The most worrisome aspect of this essay is that it questions whether Uber has a viable business model.
The OP argues that Uber will never be able to charge prices in excess of the level required by a traditional taxi/limo operator to be profitable for long enough to recoup the billions of dollars the company has burned by subsidizing the price of rides. Put another way, even if Uber drives every competing taxi/limo operator out of business, as soon as the company raises prices to cover costs -- vehicle, insurance, maintenance, fuel, credit card processing, license fees, and (at least for now) labor -- new entrants (and revived old entrants) would quickly come into the market, preventing Uber from keeping prices up.
If the OP is right, Uber is truly in a precarious situation, because, as Brad Feld recently wrote: "the markets reward growth until they don’t. Then they reward profitability. The trick is to be in a position to make the switch when you need to. Lots of CEOs and boards fantasize about this, but don’t actually have a plan in place to do this as they expect the future – where the switch from growth to profitability – will never come. Or, they hope the exit will happen before this moment."[1]
Uber doesn't seem to have a plan to make the switch. If the markets start demanding profitability (or at least a convincing plan for reaching profitability), Uber's wheels could indeed come off very quickly.
Gee, it's almost as if a municipality that valued the good provided by a shared-ride or car-for-hire service to their community would have an interest in creating an artificial monopoly for the sake of allowing such a service to operate in a profitable manner...
Price comparison against current taxi services operating in the US is akin to a price comparison of a complex medical procedure across US medical providers - there's a lack of transparency around pricing, and a bunch of gotchas, such as the driver not taking the optimal route or frowning at you for a mere 10% tip.
So until taxicab operators in major cities get a nifty app with guaranteed pricing most of people would just limit the price comparison to Uber vs Lyft.
In Singapore grab has added taxi's to it's fixed price or you can book a taxi with normal meter fare. At peak periods taxi with meter is about 25-35% cheaper and without peak 5-10% cheaper. The government has also allowed taxi companies to offer fixed fares from their apps the way things are going I don't think uber will be able to compete very long if it actually tries to be profitable.
> Put another way, even if Uber drives every competing taxi/limo operator out of business, as soon as the company raises prices to cover costs -- vehicle, insurance, maintenance, fuel, credit card processing, license fees, and (at least for now) labor -- new entrants (and revived old entrants) would quickly come into the market, preventing Uber from keeping prices up.
Not true -- Uber has a permanent moat, which is their steadfast, solitary willingness to be a no-tipping oasis, which others equally refuse to replicate.
More generally, the way tipping works, there is no clear, consistent, compatible expectation, so I'm forced into a position of either a) overpaying, b) committing a silent faux pas, or c) having negative feedback misinterpreted as stinginess or ignorance.
Would you not consider that a big deal? Are you really surprised about the existence of people who don't like the tipping system, or who don't consider "just stiff them" a valid workaround?
The alternative is not supporting a company who doesn't provide a living wage for their workers after they go into debt. They talk about making drivers entrepreneurs? That's just code for "we convinced some suckers to invest in a falling wage". Who do you know who invested in a black car and paid it off driving uber? There are similar stories with medallions, but that's a separate issue with separate solutions.
Lyft may have similar issues, but in cities without real taxi companies (e.g. Sf) there's no real alternative to being a part of this terrible "entrepeneurship". Tipping will put uber back on my phone.
Tipping isn't about scruples. Businesses with scruples would pay their employees a fair wage and price accordingly. And then immediately go out of business as everyone flocks to the competitor that's magically 20% cheaper (before the essentially mandatory 20% tip).
Tipping is entirely about being able to advertise a lower price than the actual customer cost. Unfortunately that is extremely effective, so if one company in a market accepts tips all the others basically have to.
Well, yeah, exactly, that's what the guys on Naked Capitalism have been saying for a while. Even if they establish their monopoly there is no barrier to entry for new competitors.
