AirBnb is doing well since it provides a way around zoning rules so that one can operate a hotel in a residential neighborhood. Since it can benefit property owners who are also voters and taxpayers, it is hard, but not impossible, to regulate. It drives up local rents and property values, so it can produce a lot of value while strangling a local economy.

AirBnb allows one to maximize the return on one's capital. Uber and the like don't allow one to maximize the return on one's labor. The original Uber ride sharing idea was that Uber would be a spare time operation, but it quickly professionalized when subsidies made it profitable. When the subsidies vanished, a lot of the professionals vanished.

I think Coase was slightly off target. Companies exist because they can cross subsidize operations to support an efficient internal system based on highly optimized and specialized knowledge. A profitable, efficient company is always going to have some components that cannot be justified internally by their own profitability but are critical to their overall success. The necessary transactions could not be justified if outsourced, but can easily be justified if the transaction costs can be hidden. That's hidden, not necessarily minimized. The secret sauce is often that those costs need not be minimized.

One example is Amazon. It internally subsidized the construction of AWS and its logistics systems. It was unable to show a profit for a decade, but as a company it was able to hide the internal cost structure until a dominant position was achieved. Even now, Amazon has a lot of invisible internal cross subsidies. When it starts farming out the relevant operations to Mechanical Turk, it will be time to short the stock.

Another example is Boeing which hid the cost of its engineering based internals. Even assembly line workers were expected to think like and work like engineers. Engineers were expected to have contact with the factory floor and deal with every component of an aircraft. This let them design and build aircraft profitably. When they made the internal subsidies visible, they started outsourcing, relying on contractors and lower cost labor. Now they can barely build aircraft, and it is unclear if they will be able to take the next step in aviation.

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In Israel, taxis have always been obtained from many small companies, or even individual drivers who built a customer list. Their response to Uber was swift and effective. An app mysteriously appeared, that all drivers use to respond to your call in the same taxis as before. So they pretty much replaced one dispatcher for each company with the app, and life continues as before.

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Aug 23, 2021Liked by Noah Smith

OnlyFans already requires an ID to post content, and release forms from guest stars in videos. There have certainly been cases of minors using fake/stolen IDs, but at some point you have to say they've done enough and not hold them liable when a user defrauds them to post disallowed content.


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Love seeing people talk Coase! You're the first person I've seen talk about the gig economy from a Coasean perspective, which *obviously* is the right way to look at it.

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I think Uber and Lyft haven’t really worked out because demand for taxis isn’t actually that high. Like, they’re not really that common outside of NYC.

DoorDash is more interesting because it’s structured as a gig company but has a pretty straightforward business model: they sell delivery services to restaurants which otherwise couldn’t afford or manage a delivery service. Understood as a B2B service, it makes more sense why it seems to work better.

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I am confused by "Driving yourself somewhere, or riding a bike, is still usually cheaper than hiring a chauffeur." + "I depend on Airbnb a lot when I travel."

First, owning a car is not cheap. Second, especially for travel, Uber seems far more important than AirBnB to me--the convenience difference between Uber and renting a car is much larger than the convenience difference between AirBnB and a hotel (in fact the former seems less convenient? I still don't really understand what the appeal of AirBnB is other than sometimes price improvements).

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Fatal flaw with your piece is right up front--claiming Uber, Lyft, DiDi, Airbnb, Instacart, and DoorDash were “big successes.” In what universe is a company (Uber) that has never generated positive cash flow after 11 years and has never achieved a GAAP net margin on its actual business operations better than negative 38%, and cannot articulate any plausible path to sustainable profitability be considered a big success? The economics of the food delivery companies are even worse.

Your article presumes that the “gig economy” was based on major efficiency improvements and that the huge valuations of these unicorns were largely justified by superior competitive economics, but you can’t provide any objective evidence supporting your gut feel. You seem to have come to the recognition that many of PR claims about these companies (massive potential market, monopoly power, robot cars will replace drivers, huge network effects, etc) were never true. But the total absence of economic evidence doesn’t lead to consider that your presumptions may have simply been wrong. Since your analysis is still based on those vague presumptions and not on operating or financial data you can’t possibly answer your “what will stanch the bleeding?” question.

Traditionally companies that were “big successes” had come up with efficiency/quality/service breakthroughs that created sustainable competitive advantages over incumbents. The magnitude of the gains (e.g. much lower unit costs, higher unit revenue) could be objectively measured. Uber (as its P&Ls demonstrate) is actually much less efficient and has much higher costs that the economically marginal and unpopular traditional taxi operators they drove out of business.

Hundreds of billions in capital have been reallocated to much less efficient uses. Uber’s early investors extracted billions in wealth without actually creating a sustainable company or creating any economic value for the rest of society. As you note, Uber was openly pursuing monopoly power, another form of extractive wealth transfer. But as Didi has demonstrated, even with a 95+% market share this business model is structurally incapable of generating profits.

None of Uber’s vaunted “technological innovations” translated into actual productivity improvements that had any material P&L impact. In 100 years of taxi history nobody has ever found meaningful scale economies. Almost all of Uber’s limited margin improvements come from suppressing (already dismal) driver compensation down to minimum wage levels. This was the sole economic basis for every large scale “gig economy” company. The problem isn’t that network efficiencies weren’t global, it is that no one has any evidence showing that “Gig platforms definitely cut down on transaction costs” in any material way, much less to the point where they could help justify hundred billion dollar valuations.

