disrupting the taxi market in the big cities around the world, we must first separate the digital opportunity from the physical taxi activity. While Uber may think their market is the market of transporting people and goods from A to B (NACE classification code 493 and 494), their app suggests that they are more of an intermediation agency. The Uber service is not an alternative taxi service tapping into the value add of the existing traditional transport sector. What Uber does is bringing together supply and demand in a much more efficient way than before. They actually only replace the current ride dispatching and communication system of the traditional taxi companies through their matchmaking app.  Given the taxi situation in Amsterdam this is a good thing. They make it cheaper, shorten the waiting time and may even turn the terrible taxi experience we have all gotten used to in Amsterdam around; something to look forward to.

Charting this digital opportunity is relatively easy: when a passenger pays 20 Euro for a ride with an Uber driver, 20 percent (or whatever Uber or its competitors are charging) goes to Uber, 80 percent stays with the driver. The digital value-add for Uber is 4 euro max. There still is the question in what sector we can place Uber but for the moment ‘services for transport’ (NACE 522) seems applicable. The physical value-add for the traditional transport sectors is the remaining 16 Euro. However as information technology is also increasingly applied in the transport sector, there is a portion of the total value-add that should be attributed to digital value add within this traditional sector.

But there are more consequences we need to look into. Another unexpected but interesting phenomenon that comes out of the sharing principle is that it tends to eat into the official economy. If an Amsterdam Uber driver is using his car from 20:00 to 24:00 to generate additional income it is likely that this will not pop up on the economic charts. A freelance Uber driver may have his main income from a regular day job or as a freelance consultant for that matter. But the way economic activities are recorded is by looking at a company’s primary activity. So official statistics may show that the taxi sector is showing less and less value add while in reality it could be skyrocketing. Why?

In the San Francisco Bay Area Uber is in fierce competition with Lyft. In order to win the battle they are both lowering their tariffs. But not at the direct expense of the drivers. They take it out of their own margin, out of their 20%. They may go even as low as 5% margin or even less,.. and still make money. After all there are no people (drivers) on the payroll and no fixed assets (cars) to take care of, there is just the app and ads. They make up for the margin drop by attracting more drivers (who doesn’t want to make some money on the side?) and with the lower tariffs taking a taxi will become a viable alternative for taking the bus and boost rides. Eventually this will turn into a race to the bottom, bottom rates that is, with far more consequences for the drivers than for the taxi app owners who are pursuing a volume market. Venture capitalists and Google have clearly seen this opportunity too and are heavily investing in taxi apps. For Uber this has turned into an estimated market cap for Uber of $ 17 billion. The fact that its matchmaking technology can be adopted to other sectors adds to this number.

But there is more. The sudden popularity has caught politicians of guard which is best exemplified by the row between Brussels authorities (trying to ban Uber taxies in Brussels) and EC vice president Neelie Kroes (calls for open taxi market and is a strong supporter of the digital economy). Disruption is happening fast and fierce and has taken authorities and traditional sectors again by surprise. Which one will be next?

On another note the success of the taxi apps also reflects statistics that owning a car is no longer the dream of every young adult. Instead, having access to an efficient and high quality transport system is increasingly regarded as part of good urban living conditions. Translate that to other capital assets and it becomes clear why AirBNB or Taskrabbit are other potential hits in a world that soon might embrace disownership as the new normal.

Finally, charting the digital economy will be a serious challenge because the sharing principle has a big potential impact on the official economy. It will take a big chunk out of the transaction cost of traditional sectors by reducing inefficiencies in current business processes of traditional sectors.  Together with the increasing acceptance of digital cash like Bitcoin, a growing peer-to-peer economy could emerge that could entirely escape the national statistics and subsequently underestimate a country’s official GDP.

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About Marcel Warmerdam