That moat only holds out aspiring competitors who compete using the same game Google plays. The person who can come up with a way to show you a grommet when you're thinking cloth clamp will break Google. How many times have you searched for an algorithm, knowing it exists, but not knowing its name? Search is still very broken, and after 20 years of Google is very ripe for disruption.
I think that's the point, though. To compete (as a new entrant) with Uber+Lyft, wouldn't you need to build infrastructure, win mindshare with drivers + passengers, and all the other things that Lyft and Uber have been spending years doing?
The argument of the 10-part series they put out on Uber is that main expense is the actual transportation, and you can't achieve meaningful economies of scale, which is the reason that livery services never expanded beyond regional monopolies previously. Relatively speaking the software is a commodity (and traditional taxi services remain competitors to Uber anyway -- likely more attractive in many cases if you take away the subsidized price difference).
And also Uber (more than Lyft) it's by far the major player, it's entrenched in people's imagination as the representative of the very service it provides, and it just works.
"Call an Uber" is as idiomatic today as "Google something".
I don't believe this non-equitable business model holds true when automated vehicles become an option. That is, I don't think Uber itself has a viable business model because they've sunk too much cash too quickly to be around long enough for it to be a great model.
However whomever has a fleet of automated vehicles could easily divert resources into an uber-like ride sharing app.
Cities that limit the number of taxi drivers allowed to work are demonstrating that there's a viable market-clearing price lower than current taxi rates.
the article is frustratingly light on actual reasoning about why uber can't become profitable. the tl;dr is basically "it looks bad so they're going to fail". it does look very bad but that in itself (even with the various details mentioned) doesn't shine a light on the path that uber will take to failure. it only shows that any path they could take is treacherous.
it's an opinion piece with a bunch of facts thrown around but no reasoning to thread it together. i wouldn't bother putting any weight on it's conclusions (or wasting your time reading it, if you haven't).
Uber’s real problem is that it is a staggeringly unprofitable company with fundamentally uncompetitive economics. It lost $2 billion in 2015, $3 billion in 2016, and another billion in China. It is a higher cost, less efficient producer of taxi service than traditional operators; all of its growth is explained by these multi-billion dollar subsidies as it has flooded markets with additional capacity offering unprofitably low fares.
It has none of the scale or network economies that allowed other startups to quickly grow into profitability. In its fifth year of operation Facebook had achieved 25% profit margins; in Uber’s fifth year its profit margins were negative 149%. Absolute Uber losses have continued to worsen with recent growth. Margins improved somewhat in 2016, but only because Uber unilaterally reduced driver compensation by $1 billion, leading to news reports of drivers sleeping in the cars in order to make ends meet. Uber never had any hope of profitability in a competitive market, even at its present scale.
The response to that has always been that if they can stay afloat until autonomous vehicles arrive, they can cut costs to the point where they're profitable. Beyond that, with the driver costs out of the picture, the cost of an autonomous ride would actually be below the per-mile cost of driving your own vehicle to the point where Uber would ride a wave of decreased individual ownership and reliance on car-hailing services.
The WayMo lawsuit, in which Google appears to have a pretty airtight case, has destroyed that hope. It's the Carpathia radioing that they're 4 hours away. There's no help coming and the Titanic is going down.
Now all these shifts are likely still going to happen. A seemingly cogent analysis I came across recently [1] breaks down the costs and strongly argues for a future where individual vehicle ownership is the departure from the norm rather than the default that it is today. But it just won't be Uber that cashes in on it. Or, more accurately, it won't be the current Uber. If Uber goes down in flames, their carcass will be plucked and someone, perhaps Google in the lawsuit settlement, will come away with Uber's brand and logistics platform that can be paired with self-driving technology to achieve Uber's vision.
Even if they could survive until they can switch to autonomous cars, that would remove the barrier to entry for competitors because they wouldn't have to convince drivers to use them. There's more on this comment from last year:
The Waymo lawsuit shouldn't affect Uber much. Google's LIDAR is rotating machinery for experimental vehicles, not production use. The production products will be flash LIDAR at a low price point. From Continental, definitely, and Quanergy, maybe. (Quanergy, maybe not. They've been talking big since 2015, but haven't shipped.)
