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Why Uber is a Better Business than Facebook

When you're building a platform that serves billions, how to decide to make your money matters. Uber, for all its toxicity under its former CEO Travis Kalanick makes it money by generating true value for both sides of every transaction; riders get cheaper rides while drivers make money from an asset they own.

I think of this as a business model based on a balanced transaction. Each transaction generates revenue because the consumer pays the seller for value received, while the platform gets a cut for making it happen, fueling the entire system. This is good money. In an ideal world you would not subsidize the price as Uber did, but gradually raise the prices to the level customers were willing to bear and then keep it to that (taking venture money later than earlier is the lesson there ). As competition stressed your business model, you would innovate new offerings and optimize your internal workings to stay efficient and lean growing slowly and in response to market forces.

You may still need to blitzscale, but this is more like opening up franchises of Coca-Cola worldwide. The recipe stays with you but you allow local players into a piece of the action. If it's a purely digital product like Stripe, scale in built-in to the product. If its mix of digital and physical products, and needs feet on the street -- like Wag for example -- you are better off franchising and setting a high bar for the quality of the franchise than owning assets and employees worldwide.

This is good for everyone. True value is hard to copy and stands the test of time. And when it does get copied, you have already established a brand attribute of quality you can build on to introduce newer and higher-value products that will inherit the halo of your previous product. In other words, you've built a brand and not just a product.

By comparison, Facebook has a business model based on unbalanced transactions. Money is not made by the consumer paying for value received. Instead, its made by taking money from advertisers who want to sell you stuff. This is bad money. Their business model requires that they convert human attention -- naturally a variable -- to a constant so that they can tell make selling predictable for its advertisers. They need to addict you to survive. And since only extreme emotions have the power to transfix us (by hijacking our amygdala) you are seeing just the next chapter of a pretty predictable business model. You really are a user.

Because Facebook needs to differentiate from other forms of selling, it also needs to provide advertisers something only the internet can: detailed information on your habits, needs, and desires. To make more money Facebook has to ensure you spend increasingly more time on their platform and provide their advertisers with increasingly more precise data on your wants, needs, and desires. Add to this the fact that each feed is different, making having shared conversations impossible, it's easy to see why it is such a good tool for waging psychological warfare. In an odd twist, Facebook itself is addicted to advertising money in the same way it needs you to stay addicted to Facebook.

This is bad money because it is created not by creating true value for parties in a transaction and the platform taking a cut for it. Here money is created by one side paying the platform to sell to the other side whether the other side needs it or not. Basically, the platform cannot say no since as a marketplace, it cannot have an opinion on what can or cannot be sold. Worse, empowering only one side of the transaction leads, like in every other relationship, to abuse. Value is best served when both sides of a business transaction have power equally so one side regulates the other.

If you're starting your business, resolve to make money from balanced transactions.

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