When done right, software is far more profitable than any product manufactured from physical materials: Once you’ve built your app or program, you can copy it an infinite number of times at no additional cost, whereas running real-world widgets off a production line will always cost you a certain amount per unit. Sure, you need data centers to hold customer data, and customer-service people to deal with bugs—but those costs are nothing compared to the resources and employees needed to run physical infrastructure. There’s a reason why Facebook has just over 7,000 employees, while car manufacturer Ford has 181,000.
That economy of scale is one reason why many tech companies have proven so profitable over the past few decades. But for the latest generation of “disruptive” apps such as Uber and Lyft, a deep reliance on real-world infrastructure may wreck that old, reliable framework. As Marcus Wohlsen recently explained in Wired, these new apps use software to milk greater efficiencies from older business models such as car services or local delivery, which requires drivers—lots of drivers.
That need for drivers is at the root of the vicious battle currently raging between Uber and Lyft in New York City and other metropolises. Real-world costs such as driver salaries will also make it that much more difficult for those apps to squeeze out the incredible margins enjoyed by traditional software firms and app developers. “To get, keep, and expand its roster of drivers, Uber must sink money into marketing, operations, and insurance in a way that, say, Google or Facebook never had to,” Wohlsen wrote in his piece. “Such on-the-ground expenditures don’t carry the obvious promise of an exponential return on investment.”
That’s not to say that Uber won’t achieve its goal of becoming a multi-billion-dollar company devoted to transporting people and goods. But for those interested in starting their own company, particularly one that deals with tech, it’s worth considering how much your product depends on things and people—whether widgets, employees, or contractors—that rapidly increase in cost as the business grows, without necessarily adding proportionally more value to the bottom line.
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