

An Alternative Look at Uber’s Potential Market Size - dangoldin
http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/

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jzwinck
Much is made in this article of the trust which users have in the Uber system.
That is probably valid today, but is unlikely to scale. Anyone who used
Craigslist or eBay over the past 10-15 years can tell you that as such systems
grow from tens or hundreds of thousands of users to tens or hundreds of
millions, the experience becomes very different.

Today we can rely on Uber's mutual rating system. We used to do the same on
eBay, but eventually a "business decision" was made and eBay switched to
quasi-unilateral ratings (sellers cannot negatively rate buyers anymore).

Today when an Uber driver picks us up, it is likely that they are reasonably
in touch with modern society, probably at least a little bit educated, etc.
Craigslist used to be like that too. Now it's a spam bazaar full of non-owners
selling by owner, hookers pretending to be girlfriends, and so on.

These sorts of changes are inevitable if Uber grows to the sort of revenues
being discussed here. Trust hasn't scaled before, and Uber probably can't
innovate that away.

~~~
TheBiv
I think the core difference between Uber and the examples you provided is that
in Uber, people have to meet each other in real life.

Real life still has trust that scales, called the credit system.

~~~
eli
Unless you fall for a Western Union scam, you generally meet Craigslist people
in "real life" too. Still plenty of scams.

~~~
voxic11
Craigslist doesnt really have a rating system though so its not really the
same.

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santoshsankar
Part of this is just Finance 101. Valuation is an art as much as it is a
science. Arguing assumptions is exactly what valuation is about-- this does
not seem to reveal anything great.

Gurley is obviously a buyer of Uber while Damodaran is not. The lower TAM or
penetration numbers could even be written off as conservatism, after all
humans are generally more optimistic about future prospects.

Gurley makes a good point on the elasticity of Uber but frankly if I am in a
suburb (as most of my close friends and family), you do not use Uber as much
given you own a car you paid $30K+ for. In areas like NYC where Uber is used
more, there could be higher demand but then you meet a limit- the number of
cars on the road... too many causes congestion and people opt for mass
transit. I do agree with the napkin sketch but I think there are multiple
forces working against Uber away from large metropolitan areas (which is
stated as a growth opportunity) including 1) car ownership; 2) infrequent
trips -- you generally do a bunch of errands in one shot due to distance; 3)
physical space-- how many ubers can there honestly be in a 20-40 mile radius
in a lower volume area? Why not go to a nearby city, instead?

Uber is a great service and I use it a lot but I find it hard to see as a car
alternative. It is an alternative to existing cabs and mass transit in most
areas. It will be interesting to see how it grows and like previously stated,
what kind of margins it's drivers are earning... at a certain point you can
only drive so much in price drops till they leave for the alternative.

"Appendix" I even spoke to a yellow cab driver in NYC the other day and he
stated that he is rounding up support from the commissioner for help on two
things: 1) Green cabs (limited to where they can physically pick up but often
times break rules) and 2) Uber.

~~~
aetherson
The other thing about non-large-metro areas is that they're expensive to
expand into. You need to promote Uber locally, recruit drivers, use promotions
to drive demand while building supply, and all of that for a not very large
market. There are a lot of these not-very-large markets, and, in aggregate,
they're definitely a big opportunity. But they're inherently more expensive to
acquire and slow to move into. Great for a mature company -- but hard to drive
rapid growth with such a strategy.

~~~
pbreit
Uber is close to or has already proven that it can effectively move in to less
dense areas. Another huge advantage for it. With more courage and resources on
pricing, it can go into new markets much more efficiently.

------
billybones
Aswath Damodaran, for what it's worth, is the same professor who got similar
press last year for valuing Tesla (then trading at $170) at $67 a share:

[http://aswathdamodaran.blogspot.com/2013/09/valuation-of-
wee...](http://aswathdamodaran.blogspot.com/2013/09/valuation-of-week-1-tesla-
test.html)

OP's article nails it: precise financial analysis is meaningless if you base
your projections on way-off assumptions.

~~~
josephlord
Not read the Tesla piece but at least with the Uber piece the assumptions were
clearly stated so they can be challenged.

One challenge I would make to this article's assumptions is that the world is
like San Francisco. In many places there are already cheap private hire
options available[0]. I'm not sure how to calculate for the existing cost and
availability of such options. If it makes sense for the drivers they may
become Uber drivers but there may be less decrease in car ownership and
changes in customer behaviour.

