Apologies for the late newsletter, was caught up on some work-related stuff last weekend. I’m also planning on incorporating podcasts into Against the Current - as some subjects are easier to share verbally than it is in writing.
Before I dive into Uber, I want to share a framework that I’ve been developing to identify opportunities where the concept of amortized services can be applied. Specifically, I believe there is an opportunity to disrupt the market with an amortized service when:
the product is fungible
there is value in aggregation
For example, AWS is fundamentally servers-as-a-service. It only works because any server can be replaced by any other. The fungibility of servers allows Amazon efficiently allocate server usage, which drives down the cost for the end user. In a sense, the fungibility of servers is what makes it valuable to aggregate.
You might argue that movies and TV shows aren’t fungible in the way that servers are—and you’d be mostly correct. However, the way that people use Netflix tends to be in a way that makes the individual items fungible. People don’t subscribe to Netflix so they can watch a specific show (which is true in the case of HBO for Game of Thrones), people subscribe to Netflix for general entertainment. When considered from that lens, you realize that individual pieces of content on Netflix are fungible. This is also why HBO subscribers don’t stick around, whereas Netflix subscribers do. The individual units of HBO are much more valuable for its business than the individual units of Netflix is for theirs.
The value of HBO is that it allows you to watch Game of Thrones (and now Chernobyl). The power of Netflix is that it allows you to watch everything else (aggregation). Ben Thompson has a great series on this concept.
With this framework in mind, let’s dive into Uber.
Uber
It wasn’t too long ago when I felt like I needed a car to get around Palo Alto—so much so that it ended up being the reason why I rarely left Stanford campus. That was only 5 years ago, and it feels like the entire world has changed since then.
Is the service that Uber provides fungible? Yes, perhaps too much so (see Lyft). There is virtually no difference to the end user whose car they get into, as long as that car meets a minimum bar for cleanliness (and has the required amount of seats).
The fungibility of cars as a vehicle for transportation is what makes it valuable to aggregate—as previous downtime is now translated into “uptime”. I recently listened to a podcast Guy Raz did with Lyft co-founder, John Zimmer, who stated that out of roughly 250 million cars in the US, each car is in use only 4% of the time.
In other words, take something that has high unit costs (the average car costs ~35K to buy), excessive downtime, and fungibility and you get the perfect recipe for a highly disruptive amortized service.
This begs an interesting question—what are the other high unit cost, high downtime items that we buy today? Will an amortized service replace it in the future?
AC/Heating units?
Laundry machines
Dishwashers
Barbeques
Snowblowers
Anything else? (would love to hear your responses!)
Of course, not all of these are good candidates for ownership to be replaced by an amortized service (for example, there are very real structural benefits from having your dishwasher next to your garbage and kitchen sink). But for the ones that are—how will it be done?