
An examination of Uber’s economics - microwavecamera
https://americanaffairsjournal.org/2019/05/ubers-path-of-destruction/
======
jppope
Regarding the lack of "innovation" concept this article is hocking... pretty
sure before Uber/Lyft I couldn't click a button and know how much my ride to a
place would cost then, book it and pay for it.

(I still remember cabs in NYC where the driver "knew a shortcut" that ended up
adding $10/$15 to a ride... I've never seen uber/Lyft pull that move)

~~~
amelius
Yes, but that's not an innovation worth billions of dollars, like real high
tech innovation that takes billions of dollars to get off the ground (e.g. the
semiconductor industry back in the days). Instead it's pretty much
straightforward functionality that could be implemented by _any_ small team of
programmers.

~~~
hyperbovine
I’ve felt that way about Twitter since the beginning. The core idea is like
1000 lines of RoR. Yet year after year, nothing displaces Twitter. Network
effects are real and powerful.

~~~
sweeneyrod
Network effects are crucial to social networks like Twitter. But why should
that apply to Uber? The network effect on Twitter etc. comes from the fact
that each additional user increases value for existing users. But Uber is a
two-sided market, and while each additional driver benefits existing riders
they are also additional competition for existing drivers.

~~~
FabHK
The article makes that point, too:

> [Uber etc.] also have none of the Facebook-type network effects (following
> what is known as “Metcalfe’s Law”), by which each new user makes the network
> more valuable to all other users, which makes it nearly impossible for
> smaller competitors to survive.

However, I think that's wrong. If I'm in a city with two "ride sharing"
companies, but one has twice as many cars on the road, I'd expect to wait
longer for a taxi from the company with fewer cars, right (or, if I check
both, most of the time the one with more cars will show a shorter waiting
time). Thus, as a customer I'd be inclined to choose the one with more cars.

~~~
amelius
But shouldn't most drivers be working for both companies?

I mean it was recently decided that uber drivers are contractors (not
employees), so they should be free to do that.

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empath75
I’m bearish on Uber and I read the entire article, but it’s full of a lot of
bald assertions with no supporting evidence and the only real point it makes,
and it makes repeatedly is that Uber is only “successful” because they offer
below cost rides subsidized by investors who were pushing growth at all costs
because they wanted to flip their shares to dumber money in the future.

I don’t feel like he needed that many words to say that.

~~~
throwaway-571
I thought the Uber goal was also to drive the competition out of business via
any means necessary and then raise price.

~~~
BeaverBomber
That is their ultimate goal. There's no indication that they'll be able
acheive it. Their main "innovation" if you can call it that is removing
regulations that were previous barriers to entry. If Uber removes all barriers
to entry, somehow eliminates competition, how does it not come back once they
raise prices past a point that makes it profitable to compete?

The other goal they have is to be the first to engineer autonomous cars and
replace all their drivers, roughly halving their operating costs. As the
article points out, that is several years away, and would require Uber to
expend huge capital costs to acquire and operate said cars. They are currently
a company that doesn't do anything close to that.

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adlpz
Honest question: how isn't this dumping? I thought that anti-dumping measures
were a thing. Couldn't it be argued that nine years of losses mean fares are
being sold below cost to push out competition, and therefore this is not ok?
In particular in the context of Uber being a US-based company operating in
lots of other countries (as in, being international trade, etc).

~~~
AnthonyMouse
Dumping usually means selling below unit cost, which they're not doing. What
they're doing is failing to cover their fixed costs in the same year they
incur them. That's completely normal, especially for new businesses. Whether
they ever will be profitable is a different question entirely.

~~~
Barrin92
>Dumping usually means selling below unit cost, which they're not doing.

only if you fall for their clever structural arrangement, the article
addressed this. Regular tech startups lose money because of high fixed costs
but recuperate through falling marginal cost once they scale.

Uber has no change in marginal cost because every additional driver costs
exactly the same, and in fact they incur inefficiencies because every driver
has to look after their own car, so there is no scale.

They absolutely do sell below unit costs, just with one level of indirection
between drivers and company because at the end of the day they have to
subsidize rides if they want to compete with other business.

~~~
AnthonyMouse
Their long-term plan has been to replace human drivers with autonomous
vehicles, which actually would reduce marginal costs. Whether that ever
actually happens we don't know yet, but the fact that they've been pouring
money into it with no returns as yet is a major source of their losses.

