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--:-- Noelle King: Welcome to Today Explained. I'm Noelle King. I have bad eyes and psychotic spatial reasoning and a perverse sense of direction. And as a result, I do not own a car. So for a decade-ish, I've relied on the apps, the Ubers, the grocery delivery. They've made my life easier and they've been cheap.
--:-- Noelle King: When you've been ordering an Uber or ordering a Lyft or getting something delivered on DoorDash and you paid a price for it, almost every time you were paying that price, I would argue that you were getting a little bit of a subsidy from venture capital. A subsidy. The reason we were all paying prices that seemed literally too low was that those startups wanted us as customers and they were happy to undercharge. And I call this whole arrangement the Millennial Lifestyle Subsidy.
--:-- Noelle King: Coming up, changing times. Explained Today by Atlantic writer and millennial Derek Thompson. Support for Today Explained comes from Saks Fifth Avenue. Fall is here. Might be time to find some nice new pieces you can wear again and again. With Saks Fifth Avenue, it can be a breeze to shop for your personal style.
--:-- Noelle King: This is very Sean. This is very Sean-coated. Gucci loafers. Saks says Saks makes shopping feel totally customized to you, whether that's from an in-store stylist or a visit to Saks.com, where they can show you just what you want to see. They say they'll even let you know when arrivals from your favorite designers are in or when something you've been eyeing is back in stock. You can find inspiration for your personal style every day at Saks Fifth Avenue.
--:-- Noelle King: Support for this show comes from strawberry.me. Be honest. Are you happy with your job? Or are you stuck in one you've outgrown? or never wanted in the first place? Sure, you can probably list the reasons for staying, but are they actually just excuses for not leaving? Let a career coach from strawberry.me help you get unstuck. Discover the benefits of having a dedicated career coach in your corner. Go to strawberry.me slash unstuck to claim a special offer.
--:-- Derek Thompson: When did you first start noticing that there was a subsidy for the millennial lifestyle? There were a couple economic papers that were published in the mid-2010s. They were pointing out that Uber prices were being kept artificially low, essentially because venture capitalists were subsidizing those prices.
--:-- Derek Thompson: And I remember joking around that it was as if venture capitalists had, you know, out of the goodness of their hearts, decided to give all the millennials that live in New York City, Washington, D.C., and San Francisco a little bit of extra spending cash because they just felt like we deserved it.
--:-- Kevin Roos: Hi, I'm Kevin Roos. I'm a technology columnist for the New York Times. And we went back and forth about what exactly was going on. And one or the other of us, I actually don't remember which, said, you know, it's like a millennial lifestyle subsidy. I can't know for sure whether it was me or Derek, but as a magnanimous gesture of friendship and goodwill, I will release it to him and he can be the lawful creator.
--:-- Derek Thompson: And the word just caught on, and the observation really caught on. This fact that if you interacted with this fleet of companies, you know, if you went to bed on a Casper, and you, you know, went to work in an Uber, and then you ordered lunch through DoorDash, and you came home in a Lyft, and maybe you did a Lime scooter ride somewhere around the city, you were essentially interacting with a fleet of companies that were losing billions of dollars a year.
--:-- Derek Thompson: And if they were losing billions of dollars a year, then those losses being subsidized by venture capitalists were cashing out, in a way, in low prices. We were paying low prices for these services. And this is a story that was, you know, wonderful for consumers and maybe not so wonderful for people that were working for these companies for a long time.
--:-- Derek Thompson: And I do think that this story is now coming to an end. What is the rationale for an American company in a capitalist country being totally cool with not making money or even losing money? Yeah, it does seem kind of confusing, right?
--:-- Derek Thompson: It's like, wait, I thought the whole thing with capitalism was that these greedy capitalists were trying to make money from consumers by jacking up the price when they could. But in fact, for a while, it was rational, in a strange way, to not try to be profitable on a sale per sale basis.
--:-- Derek Thompson: Let's consider a really simple example. Let's consider a pizza delivery in New York City. Let's say that the ingredients and the labor and the transportation cost of that pizza delivery in New York City Average is about 20 bucks. Now I'm making up that number, but let's just make it really simple 20 bucks.