[0] Minicabs, rickshaws etc.

~~~
PinguTS
To add to that, what about those cities where you have also a good public
transport in place like NYC, Lodon, Paris, Berlin and many more? Where it is
may be comfortable to use such a service, but also more expansive and more
slower (because of traffic jam).

~~~
vidarh
London not only have good public transport and horribly slow/congested roads
in the centre. We _also_ have cheap minicabs, Hailo, and at least one "Uber-
like" that contracts minicab companies rather than individual drivers. And
many of the larger minicab fleets seems fairly similar to Uber in the way they
operate as well.

(We also have rickshaws; mostly as a tourist novelty, though)

Doesn't mean they can't do well here too, but certainly a different
proposition to one where they only competes against normal taxis.

------
jeffyee
Is Uber more disruptive because of its experience or the fact that it
technically violates the rules/regulations in the taxi cab market? Cabs can't
compete on price because, the prices are regulated and fixed, and of the cost
of medallions and compliance etc are non-zero. Similar remarks for the hotel
industry and AirBnB.

Can this/should this be done in other markets? If someone built an equity
crowdfunding platform that ignores SEC rules (and the JOBS act) but investors
like it/use it, would it succeed? In the cases of Aereo and Silkroad, they
didn't succeed in fighting the laws.

The rules and regulations exist ostensibly to "protect" consumers, but we see
that when consumers don't agree with them, huge companies get created.

~~~
xorcist
Let's split up the questions and look at them one by one:

Is Uber disruptive? Probably in some places.

Why? Because some free market-liberal cooked up a way to cap the number of
available taxis. Ubers skirts these restrictions by loudly proclaiming not to
be taxis in various creative ways, thereby lowering their price structure.

How could this be done in other markets? Definitions matter. Could you raise
funding by callling it something else? Very unlikely (it's hard to deny why
people send you money). Could you sell useless medicine by calling it
something else? Very likely (see "homeopathy", "natural medicine").

------
netcan
Excellent article.

I realize positions need to be based off something, but it always seems
strange to me to see analysis like the one being challenged here for a young
(albeit large) innovative tech company. Think of Google in 2003, Amazon in 99'
or MSFT in 89'.

None of your medium-long term assumptions can stand on very solid ground. What
the market is, it's size, it's structure and the company's potential role in
it.

Assumption: "the primary market Uber is targeting is the global taxi and car-
service market ($100 billion)" \- is this correct in 5-10 years? Could Uber
target other markets? Deliveries

Assumption: Uber are taking over market share. Can other forms of transport,
public or private be replaced by Uber? Where do new technologies (like self
riving cars) affect things?

My own speculations gravitate towards efficiencies from having all that data
valuable at once.

The 5 seater is a general purpose vehicle for 1-5 people and used for highway
driving and for short trips along congested streets. Could Uber's smart system
offer regular Sedans for 25 mile highway journeys and golf cart like cars for
1 person inner city journeys?

Could hub and spoke systems exist where several cars take single passengers to
a van/shuttle for longer (more expensive) journeys.

Everything is low probability big payoff. Even the the straightforward
mission:'take over the existing taxi-limo' is still a high risk-reward
proposition. Basically, I think this rebuttal is better than the original
analysis. I think neither ow them can give you a number.

~~~
rayiner
> I realize positions need to be based off something, but it always seems
> strange to me to see analysis like the one being challenged here for a young
> (albeit large) innovative tech company. Think of Google in 2003, Amazon in
> 99' or MSFT in 89'.

You mention Google, Amazon, and MSFT in the same breath, but one of those is
not like the other. Google in 2003 and MSFT in 1989 were targeting markets
that were small, but young and uncertain. However, Amazon's target market was
mature and well established, but huge.

Assigning a big valuation to Google in 2003 or MSFT in 1989 would mean having
the confidence that lots of people in the future would be doing something that
they didn't do at the time. However, assigning a big valuation to Amazon in
1999 meant having the confidence that Amazon's technology would allow them to
dominate an existing, large market. After all, people aren't buying more books
and toilet paper in 2014 than they did in 1999: they're just doing more of it
through online sources instead of brick & mortar ones.

The problem with Uber is that the most obvious target market, taxis & cabs,
isn't big enough to justify its valuation even if they totally take over the
market with better technology. They're targeting a mature market that's about
$100 billion, versus Amazon, which is targeting a mature market that's in the
trillions of dollars.

