
Why Uber Keeps Raising Billions - yogi123
http://mobile.nytimes.com/2016/06/21/business/dealbook/why-uber-keeps-raising-billions.html
======
iaw
>> "Uber says it is profitable in North America, Europe, the Middle East,
Africa and Australia — if you factor out taxes and interest payments."

There's a level of immaturity in the current definitions of profitability that
the Valley is pushing. Being privately held ensures that no sensible
accounting system will be anywhere near their books.

~~~
ojbyrne
I highly doubt they don't also have GAAP numbers. For marketing purposes, they
use the numbers that put them in the best light.

~~~
prklmn
Exactly this^. Hell, Facebook is still reporting misleading non-GAAP earnings
next to its GAAP earnings.

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mwsherman
The network effect of ride-sharing is considerably weaker than that of a
social network. A social network’s effect is O(n²), as that is the number of
meaningful connections.

Ride-sharing networks are O(n). They benefit from _liquidity_ , but I derive
only secondary benefit from being “connected” to others on the platform. It's
not nothing, but it feels linear, not superlinear.

Ride-sharing apps are just apps, and the barrier for adopting a new one is
low, for both sides of the market. Further, Uber’s political operations
benefit the other apps equally.

Uber can defend its brand and its satisfied users. Size helps here. Think
iTunes. But the “network” is replicable by others.

~~~
lpolovets
IMO you can have network effects that don't have to do with connectivity.
According to Wikipedia, a network effect is "the effect that one user of a
good or service has on the value of that product to other people."

In this case... \- more passengers lead to more drivers \- more drivers lead
to shorter pick up times \- shorter pick up times lead to better UX/value to
passengers

So even though passengers aren't connected to each other, additional
passengers significantly increase the value of Uber for existing passengers.
This is actually very hard to replicate for new entrants.

For example, let's say when Uber started, there were 20 drivers and 1000
passengers, and the average pick up time was 6 minutes. If the average ride
was 9 minutes, then a driver could do 4 rides per hour. Those 4 rides had to
provide a decent wage -- let's say $20/hour. That means each 9 minute ride was
$6.25 ($1.25 for Uber's take rate, $5 to the driver).

Now, let's say 4000 additional passengers signed up over a few months, which
led to 80 additional drivers. Now, because there are more drivers all over the
city, the average pick-up time might be 3 minutes. That means a driver can now
do five 9-minute rides per hour instead of four. That means each ride can now
cost $5 instead of $6.25, and the driver still makes $20/hr.

For passengers, this is awesome: their wait times got cut in half while the
cost of a ride dropped by 20%. For new entrants, this is awful: the two main
levers for competition are cost and waiting time, and Uber broke both of those
levers. New entrants can still match fast pick up times and low costs, but
they have to bleed much, much more money to do so when they launch in a new
market.

In a way, Uber's network effects are like economies of scale, but they're
typically classified as network effects because the means of production come
from more drivers and passengers signing up, not from Uber doing any "real"
work itself.

~~~
MarkPNeyer
> This is actually very hard to replicate for new entrants.

I've seen many drivers running both lyft and uber at the same time. A third
company comes along that pays drivers better? Why not keep all three apps up.
There's no cost to running an additional app. Literally none at all. And if it
pays slightly better, or has a fairer reputation system...

The same thing works on the rider side as well. If you've got an app (like
what's the fair) that can let you query any number of providers and get the
cheapest price, maybe you're happy to wait a few minutes to save money.

~~~
mkagenius
Someone if goes bankrupt and then making the app open source and not a taking
cut at all..can it kill Uber eventually?

Or the tech benefit of actively working people in Uber will be much better ROI
for drivers to give a 20% cut -- which other industry gives such high a cut?
(airlines or movie ticket booking doesnt)

~~~
JoshTriplett
> Someone if goes bankrupt and then making the app open source and not a
> taking cut at all..can it kill Uber eventually?

Uber and Lyft provide a substantial amount of infrastructure and staffing;
they wouldn't function without that. Someone has to keep the server
infrastructure running and scaling, and even more importantly, someone has to
maintain the support, rating, and qualification system to maintain quality.

------
nl
_Why Uber Keeps Raising Billions_ \- yes, it's trying to build marketshare,
and intimidate others from backing rivals.

But the reason isn't because ride-sharing is a network-effect heavy industry.

It's because _logistics_ is an industry that is cheaper at scale.

The long game for Uber isn't ride sharing, it's logistics, and "people
delivery" is only one (fairly minor) part. If Uber can pick up enough scale,
then every time a delivery is picked up (in one of the driverless vans of
course) it can also deliver multiple packages along the way. That's where
scale is important, and why the capital is important.

