Local On-Demand Economy: What's Driving Supply?

This post is the latest in a weekly series of excerpts from BIA/Kelsey’s recent report on the Local On-Demand Economy (LODE). The series will lead up to BIA/Kelsey NOW, a conference on LODE that will take place June 12 in San Francisco.

The success of companies in the local on-demand economy (LODE) hinges on creating network effect and balance in two sided marketplaces (supply and demand). These must grow together in unison, and in a step function that usually leads with adequate supply (i.e., enough Uber drivers).

Last week we examined demand, so now it’s time to zero in on these supply-side dynamics. There are many factors including economic (unemployment rates), geographic (urbanization) and generational (millennial work habits). These are all colliding to form the “1099 economy” at the heart of LODE.

A related excerpt from our LODE white paper is below. Consider it a primer for the discussion we’ll have on stage at BIA/Kelsey NOW. Let me know if you’d like to participate (mbolandATbiakelsey.com) and stay tuned for lots more coverage.

Next week’s excerpt: LODE’s Impact on Local Media.

Supply Side: The 1099 Economy

The two-sided marketplaces that define LODE mean that user and service provider growth must happen in approximate balance. There are unique market factors that create that balance and drive growth on each side of the supply/demand equation. The demand drivers were just covered.

For the supply side, LODE is keeping pace as its financial and lifestyle benefits are made known to service providers. This is important because the step function that defines LODE’s supply/demand balance usually starts with the supply side (i.e. enough Uber drivers).

This has been driven (excuse the pun) partly by high unemployment rates that create a larger eligible pool of service providers. For example, Uber had 160,000 drivers at the end of 2014. 40,000 signed up in December alone, and its cumulative total is doubling every six months.

Adequate supply is also driven by larger trends such as the percentage of the population that is concentrated in urban areas. This creates a larger eligible pool of suppliers. It also concentrates demand within a defined area, which provides ROI incentive for suppliers to operate.

Drilling down to more direct and tangible motives, there are often economic benefits for service providers. As mentioned above, reduction in marketing and operational costs enable individuals to sidestep traditional barriers to entrepreneurship. And some LODE services offer quick revenue.

A study by Princeton economist Alan B. Krueger reports that Uber drivers earn $19 per hour on average, and a majority are very satisfied. Drivers were also proven to work fewer hours and earn more than taxi drivers (though they must handle some expenses that taxi drivers don’t).

The Kreuger report also shows that driver growth isn’t receding even as some factors — such as high unemployment — abate. And as Uber lowers rates to the initial detriment of drivers, it argues that increased demand counteracts potential losses (per second order effect outlined earlier).

Punch Out

There is also the matter of flexibility. LODE is causing a cultural shift in the way people think about work. It’s chipping away at a centuries-long societal construct and mindset about working for companies. Ask any Uber driver how much he likes being able to create his own hours.

Though corporations absorb risk and create community — a benefit established as 20th century industrialization and urbanization created the welfare state we now know they also require sizable and sometimes inconvenient commitments from their employees.

And so a key constituency of the emerging 1099 economy has become individuals that require this flexibility out of necessity: students, contract employees, parents, people with multiple jobs. The ability to define one’s hours has been one of the biggest boons for LODE service providers.

For example, most Uber drivers work less than 15 hours per week, according to the Krueger study. According to a driver survey in the report, most are already employed full or part time. Earning additional income was stated as the primary benefit of being an Uber driver.

This flexibility is also perfect for a demographic group examined above in a different context: Millennials. The characteristic flexible hours that several LODE services offer could be form-fitted for a generation that doesn’t want to be told when to come to work.

The Dark Side of LODE

Despite many of the above advantages, there is a dark side to LODE that should be acknowledged. This involves some of the risks of distributed work forces that, for several LODE companies, exist in sometimes-vague status between full-time and contract work.

First, Uber’s rapid growth has compromised screening and led to allegations of driver misconduct, including sexual assault. This should be acknowledged, but we will not detail it any further in this report.

Regarding the official status of many LODE service providers, such as house cleaners, drivers, pet care providers, etc., its flexibility comes at the cost of assuming a certain degree of legal risk. This is part of the LODE dynamics, which transfers risk from companies to their labor pools.

This is shifting though, as well-publicized deviant acts of LODE providers (and consumers) motivate companies to provide greater insurance and legal protection for participants. Airbnb famously upped its insurance coverage after drug addicts destroyed a rented Oakland home.

Beyond legal risk for service providers, thereâ??s an inherent risk they assume in marketplace volatility. When comparing LODE to less-flexible traditional jobs, as above, it should be noted in fairness that the latter comes with a steady paycheck and risk absorption by a company.