To make the case for a high valuation for Uber, you have to redefine the
market. Either by saying that the real target is logistics more broadly ("Uber
for X") or by saying that the real market is auto transportation generally. In
the latter situation, Uber isn't going to create a higher demand for getting
from point A to point B. Instead, they have to take market share away from
personal automobiles. In a country with almost as many cars as people, and
urban and suburban areas that are designed around personal autos, that's a
really uphill battle. E.g. running errands in a suburb isn't like in a city
where you just go into town, buy everything you need, and take a cab back
home. It's a multi-hop tour through strip mall after strip mall. Personal
autos are well-suited for that: Uber totally is not.

------
domiono
I think the most important article to estimate Uber's market size is this
article, where their CEO mentions that the ground transportation market in San
Francisco is around $22B and this is only for 800,000 people
([http://qz.com/218717/what-people-who-think-uber-is-
worth-17-...](http://qz.com/218717/what-people-who-think-uber-is-
worth-17-...)). Now multiply this by 10,000 so that you are at 8B people and
you have a global ground market of 220 trillion dollars. Now that number is
probably too high, as the gross global product is $100T, but the
transportation market can be well in the range of $10T.

So once self-driving cars are up and running, nobody will drive their cars by
themselves anymore, because self-driving cars are 5 times safer than humans
driving them and for that reason, insurances will charge 5 times more if you
want to drive your car yourself. Where do you order get these self-driving
Google cars? You order them through Uber and then you have Uber attacking the
$10T ground transportation
market.([http://techcrunch.com/2013/08/25/uberauto/](http://techcrunch.com/2013/08/25/uberauto/))

~~~
xorcist
What is your basis for the $10T valuation, except for the fact that $220T is
"probably too high"?

And what is your basis to conclude that if something works in San Francisco,
it works elsewhere? Is the competition there so fierce that anything that
succeeds that everywhere else can be considered an easy market?

~~~
domiono
It's a rough estimate rather giving an idea of the market. What I want to say
is that the market is not the $10B U.S. taxi market, but that Uber's market is
probably in the trillions over the next 10 years.

~~~
mariusz79
Or $0. If you're talking about self-driving cars, you also need to consider
that more than one family may share one car without any need for Uber, or that
car manufacturers or dealers may go into taxi business themselves.

------
xorcist
The reasoning here is that Uber should not only overtake the global (London,
Ankara, Beijing, Calcutta and everything in between) taxi market, but grow it.

Extraordninary claims should require extraordninary evidence. The given
reasons are that customers feel safer, that expansion has been "rapid" even
outside San Francisco (!), and that customers "feel safer". Also no cash.

Somehow I'm not convinced.

The only vaguely reasonable point is the GPS visibility of cabs. Which is
great, but not really a billion dollar product. (What I thought to be Uber's
great feature, upfront fixed fees, is not even mentioned.)

No, if you want to argue that Ubers valuation is somehow rooted in reality,
you'd have to make a much more compelling argument. I expect it to be one
where they take a big bite out of the larger logistics market, perhaps look to
expand the delivered groceries market together with Amazon or something.

~~~
pbreit
No. One "reason given" is that Uber is already at a "healthy multiple" of the
total existing taxi market in San Francisco.

Uber doesn't need to make a dime in logistics in order to achieve $1 trillion
in gross sales.

~~~
xorcist
That's not what it actually says. The multiple is of the "historic market".
Uber grew the market, no question about that. (To exclude Uber from the taxi
market is a bit of newspeak however.) In San Francisco.

The article argues that this is true in the global taxi market as well. The
reasons given are the ones I've tried to summarize.

I might have missed a few though. The article is very long and makes a lot of
frivolous claims. Very few are substantiated enough to be questionable, but
those that are, are. The only exception I could find is the one about the real
time positioning.

------
notlisted
I find it rather interesting to see that one of the investors thinks the
valuation needs to be defended in writing.

Once drivers find out that you don't make the 90k salaries touted by Uber [1]
(note: conveniently excluded cost of gas, insurance, tolls, parking,
maintenance and repairs, and required more than 40 hour workweeks) driver
supply may not match consumer demand. Slashing the prices wasn't exactly
beneficial for current drivers either [2]

[1] [https://medium.com/@felixsalmon/how-well-uberx-pays-
part-2-c...](https://medium.com/@felixsalmon/how-well-uberx-pays-
part-2-cbc948eaeeaf)

[2] [http://uberdriverdiaries.com/uber-slahes-prices-new-york-
cit...](http://uberdriverdiaries.com/uber-slahes-prices-new-york-city-new-
jersey/)

