There’s a pretty alarming epidemic that’s now afflicting many of the matchmakers lucky enough to solve matchmaker’s biggest problem: ignition and scale. Karen Webster says that Uber, Facebook, Android, even OpenTable and the payments networks and some innovators all suffer from that disease — the one that strikes stakeholders who were once oh so happy with the benefits of the matchmaker model when it was ramping up but now want the same benefits — and even more — for less. She diagnoses the problem and then offers a cure — which, ironically, is exactly what drove the matchmaker’s success in the first place.
There’s an epidemic running rampant in the world of matchmaker businesses.
It’s particularly alarming since it’s one of those mysterious diseases that strikes when businesses least expect it — so there seems to be no real way to prevent it from happening. The cure is uncertain, and the path to a cure can be excruciatingly long — and mentally and physically debilitating. And all of you who aren’t matchmakers and think you’re immune, maybe think again. This disease could very well impact your ability to work with matchmakers now and in the future, depending upon how widespread this epidemic becomes and how scarred matchmakers are who live to see another day.
The disease: Matchmaker model amnesia.
This is a condition that strikes matchmakers after they’ve invested billions into their platforms, gotten them to scale by making it attractive for all parties to do business on that platform and receive the benefits from that new business opportunity, and transformed the sectors in which they entered. It happens when one side suddenly turns on the matchmaker and demands that things be different — just like when a cell suddenly turns on its host and rejects the body that gave it life.
Take Uber, for instance.
Ask anyone — and I do every week on The Matchmaker Is In — what matchmaker these matchmakers-in-waiting admire. So many say Uber that I had to start qualifying my question to ask: “Other than Uber, what matchmaker do you admire most and take inspiration from?”
No question about it, Uber is emblematic with the ability to use technology to turbocharge the matchmaker economy.
The story of Uber is, by now, well-trodden turf. By leveraging the mobile phone and existing platforms, such as the Apple and Android mobile operating systems and the payments rails, the cloud, a variety of technologies like GPS and apps like Maps in 2009, Uber’s platform is totally transforming the transportation sector. In the U.S., it almost single-handedly eliminated the frictions between drivers with idle capacity who want to earn money and consumers who want a ride in a metropolitan area and are willing to pay a driver to take them where they want to go.
With the addition of UberX (UberPOP outside the U.S.), Uber has given even more drivers and more consumers more options to get from Point A to Point B. Consumers now have a variety of choices about whether to schlep to the T or the Metro in inclement weather, leave the office for a meeting and stick their hand out to hail a taxi or even buy a car. There’s a clear and tangible way for the consumer to measure the ROI of making any one of those decisions based on their circumstances and situation at the time. And the ability to hop in and out of an Uber, with payment invisibly happening in the background, is the magic that often seals the deal for that consumer. That combination — reliability, consistency of service, tangible ROI and invisible payments — makes the Uber experience a friction-free and sticky consumer transportation option.
And a very attractive proposition for drivers.
Drivers, of course, are the other stakeholder that Uber needs to keep its matchmaker engine humming. Uber got drivers on board, at first, by giving limo drivers the ability to monetize their idle capacity between bookings. They paid those drivers a sign-on bonus and a guaranteed hourly wage, regardless of how many rides they took, so that they’d have a fleet of cars and drivers to respond to consumer demand. (This is Uber’s ignition strategy for new markets today, as well.) It didn’t take long before Uber became the black car drivers’ employer of choice, because substituting a human dispatcher with technology that automatically booked rides for them the instant they dropped off a fare was a better deal for them.
As Uber expanded its platform with new services, such as UberEATS, Uber drivers were presented with more opportunities to make money by delivering food to consumers in between gigs. Uber, the platform, makes money when Uber drivers, a key stakeholder, are kept busy, so Uber has an incentive to keep drivers busy and create the ultimate virtuous circle.
Speaking of making money, Uber black car drivers are paid 80 percent of their fare after a rider’s fee is assessed, and UberX drivers are paid 75 percent. Uber drivers use their own vehicles or those of an operator for whose fleet they drive. A news story that I read in prepping for this piece estimated that Uber’s fleet, if it owned it, would be worth something like $4 billion — that’s a lotta cars on the road worldwide. Drivers pay for their own gas and to keep their cars in good condition. Uber also has minimum quality standards that cars must meet in order to actually be part of the Uber fleet.
For a very long time, Uber’s only enemy were the taxi companies who watched the value of their businesses plummet. Taxi medallions were once an investment that medallion owners boasted outperformed the S&P each year. No more.
In New York today, there are 1,600 medallions for sale for which there are no buyers. Once upon a time, they’d be worth more than a billion dollars. Today, a medallion that once went for $1.3 million recently sold for $400,000 but couldn’t find a bank to finance it for that amount. Over the last seven years, Uber’s just made it easier and more attractive for consumers, which has made taxis — and, therefore, being a taxi driver — less appealing. Uber reports that there are, today, 500 drivers a week who apply to become a driver in New York City.
But a funny thing happened on the way to Uber becoming a successful matchmaker platform, now valued at more than $60 billion.
Some drivers have now turned on Uber, too.
These complainers like the freedom and flexibility to set their own hours but don’t like that they have to pay Uber 20 or 25 percent of their fare. They don’t like that they have to use their own car. They don’t like it that Uber doesn’t provide health or retirement benefits or any of the perks that employees of companies enjoy. They complain that Uber “nickels and dimes” them for everything.
