In international trade this is called “dumping”, and it’s often considered illegal and most definitely unfair
It’s usually used as a reason for regulating imports/exports
https://www.investopedia.com/terms/d/dumping.asp#:~:text=Dum....
It’s usually used as a reason for regulating imports/exports
https://www.investopedia.com/terms/d/dumping.asp#:~:text=Dum....
If you squint right, sure, VC backed low costs could be seen as dumping. But the problem is that also means virtually every startup is dumping, even bootstrapped garage efforts. And I guess any company that reports a quarterly loss is also dumping.
So I think it probably makes sense to treat VC-subsidized startups as a different economic phenomenon that needs different rules than if e.g. Goodyear sells tires at far below cost in California until competitors leave and then they raise the price.
The key difference is that startups are rarely selling the same product, to the same people, for different prices at different phases of growth. They're more often selling different products, with different positioning, to different market segments at different times in their growth; where they just happen to call those products "editions" of the same thing.
A common startup lifecycle:
1. get seed capital to build an MVP targeting one distinct market (usually consumers or individual professionals);
2. market (or give away) your consumer-product MVP to price-sensitive early adopters (which is where the initial look of "giving it away" comes from — that's what this market segment demands);
3. wait for those early adopters to educate the rest of the market about what's cool about the product and the brand;
4. meanwhile, use the "social proof" (rather than earnings reports) from these early adopters, as leverage to get a Series A investment; and use it to build a separate, more polished product targeting the enterprise market;
5. use your enterprise product, in combination with a bunch of new sales staff, to reach the non-price-sensitive late adopters. (While continuing to sell/give away the MVP consumer version!)
6. At some point, after achieving traction in both product lines, you can also "trickle down" the benefits of the enterprise product — and integrate process, saving OpEx — by building a new version of the MVP [now "consumer/SMB" product line] using the enterprise product's technology. (It's still a separate product, though, not just a feature-limited version of the enterprise product — there are a lot of things enterprises want that actively get in the way for consumers.)
This is less like Goodyear charging less for tires until they monopolize the market; and more like Goodyear starting off selling car tires, achieving brand recognition there, and then making all their real money by selling semi-truck tires.
A clear example of all six phases (but with bootstrapping in place of VC investment): Microsoft built initial versions of Windows for consumers, at retail prices (or "given away" via OEM channel-partners with steep volume discounts); achieved reach; then reinvested the revenue from that to build a more polished and robust Windows NT for enterprises, and made big money from non-discounted enterprise volume licensing; then "trickled down" the technology from Windows NT to create Windows XP, with the consumer/SMB product now just an "edition" of Windows XP.
What's the end game to VC subsidies?
There are many VC-backed businesses where 'Scale until you become profitable' is the end goal.
But there are also many where 'Outlast until competitors leave and then raise the price' is the only plausible profitable future.
I don't think VC's give a damn about long-term profitability. All they want to do is to trick later investors into buying them out. I can't think of a single one of these types of companies that has had a profitable year* let alone make enough profit to recoup their losses.
*I'm excluding AirBNB because their prices are cheap by operating in a legal gray-zone.
Not showing you the price actually makes it more profitable for the end user, not directly for Abnb. By showing price in this way Abnb attracts you, then the end user scams you for a higher price.
But this is different from the 'legal grey zone' OP was talking about. The Abnb hosts should likely be paying local taxes/fees for operating as a short term rental, in which if they were doing so the final costs to rent an Abnb would be higher in most jurisdictions.
If they put a sign on the side of the road or in front of their place, they’d get shut down post haste, but because it’s online it’s easier to turn a blind eye and ask forgiveness, not permission.
Things like Uber are a typical dumping cases. For years, they charged below their COGS and eventual profitability depended on driving out competition and raising prices.
Not saying whether or not this actually happened, only that it's mathematically totally possible.
did you not read the article? the entire thing premise is that is not true and there are negative externalities and incentives even if the company doesn't ever make a profit.
It's a rather sickening bet though. One would hope they'd lose.
Uber and other folks who sell whatever it is they sell at a loss -- with no real expectation (other than driving their competition out of business so they can then hike prices well beyond where those who can actually make a profit charge) always reminds me of this[0].
The ridiculous part is that the link below was a parody when created. Now it's a "business model." Sigh.
On top of that, there is nuance as to what goes into fixed v variable, how fixed fixed really is, how good your management accounting system is, how good you are at predicting things like product recalls, or insurance losses, or loan recoveries, or whatever other variables are part of your particular business.
Even these things get played. Sometimes driver/rider subsidies get classified as "Marketing expense" rather than cost of goods sold.
Well yes, because they are selling software or other products which require a very high investment into R&D and have minimal marginal cost...
Other markets don't work like that so I don't think this is particularly relevant especially considering the a huge proportion or the majority of those startups (which received the most VC money) are yet to turn a profit (until they do it's still 'dumping' in this sense).
I think the key difference is how the price for the sold good changes over time, not the net profit for sales. If Your business model is to hold price relatively constant, but only see a profit when you hit your target market share, that's not dumping. It becomes dumping if your business plan is to capture Market share at a low price, and then ratchet up your price once you have displaced competitors.
Many startups and new projects operate with effectively zero revenue until critical mass, at which point they start charging. Youtube, Meetup, Reddit, G Suite, facebook, craigslist, twitter, linkedin. The list goes forever. These all started as free services without any meaningful revenue. I don't see any difference between these platforms and Uber, which while not free, is also selling below costs.
i.e., if you sell a widget for more than it costs to manufacture, but unprofitable after you account for indirect costs like R&D and other corporate costs, it may or may not be dumping.
The VC-backed companies like Uber weren't doing this. They were unprofitable even under the standard of price > direct cost. That's pretty cut and dry dumping.
"Scale until you become profitable" in the traditional (and IMO defensible and sound business) sense is about scaling until your margins cover your fixed and indirect costs like R&D (see: Google, Facebook), but that's not the Uber model.
If widgets costs you $12 to make and you sell them for $10, you are currently running at a loss.
If you plan to continue selling them at that price and reduce your costs to $8, that's okay.
Whereas if you plan to later raise your price to $15, you're dumping.
Though if you plan to develop super-widgets and sell those for $15, that's okay.
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Hopefully that makes sense.
That said, a frequent issue is overestimating margins (intentionally or unintentionally). Uber underestimates their fundamental costs, so (intentionally or unintentionally) are dumping.
I get why you’re saying it, we’re profiting from it (kinda?), but a spade is still a spade when it’s shaped exactly like a spade, used for digging, etc. regardless of what label marketing slapped on it.
There is a bit of a difference here in that it is private vs gov’t backed (kinda, unless you count fed printing money as gov’t backing, which it wouldn’t require much squinting to do).
Anyway, the essence of it is that running at a loss for a while in order to drive your competitors out of business, then raise the prices, is widely recognized as the kind of market practice that the government is justified in taking action against.
"In 1905, German bromide producers began dumping bromides at low cost in the U.S. in an effort to prevent Dow from expanding its sales of bromides in Europe. Instead of competing directly for market share with the German producers, Dow bought the cheap German-made bromides and shipped them back to Europe."
Surely not the first, but old enough to make the point:
> 7 May 1934, Lewiston (ID) Morning Tribune, “News Behind the News” by Paul Mallon, pg. 4, col. 4:
> The oil men were acting like the peddler who lost money on every sale but tried to make it up on volume.