The Gig Economy’s Death Cross

Financial Charts

Financial markets have some predetermined signals that are supposed to alert investors that the bottom is getting ready to fall out of the market. One of the more popular indicators is the “Death Cross,” which happens when the short term average value (usually 50 days) of a stock falls below the long term average value (usually 200 days). Some financial advisors argue this means a stock has peaked and you can expect a long term downward trend to begin, and we’ll theorize a similar indicator exists for the gig economy.

Market Share Over Profitability

Burning Money

The gig economy is Silicon Valley’s most extreme version of the Software as a Service (SaaS) business model. A business model that, as noted in a previous post, we think offers no long term value to the economy or the consumers that are using it. We’ve concluded this based on the fact the those who participate in this type of business model are offering services well below fair market value to gain market share, without concern over how the business will eventually reach profitability.

Because these businesses are offering services at an unprofitable level, they are easily identifiable by their high cash burn rates and the fact their operations are usually subsidized through private investment capital or early-stage Initial Public Offerings (IPOs). The list of notable companies we consider to be a part of this group is Uber, Lyft, Instacart, DoorDash, MoviePass, etc., and a variety of scandals have emerged over how some of these companies are paying their “contractors.”

Each one of these companies facilitates a connection between an end-user and service provider with the hopes of receiving a piece of the action – the very definition of a middle man. The problem is a middle man can’t earn any money in a non-profitable endeavor, and the results are beginning to show, something that should worry anyone associated with these companies.

It Can’t be that Bad

Borrowing Money

Take Uber for example, which has a well-publicized issue with driver wages falling below, or being just above minimum wage. With labor rates so low (a goal of so many organizations), many would imagine Uber must be a highly profitable business, but according to self-reported earnings, Uber’s losses are widening, and growth is slowing. These reports are leaving some early investors wondering if they will ever see a return on their investment, with the only possible fix to the situation being a significant increase in service rates.

In other news, MoviePass’s recent spiral has also been high-publicized as it continues to restructure pricing and access for its users to shave their massive losses. The most recent changes resulting in a lower number of users on the platform and higher prices for those customers that remain, although the only metric anyone cares about is the 126 million dollars in losses.

Even Lyft, which seems to attract fewer negative public relations mentions than the previous companies, has been forced to make some changes. Since Lyft also doesn’t have a profitable structure, recent changes in minimum wage laws have forced them to raise their rates to guarantee their drivers earn a living wage.

How to Create a Death Cross

In case you haven’t noticed the trend, time vets all business models, and the fix for all of these businesses is the same – they have to raise prices. The problem is most of their users have been acquired based on the price point of the service, not on its quality; therefore, the inevitable result of raising prices is a decrease in users.

It’s quite simple when you boil it down to most simple mathematical elements. On the hand, you have the price of the service, and on the other, you have the number of user on the platform. As the price goes up, the number of users comes down, and at some point, these two lines will overlap creating the “Gig Economy Death Cross.”

Death Cross

The Gig Economy Death Cross represents a sobering reality for these business models. At its core, it’s the maximum rate they can charge for their service before the user loss becomes unreasonable, and the resulting evaluation will determine if the company is dead on arrival.

Take the dollar amount at the point of intersection, multiply it by the number of users to estimate the revenue earned, and then subtract the company’s expenses. If the resulting number is in the red, I suggest you start polishing up that resume.

It’s always convenient for believers in these businesses to argue that an evaluation of this kind is too simplistic, we would counter by illustrating most of the business community’s longest standing principles are along these lines. Beliefs like, supply and demand, or word-of-mouth is the best advertising, have long stood the test of time, so it’s hard for us to comprehend how something like needing to generate more money than you spend could have slipped through the cracks.

Please leave any comments or questions about this post in the section below.

 

 

Can “New Silicon Valley” Survive without Ads?

Silicon Valley Apocalypse

I’ll start by stating something that I thought should be obvious by now, nothing is free, especially when it comes to content and services. I’m not trying to be a Richard when I say things like this; I just feel like most of us are only paying lip service when we talk about valuing people, time, and hard work. We offer euphemisms like, “you can’t get something for nothing,” but when it comes down to it, we’ve all come to expect a lot of things for “free.” About online content and services, a lot of us consider our use of Google Maps, for example, to be free. But it’s not, we pay for the service by turning over our personal information, GPS location data, search history, etc., with all of that data being used to target advertising more accurately.