I will read this, but from an intuitive perspective Uber should have dramatically better economics vs taxis in places where the minimum buy-in is a $1m medallion purchase.
that article is better, but that doesn't change the fact that the originally linked article is a puff piece.
even in your article, it's not obvious that the economics of uber is doomed. it doesn't talk about the economics of the taxi industry, but simply makes a big assumption that it's an efficient market (just considering medallions should make you skeptical of that claim), so uber must get it's economics in line with the taxi industry. that's not obvious. (maybe it's explained in the 10 parts, but 10 parts?!?! seems like an editor might be warranted).
to be clear, i'm not defending uber, just that the arguments presented aren't so convincing once you dig into them a bit (and appeals to authority make me even more skeptical. it's like saying "trust me"... it sets the alarm bells off).
It might be puff piece, but at least it does not focus on "toxic culture forced CEO to resign". The latter story might feel good and thus be more popular, but is less likely reason for investors revolution then "they are losing money, have no plan and are overall ineffective".
It is true that former CEO personality was important for uber and different dude or lady could not achieve the same, but achievement here is losing tons of money on business that does not seem to be profitable ever. That is odd definition of winning.
The reasoning in the article seemed strong to me: Street level transport is a commodity and the market is mature. There is a maximum amount of value to extract from this business and the current companies almost do that. Uber spent way more money than the industry is likely to generate to try and steal their business.
Combine that seemingly solid market reasoning with them being opposed often and them fucking up almost as often and it seems surprising they are still functioning now. Their are missing leadership, their investors are unlikely to assemble a stellar team, there are existing internal and external problems. This seems overwhelming for all but the most profitable companies, and that is just what was in this short article. Even if it is wrong the reasoning seems solid. News facts or or astounding leadership at Uber are required to pull out of such a deep hole.
Their master stroke was supposed to be a self driving taxi, but they are no closer than anyone else and their bill is due. They appear to have an existential need to have that desperation move work for them for at least a few years before anyone else gets in on it. If they succeed then likely Google and Telsa will succeed within a few months of them. There appears to be no situations where they can recoup losses at a reasonable rate.
I could be totally wrong, but it looks suspicious as hell. If I had money to invest at a scale that mattered to Uber, I sure wouldn't go with them.
your summary of the reasoning is much better than the article itself, which simply asserts that uber is doomed while randomly citing recent developments in the news about uber.
given what i know (which is admittedly not much), i probably wouldn't invest in uber at this point either, but i remain skeptical that the taxi industry is a mature and efficient market, such that uber has no path to profitability (setting aside all their other asinine self-inflicted wounds).
I could be convinced to be more neutral by as little as a reasonable argument that they have a plan. I have not yet seen this plan. I have seen both pro and anti uber zealots though.
The reasoning seems pretty straightforward. Uber is only cheaper than taxis because investors are subsidizing the operating costs. They won't be able to do that forever and become a viable business, and there isn't a very high barrier to entry for competitors even if they somehow manage to snuff out all other traditional cab operators and Lyft etc, because once they raise the prices new competitors can swoop in.
Naked Capitalism did a series of posts on Uber back in November/December of 2016 that did have a lot more facts and reasoning behind them. They probably figured their readers are already familiar with those posts and didn't want to be redundant. You should read those before blithely assuming they don't know what they're talking about.
> It's a question if uber can race to self driving cars fast enough.
I'm not sure that's true though; I don't get the oft-repeated logic that self-driving cars will save Uber. OK, they save on labor costs, but right one now of Uber's (slimy, IMO, but significant nonetheless) major savings is pushing vehicle maintenance and deprecation costs onto their drivers. They won't be able to do that with self-driving cars: they'll have to pay operate a fleet, in direct competition with automakers.
> Uber's (slimy, IMO, but significant nonetheless) major savings is pushing vehicle maintenance and deprecation costs onto their drivers.