~~~
cm2012
Uber driving is basically an unskilled job (most Americans know how to drive).
A job that an unskilled person can reliably get for $50k take home a year is
gold (remember that the US median household income is 50k - and that's for the
whole household). This doesn't mean Uber will succeed, but they will never
lack for labor.

~~~
nilkn
> remember that the US median household income is 50k - and that's for the
> whole household

That figure includes folks in rural areas where Uber is basically non-
existent.

I don't think you're going to get $50k annually with Uber right now unless, at
the very least, you're in a major metropolitan area.

That said, I still can't deny that $50k (if that number is realistic and
already includes expenditures like gas) is a good amount for what amounts to
borderline unskilled labor.

~~~
cm2012
The New York City median annual family income is actually lower than the
nation as a whole - $49k ish.

------
pbreit
The professor's analysis was so obviously bad that it's very surprising it
made it into FiveThirtyEight. I have dozens of friends who used to take a taxi
trip or 2 a week who now take a dozen or more Ubers in the same time. It's
patently obvious that the Uber market opportunity is much larger than the
current taxi/towncar industry.

And Uber works even better in the suburbs than in cities.

Edit: I commented before reading the whole article which totally nails it.
Uber might be the first to $1 trillion in revenue.

~~~
rayiner
I see you're in San Francisco. May I suggest that living in a city that has a
unique combination of density and awful transit options probably colors your
views. Of my friends who live in the suburbs or sprawly cities like Atlanta,
none take Uber. Why would they? They have a car, commute 10+ miles ($14 just
in mileage charges on UberX!), and on weekends their travel generally involves
multiple hops in various areas (drive to the Target, then the Costco, etc).
Also 10+ miles added together.

And my friends in NYC or Chicago don't use Uber because they can just hail a
cab. Five minutes is "high liquidity?" If it takes me five minutes to hail a
cab here in downtown Philly, I'm having a bad day!

~~~
jmccree
I live in downtown Atlanta and Uber is huge among the intown population. I
know people who have sold their cars solely because Uber X was introduced.
Perhaps intown Atlanta is in a similar position to SF of density and lack of
transit. Cabs here are simply awful. They don't take cards, you're lucky if
one will show up within an hour (And I live one block from the central subway
station), and they a guaranteed to try and rip you off somehow. Uber arrives
in minutes, is cheaper, and the drivers are friendly. I was shopping for a car
until Uber X arrived, but now uber fills the gaps in our public transit
system.

As more and more young people are moving into the cities again, especially
cities in the sunbelt that lack the public transit and availability of cabs of
NY/Chicago, there's huge opportunity for uber. When you consider all the
people now moving back into downtowns and wanting to live the urban walkable
lifestyle, but in cities with subpar transit, the opportunity is massive.

~~~
rayiner
I lived in Atlanta for 7-8 years, and I'd definitely take Uber instead of
calling Checker Cab. However, people giving up their personal cars in favor of
Uber + transit is a marginal trend at best. The basic bottleneck is: how do
you get to work? Like most sunbelt cities, the jobs in the Atlanta area are
scattered across the city and suburbs. The average person in the metro area
drives 17.5 miles and 30 minutes each way to work. That's a $30 Uber fare.
There's no regional rail to get people to work, and MARTA barely goes
anywhere. Very few people can get rid of their personal car because there are
no other practical options for getting to work. And that bottleneck drives
everything else. If you already have a car to get to work, why would you pay
$20 bucks (roundtrip) to go from Buckhead to Atlantic Station for a night out?

I think you're just plain overestimating the demographic trends actually in
play. Yes, there is some growth in urban areas, but we're talking very
marginal ones here: [http://www.city-
journal.org/2011/eon0406jkwc.html](http://www.city-
journal.org/2011/eon0406jkwc.html). There's no demographic trend of a major
shift to the cities that will create a "massive" opportunity for a company
like Uber.

~~~
pbreit
A guy who has way more information about the matter thinks you're wrong. While
he's biased, he's very credible and his writing matches up with with my sense.

------
abalone
He seems to say that Uber's recent price drop is due to more efficient
utilization, not lower driver wages or a VC-subsidized price war.

That's plausible, but is there any good data on what Uber drivers make, or how
much margin these price cuts leave Uber with?