I want you to stop and think about this for a second, almost every service that’s “free” on a connected device is primarily a tool for selling us more stuff later down the road. I’m not saying this business model is new; I’m merely stating we’re in advertising overdrive since the transition to the digital era, and I’m not sure if it’s sustainable. When I talk to clients about the “New Silicon Valley,” I’m mainly expressing a shift towards the market share first, advertising next, business models that are sweeping through the region, and it’s all based on the perception that we’re getting content and/or services for free.

Over the last decade, a lot of companies have gone public without presenting a legitimate monetization strategy to investors; solely presenting market share numbers for users in the key, but never really profitable, demographic known as Millenials. Each of these businesses ultimately landed on the same business path to profitability – advertising. And with so many companies relying on advertising dollars to keep their metaphorical ships from sinking, I’m not surprised that the emergence of native browser, ad-blockers gave Silicon Valley quite the scare. 

The True Cost of Content

Dollar Bills

The whisper of the idea that companies are going to be forced to live in a world where ads won’t reach the screens of potential consumers sent chills down the spine of Silicon Valley.  If advertising revenue models went away, a lot of your favorite Silicon Valley darlings would plummet back down to earth as if their unicorn wings had been clipped, forcing them to sell their products and services for a hefty fee (Facebook would cost ~$168 year). This situation could be the ultimate demise of the companies, as no one really buys content or services anymore, as a matter of fact, no one really buys anything. I’m not even sure if it’s okay for me to admit that I miss the days when I handed over money and received something tangible in return.

“Between radio, television, print, online, and subscription services, how many advertising dollars are there to go around?”

I’m no Saint when it comes to using advertising as a part of a business model, especially when I’m subsidizing this blog with advertisements (is you see something you like, be sure to click on it), but there is no way there are enough advertising dollars for all of us to survive. It’s not as if producing content can ever be free, regardless of its medium, someone had to pay for it in some way. In the case of this blog, my time was spent writing this; time I could have spent growing other parts of the business, managing employees, or making sales calls.

Not only is my time worth some monetary value (I won’t mention my hourly rate), but not performing other activities in place of this blog also carries its own theoretical loss of value by choosing this activity over another. Unless this blog goes viral, the pennies on the dollar I’ll generate from advertising revenue will never be enough to make up for the cost of creating this content. And it’s for this reason; I would remind all content creators that advertising revenue is supposed to be a subsidy, not a core revenue stream (Google Search being the exception to the rule).

Great Services, Equals Great Profits

Profit Margin

In the midst of the “New Silicon Valley,” we can’t lose sight of the real problem; companies have yet to position their content and services in a manner that validates its monetary value on its merit. A situation that is especially sad when you consider the number of people that helped to create said content and services that go un/underpaid. At some point, the cost of content and services will have to garner enough revenue to sustain the businesses that produce it, leading back to an era when we didn’t consider “software a service.”

“There it is. I don’t believe software is a service –”

I’ve been dancing around calling it out this entire article, but now all the cards are on the table, so I can go hard to close this thing out.

I’m not old enough to call myself “old school” when it comes to service. I wasn’t around for the heydays of personalized service, or have the money to enjoy the convenience of a personal shopper, but one thing I do know is that service usually involves humans. Not software and a touchscreen, but actual human interactions. While software and automation provide vital costs savings to many businesses, they are also diminishing their ability to differentiate themselves from one another. Long term, this is going to be a problem. The only businesses that seem to be flourishing in the digital era, other than a handful of software companies, are those that generate profits through quality service.

In my heart, I believe there only a handful of companies producing content or software that is so unique that you can call them a service, and as the fear of failure looms for the rest of those companies that opted to play the “long game” with profits, they will find their backs against the wall in the coming years. You should start asking yourself, what’s the maximum your willing to pay for Netflix, Spotify, or any other media service? In the next decade, all those companies will have to figure out what that number is if they hope to survive.