This is fallacious. The end-user pays for vehicle maintenance and depreciation. There cannot be any savings by pushing around which party writes the cheque as the only source of income to pay that cheque can be the end-user.
You're assuming perfect information, rational behaviour, and the same maintenance standards. Uber can save money at the expense of their drivers if drivers underestimate maintenance and depreciation costs. If they manage to shift liability for inadequate maintenance onto drivers they could also save money by under-maintaining and then allowing the resulting fines to bankrupt individuals rather than cost the company profits.
Self-driving is an engineering problem so I think a good guess is that a strong engineering company will get it to market first: Google. If that happens, wouldn't Google just start their own ride-sharing service, and drop it right into google maps so customers never even try uber?
I disagree with the idea that self-driving cars will have the same commodity issue as today's car ride services. How could a significant decrease in operating expenses not increase the profit margin?
Let's put it this way - if you had the choice between paying 1/5th of what you pay now for the cheapest ride available, or half what you pay now for a ride in a nicer, cleaner car that picks you up within seconds, which would you pick? My guess is that with those choices, more people won't pick the cheapest option available.
> That's really the only way their financial model can make sense.
Theirs and Tesla's, Faraday Future's, Ford's, Waymo's, Nutonomy's, Apple's (?), Yandex's, Audi's, GM's, Land Rover's, Hyundai's, BMW' and a few others I missed but that can be found by Googling "* investing self driving".
If this is true if uber, that it has no path to profitability, isn't it also true of ubers competitors? Their price points are fairly similar and they all, at some point, offer incentives to ensure you keep using their service.
Yes. The argument is that there simply isn't $80 billion to be made in the taxi industry; it's inherently a comodity business where boring companies should be able to make a steady 2% return rather than the kind of industry where a company that manages to sieze the market can make it back in monopoly rents.
What would be interesting would be to see how far all the ridesharing revenues would have gone in actually really good public and municipal transportation and many other lifestyle changes (i.e. what if every company reduced to a 4-day work week, or at least a mandatory 1-day work from home in applicable industries.)
it would be interesting to see where ridesharing investment money and the revenues the companies made could have ad a differing/better/other impact, just as a matter of looking at all possible outcomes as opposed to simply taken the state of things as a given.
If this is true if uber, that it has no path to profitability, isn't it also true of ubers competitors?
A lot of Uber's costs to date have been proving that ride-sharing is a thing that consumers want to do (market education) and that governments don't want to stop (lobbying). Their competition get the benefit of that Uber's investment in those things for free, so it might be the case that Uber will fail and their competition won't.
That's by no means saying it's definitely the case, but being the first mover has downsides as well as advantages.
Forgive me if I am being slow but what is the actual difference between "ride sharing" and "unlicensed minicab"? I mean that seems to be the crux of all Uber's regulatory woes - that they are either unwilling or unable to articulate it.
The difference is ride sharing is when the driver was going to do the ride anyway, and the passengers are just sharing the ride, hence the name. It's historically been mildly popular, for instance, on weekends and other breaks with trips originating at and returning to college campuses.
Of course, none of the big “ride sharing companies” have anything to do with actual ride sharing.
On the face of it there is no difference. Uber's reasoning seems to be that even if the driver is the same as a minicab that's nothing to do with Uber. All they claim to do is connect drivers with passengers in a convenient app. They say they're no more liable for the legality of the ride as the phone company is if you call a cab company that isn't compliant with the law.
I think there are lots of companies that can capture the market better and for less money. Just look at mytaxi in Europe for a smaller scale conpany that is expanding rapidly.
You can also hold political bias and fake a "strong" analysis, especially if your audience already agrees with or desires the outcome in your conclusion.