--:-- Derek Thompson: If the company charges $21 For the average New York City pizza delivery It makes a profit of $1. But if it charges $10 Sure, it loses money on every individual pizza, but it gets a lot more pizza orders.
--:-- Derek Thompson: So suddenly you're just totally swimming in pizza orders. And when they show their investors what's going on with the business, they're like, oh my God, look at all these customers. Look at all this revenue.
--:-- Derek Thompson: And the investors are dealing with a zero rate environment, a low interest rate environment, where they're looking for long-term growth rather than short-term profit. And so in a very strange way, as long as money was cheap and Silicon Valley investors were telling themselves that they could build the next world-conquering consumer tech firm, the next Amazon, in the next funding round, the best way for a startup to make money from investors was to lose money acquiring customers.
--:-- Derek Thompson: And that's how you get to this bizarre rationale where losing money actually is rational.
--:-- Derek Thompson: Okay, talk about how low interest rates play into this, because obviously they do. What happens when money is cheap, Derek? When money is cheap when interest rates are near zero investors want to put their money into longer bets.
--:-- Derek Thompson: The bets get crowded. Equities get expensive. In the everything boom as I described it in my podcast we talked about this everything boom where kind of everything was expensive. Stocks were expensive and real estate was expensive and bonds.
--:-- Derek Thompson: And so investors are like, okay, where's yield? And yield, they said, yield would come from these big bets on building the next Amazon. They said, we're going to subsidize these companies, right? The Pelotons, the WeWorks, the Ubers, the Lyfts, the DoorDashes, we're going to subsidize them in the short run.
--:-- Derek Thompson: They'll lose a lot of money acquiring new consumers, but eventually they'll grow their total user base, monopolize whatever little industry that they're in, and eventually they'll be able to flip that switch, suddenly raise prices, and we'll be reigning in profits.
--:-- Derek Thompson: We won't be reigning in profits now or in five years, but maybe in 10 years, this will be our lot. Why would you go after revenue? Because to make money? No. If you show revenue, people will ask how much and it will never be enough.
--:-- Derek Thompson: The company that was the 100Xer, the 1,000Xer becomes the 2X dog. But if you have no revenue, you can say you're pre-revenue. You're a potential pure play. It's not about how much you earn. It's about what you're worth.
--:-- Derek Thompson: And who's worth the most? Companies that lose money.
--:-- Noelle King: Can I speak on behalf of wounded millennials for a second? Are you a millennial? I am a millennial, yes. So when I use the term in any kind of pejorative way, I am being a little bit masochistic.
--:-- Derek Thompson: Was there a moment of peak millennial lifestyle subsidy? I'd say it was probably like 2015, 2016. In the middle of the 2010s, you had a couple things going for the millennial lifestyle subsidy.
--:-- Derek Thompson: Number one, unfortunately, you had an abundance of cheap labor, right? You still had high unemployment, so you had a lot of people that were willing to drive Uber and Lyft for a living.
--:-- Derek Thompson: Number two, you had really low interest rates, which meant that these venture capitalists were willing to spend gobs and gobs of money holding down the price of Ubers and Lyft in the hopes that eventually, essentially, they'd drive all the taxi businesses out of business and be able to dominate those markets.
--:-- Derek Thompson: So I'd say maybe the 2015-2016 era was the high-water mark of the millennial lifestyle subsidy.
--:-- Derek Thompson: I am hurt because here's why. We got these nice subsidies, and yes, they worked in our favor, and I loved the Ubers, and I loved the DoorDashes.
--:-- Derek Thompson: But this whole time, the point was to make it so that there was only one Uber and then, like, yellow cab, and I would become dependent on Uber and Uber would be the only company on the playing field.
--:-- Derek Thompson: And so I would have to rely on Uber and then Uber was going to raise their prices on me. That's where we were headed.
--:-- Noelle King: I'm really glad that you raised that point because there's actually two problems that you can point out with the millennial consumer subsidy, right? I don't want to talk about this thing like it's purely good. It's not.