They complain about too many drivers on the road. They complain when Uber reduces fares in order to get more consumers onto the platform that they don’t make enough money. They used to complain about being paid weekly, until Uber launched Instant Pay with GoBank — and now complain that it requires a separate account with GoBank to receive that benefit. In many states, Uber driver blogs show calculations that reflect an hourly rate below minimum wage in those states after all expenses are deducted, even though that’s not even an apples-to-apples comparison of hourly wage calculations. When Uber guarantees a minimum hourly wage in some cities during slower times, like winter and after hours, drivers complain that, in order to benefit from that economic proposition, they have to accept 90 percent of the rides.
In many states, including Massachusetts, drivers have done more than just complain.
They’ve taken their grievances to the regulators and engaged the class-action lawyers to bring suits against Uber, claiming that, since Uber sets the rules, including the prices, that they need to be employees and be extended the same benefits as employees and be given wage guarantees. (Of course, in the U.S., some class-action lawyers reverse this and go sign up some complainers so they can file a lawsuit and maybe get a big payday).
Now, it’s well above my pay grade to comment on the merits of their claims or the case law on matters regarding independent contractors and labor laws — so I won’t. My job is to lay out the impact of the matchmaker amnesia epidemic that threatens the matchmaker business model and all that it promises the matchmakers and those who benefit from their services.
Back in the early 2010s, when Uber was investing billions into building its business and scaling its platform, everyone was really happy. It was new and novel, and everyone wanted to jump in. Drivers called Uber the best thing that ever happened to the liveried transportation business — liberating and empowering. For many, Uber was an easy side job — a way to make extra money whenever it was convenient for the driver to log on. For those who drove for Uber full time, they remarked that the flexibility to be their own boss and be served a steady stream of business is what they liked most. The technology allowed them to both have a steady flow of consumers who loved the service and to eliminate dead time between pickups since drivers were assigned to fares on the basis of who was closest at the time of the request.
Today, after receiving the benefit of the platform and the investments Uber made to improve it, their feelings about the utility of the platform are different. Why should Uber make so much money, drivers now ask, on their backs? Uber’s worth $60 billion, they complain, so it’s time to give some of it back to the drivers who make the service work.
Well, that line of reasoning ignores two facts.
One: $60 billion in valuation aside, it’s not clear that Uber is a profitable business and has money to “give back.” We don’t know for sure that it isn’t, but we can suspect that one of the reasons it hasn’t IPO’d is because it’d like to avoid the public unveiling of a possibly messy balance sheet. Regardless, it’s unlikely that Uber is an Apple-like entity in disguise with billions or even hundreds of millions sitting idle in its bank accounts.
And two: Platforms are actually in business to make a profit — how about that — and to do that by enabling the frictionless transacting of its stakeholders. That means that someone has to pay. In the case of Uber, there are only two sides from which to extract that value: the driver or the passenger.
Broadly speaking, that decision is made by matchmakers on the basis of which “side” needs the other more. That side becomes the “revenue” side of the platform. In Uber’s model, each side pays to be part of the platform — consumers pay a fare for the ride, but it’s the driver who receives that fare for providing the service. Uber made it possible for the driver to find that passenger and provide that service. Uber the matchmaker, therefore, monetizes the driver who’s making money courtesy of their ability to deliver a consumer with an app equipped to pay them for the ride.
Uber could, of course, change that. It could very well decide to charge the consumer a 20 percent booking fee and then pass the total amount of the fare to the driver. The likely result would be a dramatic dropoff in usage, which would generate another driver complaint — not enough business.
If this sounds slightly familiar to those of you in payments land, it should.
It’s at the root of the merchant/network battle, which has now raged for decades. Networks invest in technology to make it possible for consumers to use any bank-issued card at any merchant accepting that network brand — which was cool beans until more consumers with more cards drove more volume over the network which increased the line item called interchange on their balance sheet.
Like drivers and Uber, merchants ask why the networks, who set the interchange rate to keep the payments system’s flywheels turning, are making money at their expense, ignoring the benefits they receive from consumers who like and use those cards regularly and liberally and securely in their stores.
Interestingly, this was the basic premise argued in the Amex antitrust case that was recently overturned. Citing the basics of two-sided market network theory and David Evans’ extensive writings on the topic, the judge found that merchants could no longer steer consumers away from using Amex cards in their stores simply because they were “more expensive” for them to accept. The judge said that what the merchants were advocating would simply force the network to pass along higher costs to the consumer, which would ultimately come back to hurt the merchant.
It’s not just payments cards or ridesharing services that are caught in this matchmaker amnesia epidemic either.
It’s Facebook for games and Android for wanting to monetize its free OS by bundling its apps inside of it. It’s OpenTable for creating an app that helps restaurants fill empty slots and charging restaurants $1 each time they take a reservation that puts butts in seats.
And any other matchmaker that gets big enough for the side who pays to all of a sudden forget the value they’ve received from that platform and think they deserve to get the same services but much cheaper.
All of this serves as a cautionary tale for matchmakers and matchmakers-in-waiting.
Getting to that place that all matchmakers aspire — ignition and scale — can also mean that your stakeholders fall ill to matchmaker model amnesia when that happens. This disease will not only erase any memory of the value derived from your platform but also the cost of reaching those consumers or stakeholders absent its existence.
To cure it, you could divert a chunk (or even all) of the profits that you might otherwise plow back into the platform — monies that could add more value to the other side of the platform that, but for that matchmaker, would be even more costly to reach.
Making the real victim of matchmaker model amnesia the side that fell ill.
Matchmakers, at scale, have the benefit of enough of the other side on board — in these cases, the consumer — to attract other services providers to satisfy their demand. You see, instead of scale being the cause of matchmaker model amnesia, it really turns out to be the cure.
Scale drives sales.
And that’s the best medicine of all for what ails anyone who thinks they might be coming down with a case of matchmaker model amnesia.
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