What I will say is that the author's bias has given him/her some major blinders and that s/he's become incapable of seeing ways in which s/he is wrong. My suggestion is that the author engage in a forecasting technique developed at Royal Dutch Shell known as scenario planning. One of the key features of scenario planning is that whenever you finish arriving at a conclusion, you then ask yourself the question, "the future that I predicted turned out to be wildly incorrect and X happened instead of Y. Which of my assumptions or expectations turned out to be incorrect that could lead to X happening instead of Y?" These days, this is actually a hallmark feature I look for in anyone forecasting or making predictions of any sort. If someone making a prediction has not given sufficient thought to being their own devil's advocate, it's a telltale sign of poor analysis. If you don't spend enough time doing this, you quickly get sucked into believing your own bullshit. Given the tone of this blog, do you think this author has spent enough time time poking holes in their own arguments? Have you seen many or any lines like "I believe X will happen leading to A, but it's possible that Y could happen leading to B instead and this is how it would change my predictions...". If someone's predictions don't present any possibilities for branching, they aren't being critical in their analysis, if you can even call it that.
The list of cognitive biases the author falls victim too are numerous. Over several posts I've definitely seen lots of examples of anchoring for example.
> It's not the source's responsibility to be 100% unbiased.
100% no bias isn't possible. However, are you suggesting that that they shouldn't even try to mitigate their biases? Not every reader is as informed as authors who have taken time to research a topic. Society commonly defers to experts. If it becomes common and accepted for experts to allow or even embrace their biases unabashedly, then there is no reason to defer to experts any more because we will never know if we're being subject to an endless stream of lies of omission.
> If you can't elaborate on your judgement, perhaps it's you who have blinders on?
That's totally possible. However I know for my own sake that I have certainly considered many of the assumptions and predictions the OP presented. That doesn't help you any, but it doesn't hurt you either because I haven't provided any of my own analysis (with my own biases) in the other direction either. I merely provided you with some new tools to better evaluate the predictions made by the OP. If you choose not to use those tools, that's your prerogative.
People misunderstand Uber's motives. They are not slimy.
Quite the opposite: they are a public good. The company is the front end for a giant charitable effort by venture capitalists. They are pouring money into uber, to help it drive down the costs of urban transportation, enabling people in cities to have more money available for necessities like rent, diapers, and food.
Is this a joke? They are pouring money into building a monopoly, so they can raise prices when they eventually control urban and suburban transportation.
Whoosh! Yes, I meant it as satire, but I guess I my tone was too serious. There goes my career in comedy.
But on a more serious note, the arrogance of uber (and its backers) reminds me of times before the welfare state, before governments created barriers to unbridled capitalism. Those times were hard for the disempowered poor. If you were very rich, you could reclaim virtue by leaving your fortune to some public charity, or the church. Or you could be a patron for the arts, supporting writers and artists (that's why so many old novels are dedicated to rich patrons). Or you could pay to fund a piece of urban infrastructure, like a park or school.
That's the tone I was appealing to, but I ruined the joke by explaining it.
After the French revolution, then Bismarck's Germany, and finally post-WW1 Europe, the working class gained some power, and introduced some barriers to exploitation by the wealthy classes: barriers like unions, minimum wages, workplace safety regulations, environmental protection, and eventually taxpayer-funded medical care.
Since the 1970s, there has been a wave of corporate propaganda against these barriers. They have been called "unnecessary regulation" and "loss of personal freedom". Uber has adopted that attitude too. I think they are reactionaries who want to dismantle structures that help the working class.
It's the same reason for why "investor class" let Amazon run on negative to slim profits for so long (allowing them to compete with others that could not do this).
Some (I think it was Gruber) said it's like a subsidy from Wall Street to Amazon customers.
I feel that reasoning is short-sighted and dangerous.
Of course capitalists want to make money. Their primary goal is very far from charity. They don't want to improve the common weal (although publicly they say they want to help, and some even convince themselves they mean to help society, to rationalize their selfish motives).
I'm a bit disturbed that people took my satire seriously. Are rich people different now? Is that what people think?
This is incorrect. Ask anyone who has had an insider peek of any on-demand company's finances. The largest cost to all of these companies is employee acquisition, which continues to rise.