--:-- Derek Thompson: Number one, attempts to monopolize any industry can sometimes lead to driving perfectly good businesses out of business. Right. John Schall is fed up. The owner of El Jefe's Taqueria in Cambridge says delivery companies have been sucking him dry.
--:-- Derek Thompson: It's not sustainable. I can't keep losing money. If you're a pizza company that's been operating for a long time, eking out a profit and suddenly this venture backed company comes in and totally undercuts you and drives you out of business. That's not great for you. Right.
--:-- Derek Thompson: Why only successful restaurants make 8 to 10 percent profit? When we're paying 18 to 20 percent of our revenue to the delivery companies, there's no way a restaurant can make it.
--:-- Derek Thompson: So that's one little dark wrinkle with the millennial consumer subsidy. But there's a darker wrinkle. And that is that the reason interest rates were low and the reason that this entire charade could even happen is that in the 2010s, demand was weak.
--:-- Derek Thompson: Labor markets were weak. it was not a great time for low-income people to find work that paid a living wage. And as a result, companies like DoorDash and Uber were dealing with this enormous low-income labor pool that would work for their companies without health insurance, without compensation, without benefits.
--:-- Derek Thompson: And you can argue that their relationship with these workers was mildly predatory. So in many ways, our cheap Uber prices and our cheap DoorDash prices were made possible by this slightly predatory relationship with low-income labor.
--:-- Derek Thompson: And now that is changing. You see the great resignation. You see quits rising and job openings rising and nominal wage growth rising among the low-income labor force. That's all good stuff.
--:-- Derek Thompson: When does everyone involved in the millennial lifestyle subsidy start to realize, uh-oh, this might not be working in the long term? Well, I think for a lot of people, they thought it would always work in the long term.
--:-- Derek Thompson: A lot of people probably assumed that low interest rates were here to stay and that weak labor was here to stay. But certainly, cracks started to appear in the edifice when you had the rise of inflation in 2021 and 2022.
--:-- Derek Thompson: Because that's when the Federal Reserve really started on this campaign of bringing down inflation by raising interest rates. And what happened when interest rates went up is that it sent a signal to Silicon Valley.
--:-- Derek Thompson: It sent a signal to this crop of growth startups that the game was over. The music was finally over. And we were entering a new regime of tighter money, more expensive loans, and less of this sort of infinite subsidization of the millennial lifestyle.
--:-- Noelle King: Support for Today Explained comes from Built Rewards. These days it seems like everybody has a rewards program. You swipe your card and you get one cent on the hundred dollars. But with your rent frequently you just pay month after month. You never get anything from it other than that roof over your head.
--:-- Noelle King: Not anymore, says Built Rewards. Built Rewards says it lets you earn points on your rent. By paying rent through Built, they say you can earn flexible points that can be redeemed toward hundreds of hotels and airlines, perhaps a future rent payment, your next Lyft ride, and so much more.
--:-- Derek Thompson: When super giant pizza, plain, nothing on it. It's Today Explained, Derek Thompson, writer at the Atlantic, millennial, and let's say, co-coiner of the term millennial lifestyle subsidy.
--:-- Derek Thompson: Okay, so the subsidy that venture capital provided changed the way we lived. It changed the way we spend money. And then what? You started to notice things changing?
--:-- Derek Thompson: For a long time, the phenomenon of cheap Uber rides and cheap Lyft rides and cheap DoorDash deliveries, it was invisible to me. You know, it was like seeing oxygen. It's like seeing nitrogen.
--:-- Derek Thompson: Like, it took a while to actually realize what was happening. It just seemed like, oh, yeah, of course. Some tech geniuses figured out a way to make everything cheap, and now everything's just really cheap.
--:-- Derek Thompson: And it took a while to realize, wait, the laws of economics still apply. Tech people can be really smart, but they don't wave away the fact of labor costs, the fact of oil costs, the fact of pad thai costs.
--:-- Derek Thompson: And so when these studies started to come out in the 2010s that were pointing to exactly how this mechanism was working, that you had venture capitalists putting money into companies that were delivering to consumers prices that were held artificially low, that I put one and one and one together and said, oh, I see, this is a subsidy.
