Hi everyone – welcome to 2017! I hope you all had a good Christmas and New Year’s Eve and are geared up for a big 2017.
Kicking off the year, this week, I happened to stumble on a series of articles written by Hubert Horan, who has spent the last 40 years working in the transportation industry, particularly the management and regulation of airlines. In a four-part series (two pieces were later added to respond to reader comments and look at newer evidence) published at nakedcapitalism.com, he takes a critical look at the Uber business model and dispels a bunch of myths.
Some of my longer-time readers may remember a two-piece series I wrote looking at the relative advantages of Uber and traditional taxis (Part I and Part II). This series of articles (links at the bottom) actually expands on many of the points I brought up in those articles, particularly Part II where I took a more critical look at some of Uber’s practices. The TLDR is as follows:
- Despite huge expansion across the globe, Uber is continuing to burn through investors’ cash at an unprecedented rate (around $2 billion a year).
- Although there have been large increases in revenues, there are no signs to date that Uber’s profitability (currently sitting at around -140%!) is improving due to ‘economies-of-scale’, older markets maturing, or other ‘optimizations’. In fact the only thing that has had a measurable impact on profitability has been cutting driver pay.
- Uber’s huge losses are primarily due to one thing – the expansion across the globe is being driven by subsidies. According to Horan, current Uber passengers are only paying around 41% of the cost of their rides due to these subsidies (I do note that no source was provided for this number).
- Paying drivers more than regular taxi services is one of the main ways Uber is attracting drivers. However, one of the things that allows Uber to do this is the fact that they have pushed one of the most significant costs of running a taxi onto the drivers – the actual ownership and maintenance of the car. Once the expenses of running and maintaining a car are taken into account, it is not clear that drivers are actually any better off, and in many cases, are probably worse off.
- This is something I touched on in my articles – many (most?) Uber drivers are simply not across concepts like depreciation and capital risk. For them net profit is simply ‘my share of fare revenue’ minus ‘gas costs’, which leads to a large proportion of Uber drivers continuing to drive when it is does not make economic sense for them to do so. A big part of Uber’s success has been their ability to take advantage of this ignorance.
So why are investors continuing to pour money into Uber if it isn’t making money and the current business model does not seem to make sense? I have heard two theories raised in response to this question.
The first is that Uber is simply buying time to get self-driving cars on the road, at which point, it can replace (a.k.a. fire) all its ‘driver-partners’ and Uber’s share of fare revenue goes from 30% to 100%. I was actually a believer in this theory until recently when Noah Smith made the counter-intuitive argument that self-driving technology is likely to be terrible for Uber. Why? Because every person with a self-driving car becomes a potential competitor for Uber. By simply renting out their car when they are not using it, they are competing with Uber and can do so at very low cost because they have none of the overheads Uber has. Sure, Uber will have the app, but the app is easy and cheap to recreate (as is evidenced by the 17 Uber clones in most cities already). But even without an app at all, a large portion of the market is going to go through the minimal hassle of calling or texting (or whatever else the kids are doing these days) someone for a ride if the price is even a couple of dollars better. Finally, even if Uber lowers prices to drive (pun intended) those people out of the market, as soon as prices rise again, all those individuals will re-enter the market due to the close to zero cost of doing so.
The second (and more realistic theory in my mind) is that Uber is aiming to drive all its competitors out of business and create a monopoly. Once it has a monopoly, it can lower driver pay and raise fare prices to extract monopoly profits. Uber’s behavior to date (the subsidies are simply predatory pricing with good publicity), as well as comments from prominent investors, would seem to lend credence to this theory. But even this theory has issues, the biggest of which would seem to be that it has a very limited window to operate in due to the imminent arrival of self-driving cars. I am probably more skeptical than most people on how soon self-driving cars will be on the streets of cities (10-20 years, with long haul probably coming sooner), but even if we take the best case scenario for Uber and said it is going to be 20 years before self-driving cars are on the streets of cities, is that going to be long enough to generate the returns needed to justify the huge sums investors have poured into the company? And if this is the plan, why are Uber trying to speed up the introduction of self-driving cars? I don’t have good answers to either of these questions unfortunately.
For those with any interest in this topic, I strongly encourage you to read at least the first 4 parts over at nakedcapitalism.com – here are the links:
Finally, on an anecdotal note, I have recently moved to Amman where Uber operates, along with a local competitor (Careem) and a large local taxi industry. For those that may be thinking that people will probably be happy to pay a little extra for the improved Uber experience, Amman would offer an example of the opposite case. In Amman, Uber and Careem both cost around 1.5-2 times as much as a metered taxi. Either way it is still cheap (a ride from downtown to the western edge of the city would be $2.50-$3.50 in a taxi, $5.50-$6.50 in an Uber), but even with the truly horrible state of most taxis in Amman, and the inconvenience of having to flag one down, this price differential is enough to make the ride sharing portion of the transport business practically non-existent.