Take your own advice and do the unscientific thing of talking to the drivers. How many of them are new? How many are old? Surprising how many of those fall into the first category.
By some measures Uber has been fabulously successful, coming from nowhere to the largest privately held company in seven years, and now a $70 billion g/publicly traded/private/ company.
Uber has done a stunning job of disrupting a crony-capitalist, monopolistic system. If they are still searching for a way to make a profit, surely they'll figure it out before long.
Uber loses money, but it doesn't sell rides at a loss. Up to 2015 at least (the date of the best finance leak I've seen), Uber's cut of fares was ~18%; and furthermore, that 18% cut more than covered Uber's costs of sales.
Uber actually makes money on each ride - it's just that the gross profit from those rides is short of covering its operating expenses. 12,000 employees are not inexpensive.
Based on these financials, if Uber halted most software development and halted subsidies into underdeveloped markets, it seems quite plausible the company would become profitable. Investors might not recoup their whole investments, but the company in zombie could earn back some profits.
Maybe I don't understand the charts and the article you linked to but it says that:
"Uber passengers were paying only 41% of the actual cost of their trips; Uber was using these massive subsidies to undercut the fares and provide more capacity than the competitors who had to cover 100% of their costs out of passenger fares."
On an average cost basis that includes fixed costs, yes, Uber was losing money on each ride. But on a variable cost basis, Uber was making money. Each additional ride served was bringing them closer, not further, from profitability.
Gross margins were positive even if overall margins were negative.
They have 12,000 employees, apparently. Diversity numbers they released earlier this year bucketed those employees into tech, non-tech, and customer support.
Their fixed costs probably include R&D (tech) and SG&A (non-tech). Customer support depends on how they do their accounting.
How are they selling a product at a loss? They're brokering thousands of people to rideshare their cars. Very low overhead. Seems like a brilliant business model, actually.
Eight months ago, I would have absolutely agreed. Heck, even a few months ago when Travis Kalanick started recruting a COO, I would have agreed that the company is trying to rush to a liquidity event. Today though, I think that rushing to an IPO would be completely irrational and end with Uber trading at a small fraction of their most recent private valuation.
Right now, there is a huge vacuum at the CEO/COO/CFO troika. That, combined with the sordid Waymo lawsuit, would give any institutional investor pause before buying a strong position. Consequently, I would argue that Uber needs some strong leadership at the top, and some sort of resolution on the Waymo lawsuit before they can consider going public.
I wouldn't be surprised if Uber was acquired, but I would be very surprised if Uber goes public in the next two years.
> Today though, I think that rushing to an IPO would be completely irrational and end with Uber trading at a small fraction of their most recent private valuation.
I tend to agree. I don't think that at this point they would try to IPO but if the numbers circulating are correct they will need cash in less than a year time and it might be tricky to raise this.
The OP argues that Uber will never be able to charge prices in excess of the level required by a traditional taxi/limo operator to be profitable for long enough to recoup the billions of dollars the company has burned by subsidizing the price of rides. Put another way, even if Uber drives every competing taxi/limo operator out of business, as soon as the company raises prices to cover costs -- vehicle, insurance, maintenance, fuel, credit card processing, license fees, and (at least for now) labor -- new entrants (and revived old entrants) would quickly come into the market, preventing Uber from keeping prices up.
If the OP is right, Uber is truly in a precarious situation, because, as Brad Feld recently wrote: "the markets reward growth until they don’t. Then they reward profitability. The trick is to be in a position to make the switch when you need to. Lots of CEOs and boards fantasize about this, but don’t actually have a plan in place to do this as they expect the future – where the switch from growth to profitability – will never come. Or, they hope the exit will happen before this moment."[1]
Uber doesn't seem to have a plan to make the switch. If the markets start demanding profitability (or at least a convincing plan for reaching profitability), Uber's wheels could indeed come off very quickly.
[1] https://www.feld.com/archives/2017/06/lessons-internet-bubbl...