--:-- Derek Thompson: The reason everything is cheap is that Silicon Valley is artificially holding down the price of all of these services in order to get me to use these services more. So that the companies can go back to the next round of investors and say, you know, not only is our user base like, you know, 1 million people, it's 50 million people.
--:-- Derek Thompson: Everyone is on this service because, you know, we're charging $5 for $10 pizza. Pizza!
--:-- Noelle King: Did the pandemic, like, throw a wrench in the works? Or did these companies slide through the pandemic pretty easily?
--:-- Derek Thompson: What makes answering that question, I guess, a little bit difficult is, remember when I was talking about, like, the two different ingredients in why Uber prices are low?
--:-- Derek Thompson: Yeah. On the one hand, you have lots of available labor, lots of people that are willing to drive Uber and Lyft because there aren't a lot of great opportunities for them. That was what ingredient number one.
--:-- Derek Thompson: And then ingredient number two was low interest rates, sort of fueling the millennial consumer subsidy. So interest rates throughout the pandemic were very, very low.
--:-- Derek Thompson: And there was certainly a period where unemployment was very high, which theoretically would be a good situation for Uber. But then that's complicated by the fact that it was an economic lockdown in a lot of metros.
--:-- Derek Thompson: And so people weren't driving to restaurants and bars at the same clip that they used to. The story that was clearer to me was that in 2018, 2019, just before the pandemic, the labor market started to get tight.
--:-- Derek Thompson: And that was difficult for Uber and Lyft. And then in 2021 and 2022, interest rates started to rise. And that got difficult for the Ubers and the Lyfts of the world.
--:-- Derek Thompson: And eventually, I think, once I caught on to that, I realized this game can't last forever. This music has to end eventually. And as interest rates finally started to go up, I realized, OK, this is the thing that's going to end the game.
--:-- Derek Thompson: Interest rates are going to rise and that's going to change the regime. The venture capital that has been underpinning all of these companies looks at rising interest rates and does what exactly?
--:-- Derek Thompson: Venture capital has suddenly said, you know what, we're not going to lend the same amount of money to companies in their Series A, Series B rounds. We're not going to give them the same amount of money.
--:-- Derek Thompson: It's been one of the most successful Silicon Valley firms over the decades. And Sequoia's advice to founders this time, preserve cash, cut costs, or you're not going to make it through this slowdown.
--:-- Derek Thompson: I got a copy of Sequoia. And that means that these companies don't have as much cash on hand to do business. So if they can't expect to get, you know, just tens of millions of dollars to get them through the next five years, they're like, wait, we only have enough cash to get us through maybe the next 12 months, the next 18 months.
--:-- Derek Thompson: So what do you do? What do you do if you're a company and all of a sudden you have much less cash on hand from venture capitalists? You suddenly have to change what I guess nerds would call your unit economics.
--:-- Derek Thompson: Rather than lose $5 on every single, say, Uber ride, you have to make $1 on every single Uber ride because that keeps the cash in the company, right? That means you have more free cash flow.
--:-- Derek Thompson: And so interest rates changing the behavior of venture capitalists changed the way that these companies did business. And it was no longer okay for them to just burn through tens of millions of dollars just handing it out like candy to millennials trying to get from Brooklyn to Manhattan.
--:-- Derek Thompson: Suddenly they were like no sorry those same Ubers from Brooklyn to Manhattan they need to make us money We need to keep cash inside the company. And that all cashes out as higher prices to get from you know one borough to another.
--:-- Noelle King: Are there any millennial lifestyle subsidy companies that not only are going to make it through this period, but you think are actually going to come out stronger on the other end?
--:-- Derek Thompson: I don't know which millennial consumer subsidy companies are going to come out stronger. But I have no doubt that some of them will come out of this period of inflation and possible recession and probably become absolutely ginormous companies in the future.
--:-- Derek Thompson: I mean, this is what we saw from the dot-com bust of 2000, right? At MotherNature.com, we're constantly checking out products. All sorts of companies went to zero, and most of them failed. Mother Nature fell along with everyone else.
--:-- Derek Thompson: Their stock had dropped to under $2 by April of 2000. But some of them became Amazon, you know? Well, I was on television with Tom Brokaw. He pulled together half a dozen internet entrepreneurs from that era.
