Marketplaces are market failures

Ubereats is playing a negative-sum game

Ubereats (and food delivery broadly) is an incredible case of market failure. Ubereats has managed to transform dinner - a business that has existed as long as businesses have existed at all - into negative-sum extraction. 

With third party delivery apps restaurants have smaller margins, users pay more for an error-prone experience, the delivery drivers get squeezed with brutal jobs, and the delivery companies themselves bleed money. Everyone loses!

Ubereats takes from every other party in the transaction and produces losses for itself.

It’s only the most obvious example of how marketplace businesses fail, especially in labor and SMB. Ostensibly, marketplaces like Ubereats organize supply such that it is more easily discoverable and optimally allocated (less dead time/underutilization). But making supply discoverable doesn’t earn a big enough premium on its own so marketplaces necessarily evolve into hostile relationships with their customers (suppliers).

Marketplaces like Ubereats always become rent-seeking extractors. As soon as a marketplace represents a sufficient portion of the customers’ books of business, the switch flips and subsidized take rates end. 

The same cycle plays out over and over again: sell new revenue to supply, aggregate demand, commoditize your customers, piss them off, and hopefully make a buck along the way. Rinse and repeat.The animating purpose of any marketplace is to go from driving incremental revenue to managing existing revenue as a monopsony. 

Why do these businesses keep getting founded and funded? Marketplaces are the easy answer to “how do I build an internet business in X category” but they aren’t sound models - certainly not for their customers. 

At some point it has to change. The winning business models in SMB (broadly defined) won’t be marketplaces. The future of SMB-focused companies will look more like Squarespace (help everyone become a media company) or Toast (help everyone manage existing business better). Marketplaces are an unholy marriage of demand-gen and operations management, which skews the balance of power too far from the customers.

If small businesses and independent operators can succeed, they need partners and services aligned with their sustainability. Ubereats and the like ain’t it.