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.

 

 

The Net Neutrality Paradox

Net Neutrality

Concept Explained…

White Board ExplanationFor those who aren’t as familiar with the topic of net neutrality as us hardcore techies, I’m going take a minute to summarize (in Layman’s terms) what it is, and why you should care about it. If you’re reading this post, you’re probably one of the millions of people in the world who access some kind of multimedia via the internet. If you subscribe to NetflixHulu, Amazon Prime, SpotifyApple MusicPandoraDirectv Now, or any other streaming subscription service, you fall into the category of people I’m addressing and should make sure to read this article in its entirety.

If you have one of the subscription streaming services mentioned above, you probably enjoy access to thousands of music and movie titles via an internet connection that’s provided by a cable or phone operator, and until now, that hasn’t been a problem. Since the inception of streaming services, these companies that have been happily providing internet connections to your homes while adhering to a simple principle called Net Neutrality.

The principle goes something like this, as long as you are paying for the broadband service they’ve been providing, whatever you decide to download via that connection is up to you, and the Internet Service Providers (ISPs) won’t interfere with it. But more recently, the content consumers are streaming has inhibited the ability of those same companies to monetize their content, so now they’re lobbying the FCC to remove the rules that formalized the Net Neutrality principles in writing, enabling them to charge more for content coming through their pipelines that originates from competing services.

History Repeats Itself

Infinity Sign

You’ve probably been hearing a lot of techies trying to convince consumers that net neutrality needs to stay in place, and taken at face value, that argument would appear to be correct. But if you dig a little deeper, you’ll see that the abolishment of Net Neutrality could be the best thing for those of us who choose to access our favorite media via the internet. Let me explain.

Due to the fact it’s much easier to change services and equipment between wireless carriers than it is switch between ISPs, the wireless industry has always moved faster than the “wired” industry, and it’s generally pretty safe to look toward them for indications of how strategy changes will affect markets. It’s a bit of a canary in a coal mine situation, which I’ll sure the wireless industry would prefer wasn’t the case, but never the less, here we are.

It wasn’t that long ago that conversations with wireless executives about unlimited data plans resulted in executives stating, with 100% confidence, they would never have to offer unlimited data plans to their customers. Less than five years later things have changed, with wireless agreements including unlimited talk, text, and data, in addition to offering consumers the choice between Netflix, Hulu, and HBO. And now, depending on with whom you sign on the dotted line, a whole range of extras are available because of the addition of a new point of competition.

Unlike with ISPs, wireless providers compete head-to-head in almost every region, and the result of “true competition” has benefited customer across the nation, as the average cost of wireless bills has lowered when compared to 5 years ago. The removal of net neutrality on the wired side of the business would create a point of competition between ISPs similarly to how unlimited data plans affected the wireless industry. This assertion isn’t made without merit, as I remember the days before unlimited wireless plans were everywhere, and cell phone service providers were picking and choosing which particular content to include as a part of “data free” streaming. Can you see the similarity?

The 4K Factor

The availability of Ultra High Definition (UHD or 4K) content will probably be the tipping point for all of this due to the amount of internet bandwidth it requires and the lack of ability for traditional cable providers to offer it. If imposed caps and limitations on streaming content to our homes remain in place (there’s already a 1TB cap), consumers with 4K HDTVs and streaming source content to match will quickly start looking for ISPs that aren’t tacking on extra charges for owning the latest equipment and wanting to take full advantage of its capabilities.

The delivery of 4K content has become a more significant point of emphasis now that HDTV manufacturers have been ushering retailers towards selling UHD televisions in higher proportions than 1080p sets, and the transmission of these signal puts an enormous amount of stress on an aging internet infrastructure that streaming providers like Netflix aren’t responsible for maintaining. We can argue about the fairness of this arrangement later, but for now, we’ve reached the core of the Net Neutrality dilemma.

As the amount of data used to deliver 4K content to homes increases, inevitably, consumers will realize their home internet service plans more closely resemble the restrictive wireless data plans of the past than the newer unlimited data plans of the future. This dilemma will force the cable industry to choose which strategy to pursue in the same manner as the aforementioned wireless carriers.

The Rub

On the one hand, cable and internet providers could leave home internet services and Net Neutrality as it stands, collecting overages whenever customers surpass their streaming limit, hoping they can hold on long enough to figure out their own content system.

On the other hand, they fight to abolish Net Neutrality, unleashing an immediate flurry of competition that will undoubtedly lead down a rabbit hole to including everything but the kitchen sink to maintain video subscribers. So what can they do?

Let me know your thoughts in the comments section and time will tell if any of us had the right answers.