Kevin Roose wrote in the New York Times about something that I pointed out a while ago, albeit from the perspective of the consumer. It’s a good time to take advantage of companies swimming in venture capital money to subsidize your life.
Roose notes, albeit hyperbolically, that the “entire economy” works like MoviePass. In that model, you pay a small monthly fee and get to watch a movie at a movie theater, once a day. It’s a great deal if you’re a consumer. But what seems different about MoviePass than other companies is that seemingly everybody scrutinized that business model. “How are they going to make money?,” is a question that I often get whenever I try to refer people to MoviePass. (Sign up through this link, and MoviePass gets a little more unprofitable because you’ll get a free month of movies.)
Roose correctly tells us that simple arithmetic dictates that at one time, “in order to survive, businesses had to sell goods or services above cost.” MoviePass—or any other company—can’t survive much less thrive by selling products below cost forever. But what Roose misses is that this is not unique to our era. The price-over-cost model is not, as Roose writes, “so 20th century.” We saw companies giving things away in exchange for user growth in the dot-com era. I reminisced about the dot-com era when I was writing about the online wholesale vendor Boxed.
Back in the late 1990s, there were a bunch of dot-com companies that were basically giving away the store in order to show sales growth. [Boxed] seems like one of those: a startup outfit that’s trying to rack up sales, even at a loss, to show their investors that they should keep investing.
Indeed, Roose explains why so there are so many unprofitable companies. He explains:
The rise in unprofitable companies is partly the result of growth in the technology and biotech sectors, where companies tend to lose money for years as they spend on customer acquisition and research and development, Mr. Ritter said. But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential “winner-take-all” market. You should take advantage and stock up on toilet paper before the bubble bursts.
This is like Robin Hood giving us free stuff at the expense of rich venture capital firms. We as consumers should take advantage of that, and I’m sure millions of us have. Have you sign up for a meal kit service and had cheap meals delivered to your home? And after you burned through the sign-up credit, did you sign up with another meal kit service? Great. Keep that up, and don’t forget to get one for your dog, too.
Roose sounds alarmist about the impending doom that will befall an economy that is so heavily based on future user growth. He’s right. This can’t keep up forever. As we’ve seen multiple times in our lives, after all, bubbles like these burst. And the bigger it gets, the more spectacular the crash will be.
In the meantime, it’s a party for us consumers. Even Roose scored a deal through, Beepi, the defunct used car marketplace that shut down two years ago. He revels that the company lasted long enough for him to buy “a car through the service for thousands of dollars less than its market value. Thanks, venture capitalists!” I’m with him on this one. Let the rich VC douchebags fund our movies, our meals, our pet’s meals, and our bulk toilet paper purchases. This won’t last forever so stock up and sign up for every money losing service you can.
And don’t forget to sign up through your friends’ referral links. They deserve more free stuff, too!
Update: There is of course one glaring exception to this model. That is Uber and the “ridesharing” industry. Last year, Uber lost $4.5 billion dollars subsidizing cheap rides for users, but unlike other startups here, it also depressed the wages of its drivers. For those who depend on these wages for their livelihoods, it can lead to tragic outcomes.