You claim that “A lot of Uber’s initial success came from its ability to undercut the taxi monopoly in cities like NYC. Users loved Uber so much that the city government was basically forced to accommodate them and legitimize ride-hailing.” This further illustrates the disconnect between your presumptions and basic business economics. All of the popularity and rapid early growth of these companies is because customers liked the fact they never had to pay the actual costs of the service. Pressures on city governments came from massive lobbying efforts and Uber funded efforts to get their massively subsidized customers to bombard officials with emails. Uber did not compete away monopoly deadweight costs in New York or any other city. Traditional taxi prices were undercut by Silicon Valley billionaires pursuing global market dominance in the foolish belief that any company claiming to have an app-based platform could magically achieve Amazon type returns.

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I still find the Only Fans thing baffling, given that other porn sites remain operable and most are apparently able to take credit card payments, including ones which allow users to upload material.

It can't be entirely driven by recent legal changes because there are a number of smaller payment processors who focus on or otherwise accept this type of business. (https://www.quora.com/What-payment-processor-do-you-recommend-for-adult-themed-sites)

There's some scattered reporting out there on the big credit card companies' motivations in this, but much of it is speculative, and has a very unclear relationship to the FOSTA/SESTA regulations.

For example, one key issue seems to be Mastercard's demand that all pornographic content be reviewed pre publication (presumably by a human), which would explain OF's specific restriction on that. Buy why would pornographic content be more likely to facilitate prostitution than merely nude content not featuring actual sex? Sex workers' websites almost always feature the latter and rarely the former.

If the issue is people appearing non consensually in posted images, why would a super rigid/precautionary/one strike reporting system not be preferable to blowing your entire business sky high? (There's some suggestion that an ongoing BBC investigation found holes in the reporting system and a failure to take action consistently, and this might be behind the card companies' decision. If that's the case, is this a story of management failure rather than the business model per se?)

There's also some suggestion the decision relates to OF searching for venture capital funding, but no real evidence that was decisive. Likewise with shareholder pressure on the card companies.

To what extent are we looking at socially conservative activism by the card companies beyond the demands of legislation? Again, unclear.

There's a great story there for an inquisitive business reporter.

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I think your bifurcation of the "gig" economy is both correct and incorrect. For low-paid jobs likee Uber and Lyft, I think the transaction costs are higher than people realize. But for higher-paid jobs, like some of the micro-gig stuff you listed, I think transaction costs are quite a bit LOWER than before. A bunch of research out of BCG is finding massive growth in these "hybrid teams" and companies are more and more accommodating of these approaches. But hybrid teams does not mean "gig work". It means someone who is an on call resource and is paid a solid hourly rate or retainer who also KNOWS the business, the politics and the expectations - and is nearly equivalent (or better than) internal resources for the tasks at hand. They just don't want to work at one company. These folks have existed forever (they are called "consultants" or "graphic artists" or "PR agencies" etc) but I believe there is more acceptance to have them doing things that were once considered core business skills (product marketing, fractional CMO or CTO, etc). I'd love to see more exploration of this.

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Weird blindspot here Noah. Your last paragraph skirts the obvious answer. The gig economy is miserable low paid labor for services that to the consumer are bespoke luxury services. Our plutocrat dominated regulatory system tried really hard to pretend this great news opportunity to exploit labor even more brutally could take over everything. Unfortunately for them, their 40 years success in crushing the middle+ class to working class means there aren't enough people with enough money to live served by the help.

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I'll add that I represent research organizations on Labor Secretary Walsh's Workforce Information Advisory Council (WIAC) and chair its Measuring the Changing Nature of Work Subcommittee, which covers contingent work, remote work, and the impacts of technological change. This is my second tour of the WIAC, the first being 2016-18. We have a draft recommendation on measuring the changing nature of work. In 2018, we encouraged the Secretary to support the revival of the Contingent Work Supplement. Those docs are available at https://www.dol.gov/agencies/eta/wioa/wiac

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Re: OnlyFans - this is a perfect test case for Ethereum smart contracts. Strong demand for a product that transcends borders and a customer base that's motivated to jump through early adopter challenges.

If and when the happens, I think it will be extended to other gig economy platforms too. Check out how Gitcoin is applying crypto rewards to open source software.

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>>>Need someone to run a regression or wrangle some data for you? Want someone to pore over a company’s financials and report key metrics?<<<

Firms already do this kind of "micro" outsourcing a lot. It's just that the vendors that get the gigs are temp/office worker/financial professional outsource specialists. OR, one way of looking at it is that the self-employed entrepreneurs (gig workers) who get the gigs use these staffing companies to line up jobs for themselves. I think this is something of an interesting phenomenon. I know there's a lot of negative reportage on the supposed drawbacks of gig work (especially as opposed to being a regular, FT employee). But there's a sub-population of such workers who make fairly high salaries and enjoy the flexibility. A good friend of mine is a some kind of Senior Financial Analyst model-building whiz. East coast banking background but decided to relocate to Silicon Valley. Anyway, she makes ok money even by S.V. standards, I think (sometimes 200+/hr when she stacks her gigs). And seems to enjoy it.

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Ugh. Seeing how Airbnb has weaponized gentrification around the world by destroying the local communities we love (rentals removed from locals, businesses pivoting to serve tourists instead of locals), I'm happy to finally see pushback against the abuses it scales.

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Is it to ravenge of Chinese rule by urben people

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