> They absolutely do sell below unit costs, just with one level of indirection
> between drivers and company because at the end of the day they have to
> subsidize rides if they want to compete with other business.

They don't pay the drivers more than the riders pay them. That's the unit
cost. What the drivers do as independent actors is something else, but I doubt
the drivers are losing money _on purpose_.

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larrysalibra
This is a really great article digging into the economics of Uber. The
unsustainable economics of the industry were a lot more obvious to obvious in
markets where Uber had well funded local competitors and ultimate failed like
China. When Uber and Didi were competing everyone was using car service to get
around. A 45 minute ride could cost 1 us dollar. You had people in jobs making
600 USD a month riding to work in 100k usd Teslas when previously they would
take the bus or subway for 15 cents. Everyone was taking advantage of
subsidies. When Uber left China, DiDi prices went up a lot of most people
stopped using it exclusively and regularly. Taxis in many cities are both
faster to hail and cost less money.

The issue I take with the article is that the authors appear to believe in
some god-given right to car-based public transit. For example, people what
work night shifts at low paying shouldn’t have to pay the surges prices a rich
person trying to leave a club would pay. They also believe that adults
shouldn’t be able to get themselves into money losing business deals (which is
what sounds like is happening for both drivers and Uber equity holders). They
also believe that people should not use money raised voluntarily in the market
to subsidize services.

It is not clear to me that those beliefs are self evidently true.

As an example: Regulation that subsidies late night taxis for low wage night
shift workers economically distorts just like uber drivers that are receiving
food stamps. Why is the former okay but the later is not? Both are subsidies
to employers who can have a job filled by paying a lower wage than the market
would otherwise bear.

~~~
kartan
> They also believe that adults shouldn’t be able to get themselves into money
> losing business deal

When one person gets into a bad deal it is a bad decision. When tens or
hundreds of thousands get into the same bad deal with the same company then
it's systemic and creates a systemic risk.

> Regulation that subsidies late night taxis for low wage night shift workers
> economically distorts just like uber drivers that are receiving food stamps.
> Why is the former okay but the later is not?

It is not the same that the government subsidizes a night service to improve
people's lives and the economy that a company like Uber bases its business
model in not paying enough its employees and letting the taxpayers get the
bill.

Uber is gaining a competitive advantage (over taxis and other forms of public
transportation) at the cost of taxpayers. Late night taxis will probably cease
to circulate if it were not for a subsidy. And then someone at the government
thinks that to be able to take a taxi at night to go home is something
desirable.

~~~
scarface74
How is Uber gaining an advantage by taxpayer subsidies any different than any
other venture backed company that is subsidizing money losing companies? Some
of those VC funds are also coming from public pensions.

------
oldjokes
They are truly innovative in the sense that they finally exposed the fact that
much of tech startup funding is just a ponzi scheme by pushing it all the way
to the IPO with no plan to ever make money. That's a new thing, usually only
microcap companies were able to pull off that scam in the past.

Get out between series A/B if you want maximum return, the only losers in
these phony companies that never make money are the last round of investors
who get left holding the bag.

And if you're an employee looking at stock options in a startup just say no.
Stop surrendering real money for fictional money. Get a higher base salary
instead. Employees with equity plans are always at the bottom of the list to
get paid out.

~~~
skinnymuch
SoftBank’s Fund was one of the last investors and poured billion in at a $48B
valuation. So they won’t make a lot of money percentage wise but at worst
they’ll make a small profit. Otherwise they could make over a billion or two
profit from their investment. The other last investors got in at higher
valuations. So if Uber drops more they’ll lose out. Though even they won’t
lose a ton of money percentage wise.

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negamax
I don’t know, Uber Share and it’s integration with Google Maps has been a
money/time saver for me. Although I do agree about Uber’s valuation part. The
whole private equity and exit on listing to stock exchanges is a charade. It
must be broken and do away with. Or stock market listings are meaningless

------
Causality1
Frankly I hate the modern way of doing business. "Operating 25% in the red is
fine as long as we're growing 200% a year" and just keep doing that until your
company implodes and your investors have moved on to something else.

~~~
Traster
I think there are two issues operating here. The first issue is that there is
absolutely a genuine business case where as long as your COGS is close to 0
then you literally can grow into profitability. That very clearly applies to
Slack and other internet companies where you build the application and you're
basically incurring only fixed costs.

