Why Service Apps Are Raising Prices. NewsWire

NewsWire: 6/29/21

• As tech startups age, they're terminating it’s their “Millennial Lifestyle Subsidy.” Companies from Uber to Airbnb to Doordash are raising their prices, which they kept artificially low for years to spur growth. (The New York Times)
• NH: Alas, the days of cheap on-demand service apps are waning. The price of an Uber (UBER) and Lyft (LYFT) ride has increased 40% YoY. Bird has increased their scooter fare from $1 plus 15₵ per minute to $1 plus 45₵ per minute. And the average cost of an Airbnb (ABNB) increased 35% last quarter from a year earlier.
• So why are fares and fees rising? 
• Many of these price increases are a direct result of the pandemic. We have written before that Covid-19 has hit the "sharing economy" especially hard. (See “Goodbye to the Sharing Economy?”) Ridesharing companies like Uber have had to raise fees due to both fewer customers and fewer drivers returning to work. And food-delivery apps like Doordash have had to raise prices to adjust to increased usage and municipal caps on what they can charge restaurants. 
• But many of these service apps had planned to raise prices in any case before the pandemic began. Why? These tech companies were founded on the strategy of “blitzscaling.” Raise plenty of money so you can offer low, money-losing prices long enough to build an enormous user base. Once you're number one in your field, jack the fees, make money, and start paying the early investors back. Uber, Lyft, and Lime scooters all claim they will be profitable by the end of the year. And much of that will be due to their higher fares.
• Amazon (AMZN) is btw following the same strategy, though on a much longer time scale. Value investors always wondered how Amazon could justify its near-infinite PE ratio for so many years. Now they know. You wait until you are the totally dominant player, and then you wait for a good moment--the pandemic will do--to let your prices drift upward and your earnings soar. Since Q1 of 2020, Amazon's EPS has at last reached lift-off velocity.
• The sharing-economy firms will need to be careful. I have argued before that the return to post-pandemic normalcy will only be partial and that people's behavior is path dependent. Customers have learned to get through life without these amenities. And if the services increase their prices too much, consumers may just never go back to them and revert to cheaper hotels or taxis.
• Amazon of course doesn't have this worry. Its customers are now hooked more than ever. It faces a different sort of challenge: the growing threat of antitrust action. Low pricing that generates losses which the firm (and investors) fully expect to recoup later when competitors are eliminated is the FTC's textbook definition of predatory pricing. For several decades, governments have seldom sanctioned firms that practice it. But that era may be drawing to a close.
• Finally, let me offer a word to my younger readers. If your cushy bourgeois lifestyle was subsidized in recent years by cheap Uber rides and large Airbnb vacation homes, find solace in the fact that your delight came at the expense of some large wealth manager. And remember the immortal words of Dr. Seuss: “Don’t cry because it’s over. Smile because it happened.”