--:-- Derek Thompson: And he said, Mr. Bezos, can you even spell profit? And I said, sure. P-R-O-P-H-E-T. I am pretty confident that we're going to see some of these companies continue to be absolutely enormous companies in the future by figuring out a few things and maybe by adding on divisions like AWS, right?
--:-- Derek Thompson: Amazon added a cloud business on top of its e-commerce business. And that's in large part why its profits have made it a multi-hundred billion dollar company.
--:-- Derek Thompson: So I have confidence that some of these companies are gonna figure it out. I don't know which of them are going to figure it out. And I think the difference is going to be something like this.
--:-- Derek Thompson: We're going to figure out in the next few years which CEOs were just good at raising money and which CEOs are good at actually being CEOs. Because raising money from venture capitalists and actually running a profitable business turn out to be two entirely different jobs that have been bound up, bundled up in the same sort of consumer tech, go-go, everything, boom, CEO job.
--:-- Derek Thompson: And right now, the inflation era we're passing through is going to disentangle those jobs. And we're going to see who can really run a business and who is just good at talking.
--:-- Noelle King: What are the real world implications for normal people as opposed to just venture capitalists who, fine, like, let them do what they do, but I'm not going to feel bad for them if they explode?
--:-- Derek Thompson: I'd say two things are up with that. Number one, our macroeconomic conditions are just much better for workers. When unemployment was 5%, 6%, 7%, you had a lot of low-income workers that had to work for Uber and weren't getting health care from Uber and weren't being paid very much money, but had to do it anyway because there weren't a lot of low-income jobs for them.
--:-- Derek Thompson: That would pay more than just driving Uber all day. That's changed. Nominal wage growth is rising faster for low-income workers than it is for middle or higher-income workers.
--:-- Derek Thompson: And as a result, Uber has to pay more to keep those workers in the driver's seat, literally, rather than working at, you know, a restaurant.
--:-- Derek Thompson: Another great question is, should people be upset when they see rising Uber prices? I always try to be soft with myself and with other people when they complain about prices rising.
--:-- Derek Thompson: Because on the one hand, it is absolutely the case that when prices rise, that often means that someone who is a worker and not just a venture capitalist billionaire is making more money. And that's great. It's great that low income people make more money.
--:-- Derek Thompson: But it is also, I think, definitionally annoying to want to go to the airport and think it's going to cost $35 and then look at the price on your phone and it's $90, right? That's annoying.
--:-- Derek Thompson: And when people say, oh, that's annoying, I don't think like, oh, you're a monster for not recognizing that the Uber driver made an extra $50 on that trip. Yeah, prices rising sucks. Like people don't like inflation.
--:-- Derek Thompson: This is one of the reasons why, you know, whether you're on the left or the right, you have to confront the fact that 8.6 percent inflation, which is what we have right now, is a political liability for someone like Joe Biden, is a political liability for anyone in office.
--:-- Derek Thompson: People are going to blame the regime that's in power. And there's a lot of blame going around because high prices just make people mad. So I tried to say, you know, you don't have to choose one of these or the other.
--:-- Derek Thompson: You can live with the awkward synthesis that on the one hand, I want people that are low-income workers to make a living wage. And also, I'm not going to beat myself up for being mildly annoyed by the sight of shockingly high prices.
--:-- Noelle King: Today's show was produced by Miles Bryan, Matthew Collette edited, fact checker Laura Bullard brought the skepticism, Paul Mounsey engineered. The rest of our team includes Halima Shah, Avishai Artsy, Hadi Moagdi, Victoria Chamberlain, Afim Shapiro, and my co-host, Sean Ramos-Furr.
--:-- Noelle King: Our audio fellow is Tori Dominguez. Our supervising producer is Amina El-Sadi. Vox's VP of audio is Liz Kelly Nelson. We use music by Breakmaster Cylinder and Noam Hassenfeld. Our show is part of the Vox Media Podcast Network, and it is distributed by WNYC Studios.
--:-- Noelle King: I'm Noelle King. It's Today Explained. Thank you. Thank you. Thank you.