The second issue is that we have a number of companies that aren't that style
of tech company that are wrongly valued like that. Companies like Uber, Tesla
WeWork etc. All attempt to mask their traditional business with tech. I think
we can make a pretty strong case that what we're seeing there is a bubble that
will burst.

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MaupitiBlue
Do a image search for “cab company owner.” Hint, you won’t be get a bunch of
pictures of guys in Ferraris.

------
alexandercrohde
I can't understand why the model of "build an outstanding App, then reduce
engineer team to < 100" is not a thing. If they could do this, they'd be
profitable. And I think they could do this, if their codebase wasn't a mess.

Heck, I bet 25 excellent googlers could make a run a service like this with
99% uptime (obviously there would need to be a large support staff still).

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kerng
Jobs! They created millions of jobs over the years, that's something entirely
missed here.

~~~
whenchamenia
Except they arent employees, so not quite. Jobs have healthcare, and
retirement prospects. Uber is just stealing equity from your car, so drivers
are no better off excepting maybe those with title loan levels of desparation.

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intuitionist
> Customers correctly perceived that Uber offered greater availability and
> reliability than traditional cab companies used to, but failed to recognize
> that all of these improvements required billions of dollars in unsustainable
> subsidies. If a new entrant in any other established industry suddenly
> offered much more service at much lower prices than incumbents ever had, the
> normal response would be to demand evidence about the productivity
> breakthroughs making this possible.

This paragraph is baffling to me. Why shouldn’t consumers want lower prices
subsidized by billions of dollars of VC money? There are other industries with
huge subsidies (American agriculture, for instance) where consumers are also
happy to buy the artificially cheap products indefinitely, and the only people
complaining are conservative/libertarian think tanks and public health groups.

Investors had reason to question Uber’s efficiency, but it’s tough to argue
that they weren’t aware the prices were too low to be profitable, as it was
their money subsidizing it!

------
sc90
Hypothetically speaking in a world where vehicles are autonomous (no human
supervision)and/or electric would Uber be profitable?

~~~
BeaverBomber
Nobody has any idea since they don't know what an autonomous car will cost.

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neonate
[http://archive.is/NizFV](http://archive.is/NizFV)

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dnautics
> Uber not only lacks powerful competitive advantages, but it is actually less
> efficient than the competitors it has been driving out of business.

Yeah, it ought to be less 'efficient', the Uber business model is _far_ less
exploitative than the taxi model.

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remarkEon
This article is ... long.

I'm inclined to agree with some of these other comments in the thread, that
the innovation of app-ifying taxi services is indeed extremely valuable. I
suspect most of us that detract from the success of Uber are really more
concerned, among other things, about the political means by which they gained
their marketshare. The "ask for forgiveness not permission" philosophy and
their willingness to ignore existing regulations is, I think, bad form - and
the article rightly calls out that they did kind of hijack a techno-
libertarian mindset to moralize what they were doing.

Still, is it easier for me to safely get home after a happy-hour with some
friends? Sure. Am I able to more easily and reliably move about major cities -
especially ones without major public transit infrastructure - absolutely. My
gripe with Uber today is mostly that they appear to treat their employees like
crap, if they consider them "employees" at all. I don't too much care how much
they are worth, as I'm not an investor and don't plan to be one.

As an aside, this magazine has some ... interesting content. A sampling:

[https://americanaffairsjournal.org/2019/05/the-new-shame-
of-...](https://americanaffairsjournal.org/2019/05/the-new-shame-of-our-
cities/)

[https://americanaffairsjournal.org/2019/05/chinas-city-
clust...](https://americanaffairsjournal.org/2019/05/chinas-city-clusters-
pioneering-future-mega-urban-governance/)

[https://americanaffairsjournal.org/2019/05/houellebecqs-
unfi...](https://americanaffairsjournal.org/2019/05/houellebecqs-unfinished-
critique-of-liberal-modernity/)

~~~
darkpuma
That the appification of taxis was innovative is irrelevant. The article very
clearly makes the case that the appification is not a competitive advantage
Uber actually has, because all their competitors now have apps as well.

Having an app that people prefer at the present cannot justify Ubers insane
valuation. There is nothing Uber is doing with their app that their
competitors can't.

