Marginal cost and the erosion of scale

Just among us kids: I’m not a fan of this broad definition of sharing. I’ve seen it increasingly, particularly at places like SXSW. The rebirth of “social media guru” as “customer engagement strategist” doesn’t mean there’s any less snake oil in the mix.

Unfortunately, saying “attention is a currency” as a way of justifying a lack of sales only goes so far. In the end that attention has to have an economic value (i.e. compare Apple to Microsoft’s ad spend; the former pays half what the latter does because it commands attention.)

I’ve been working on this a bit for a new project (www.tiltthewindmill.com) and I’ve come to the conclusion that much of this is about the economic order quantity of the first unit being the same as that of the millionth. The notion of scale is predicated on amortizing one-time fixed costs across the volume of sales, which is why we have things like corporations and mass-production.

While James Burke’s “future of abundance” might not be here, I think there’s an interesting halfway mark when everything works in small (tiny) batches. At the same time there is a significant shift in capital ownership: when we share cars efficiently because of digital systems, the number of cars we need goes down, and puts a dent in the coffers of Detroit.

These two things  an economic order quantity of one, and the elimination of unshared goods that sit idle most of the time  are huge impacts on the economy and if they take off, will significantly change economics. But there are plenty of reasons they won’t catch on (I just like having a car; my shared tools come back dented; China stockpiles all the rare earth minerals; patents prevent you from polishing that 3D toy you just made). Most of these are cultural or legislative obstacles, rather than technical or economic ones.

The sharing economy by the numbers

Each car share member reduces their personal CO2 emissions by between 1,100 and 1,600 pounds per year. On average, car sharing members drive 40 percent fewer miles after joining a car share program. Members of Zipcar and car sharing programs report a 46% increase in public transit trips, a 10% increase in bicycling trips and a 26% increase in walking trips.

A Transportation Research Board/National Academy of Sciences study finds each shared car takes about 15 private cars off the road. The average car sharing household reduces vehicle ownership by 50 percent. North American car sharing programs average 49 members to every vehicle.

Frost & Sullivan estimates that car sharing can reduce the total transit costs for its members by 70%. Zipcar members report saving an average of $600 per month compared to owning a car.

The Uber question

The thing I want to dig into is the uber union. We all talk about how tech makes it easy for a middleman to bring together a buyer and a seller, for virtually no incremental cost, and take a percentage.

But there are three variables: price paid (see Uber surge pricing); cost of the service (such as licensing, indemnification, fraud; the App Store gets 30 percent, but Apple handles antivirus, legal defence, delivery, push updates, etc.); and cost of the resource.

Uber drivers wait for surges. They seek out hotspots. We forget that the tech which removes barriers to entry from incumbents (hotels, taxi services) also makes it easy for suppliers of the services to organize. Uber is so Ayn Randian about market-set pricing that they’ve overlooked driver-set costs. If the whole system is truly algorithmic, then a bit of derived big-O-Organization goes a long way.

The end of car culture

It was once a teenage rite of passage. A 16th birthday, a driver’s test. If all went to plan, you were handed the keys to your independence: a driver’s licence.

No longer. Driving culture has shifted dramatically in the past decade. The percentage of teenagers with driver’s licences has fallen through the floor, and young people in their 20s and 30s are fast following suit. Researchers expect falling driving rates to continue.

North Americans have fallen out of love with the automobile. Young urbanites spurred the breakup while a swirl of social changes fuelled the antipathy. Urban congestion and rising fuel costs have made cars unaffordable and unappealing for many young people.

Vancouver condominium marketer Bob Rennie said young, first-time condominium buyers don’t care if an apartment has a parking spot. They want to know if there’s a bus stop close by. The most striking difference is that current buyers don’t equate a car with status, especially young men, Rennie said. Their lifelines are smart phones and social media.

“They’re not addicted to the automobile,” Rennie said. “Their addiction is to their iPhones and Facebook. Unlike the baby boomer, they don’t need a car to get laid.”

In fact, Canada’s first car-less condo sailed through Toronto council even though staff opposed the plan. When completed, the 45-storey glass tower will have 318 junior-sized apartments and not a single parking spot.

One of the largest car-sharing services is Zip Car, which has 700,000 members around the world. People who use shared cars have a different notion from their parents of what a car should do and cost. They’re fine paying for a car, but only for a specific task; to run an errand, take a drive to the beach or buy groceries. They don’t want to pay for a car that’s sitting in the driveway.

“It becomes a variable cost rather than a fixed cost,” said Christian Demers, Zip Car’s Toronto general manager. “It really flips the concept on its head.” He compared sharing a car to downloading music. Why pay for a whole CD if you only like one song? “They buy music by the song on iTunes. Reserving a car by the hour isn’t that foreign a concept.”