Talk to an UberX driver: here anyway (in Australia) Uber is already sending
them on optimized delivery paths when they do delivery.

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ravivyas
"The ride-sharing industry has long been seen as a zero-sum game because of
the “network effect”"

I am not sure how true this is, both drivers and riders will always follow the
money, and there is not a lot you can do on the experience side that can't be
replicated by competitors. This will never be a zero sum game at scale.

When Uber & Lyft moved out of Austin, drivers rallied to make a quick network.
In India, drivers already have their closed networks, and many work for both
Uber & it's competitor Ola, which just goes to show there is no driver lock-
in.

~~~
Bombthecat
But there is a user lock in. After a while users won't switch. No matter the
difference.

Also, they are not really on it because of the drivers and users game.

The end game is self driving cars to rent.

~~~
kmonsen
Just note that in the end game the switching cost is much lower. You don't
have to convince users and drivers, only users and buy a bunch of cars in one
location.

~~~
ravivyas
Yup this point is critical. There is no loyalty bonus to stick on.

~~~
mrep
Yet. Who wants to take bets on how long it will be before they get their start
a points system and start offering an uber credit card? I'm guessing a year.

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elgabogringo
They want a cash horde that will allow them to continue to invest and expand
through the next business cycle.

~~~
mrweasel
They need money to find a new business plan. Money comes pretty easily due to
publicity, and that the people with money to invest are more likely to be
people that use Uber, at least that's my guess. So they feel it's a solid
business. People tend to believe that products they use are a good investment,
because "everyone is using it".

It wouldn't surprise me if Uber is realising that there isn't actually that
much money to be made driving people around. Taxies are a artificially limited
business, in most places, but you're not seeing a ton of wealthy taxi drivers.
Why should Uber be that much better at making money in the taxi business. I'm
not saying that there's not money to be made, or room for improvements and
increased profits. I just question the size of that potential profit.

~~~
fosk
You are making the mistake of comparing the Uber market size to the taxi
market size.

Uber, by providing an easier way to take rides, has made an existing market
much bigger, and they are taking over it. The market size has changed thanks
to Uber.

~~~
mrweasel
>Uber, by providing an easier way to take rides, has made an existing market
much bigger,

I honestly doubt it. The market size is the same, Uber just made it easier to
get a taxi by adding more of them. Taxi drivers often have a second job (at
least in some countries), they aren't wealthy people, despite having
essentially a monopoly. The only thing Uber can do, and have done, is add more
cars, at the right time.

The issue is mostly that you can't get a taxi when you need one, because most
of us need them at the same time, at 2AM on Sunday morning or when it's
raining. That's a severely limited niche and the only reason you can't a taxi
at these time is because there isn't a business case for have those cars on
the road for the rest of the week.

~~~
seizethecheese
Maybe you're from Manhattan or somewhere taxis are ubiquitous? Where I'm from
(Portland) nobody ever used to take cabs, myself included, because they were
so sparse and terrible. I'm talking about regular 30min waits. I take Uber all
the time now.

~~~
mrweasel
>because they were so sparse and terrible

My point is: They're sparse, and terrible, because that's what the market will
sustain. Uber is making more cars, better cars, available, but I don't think
that sustainable in the long run. It's my belief that Uber, and it's drivers,
will come to the conclusion that there simply aren't that much money to be
made, unless you restrict the supply of cars.

Honestly, does any one believe that the reason of taxies being sparse or
terrible is because the taxi companies doesn't give a shit? If they could make
more money by having cars on the road, then why shouldn't they work towards
that?

~~~
mrep
> Honestly, does any one believe that the reason of taxies being sparse or
> terrible is because the taxi companies doesn't give a shit? If they could
> make more money by having cars on the road, then why shouldn't they work
> towards that?

No, they were sparse and terrible because of the medallion system limiting the
supply.

~~~
lokedhs
That argument only applies in locations that have such systems.

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bdcravens
I've suspected that Uber and AirBnB know they need a legal warchest.

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personjerry
I have a great dislike of Uber. They say they are "breaking the taxi monopoly"
but they're literally just building a new one, and they're doing that by
starving out the existing taxi services with the billions and billions of
dollars they keep fundraising. It's fucking dirty.

~~~
gwright
Why do you choose to label competition and development of a better product as
'fucking dirty'? Criticizing Uber for some imaginary future world where it has
captured the market via regulatory mechanisms (like taxis), seems premature to
me.

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msoad
I don't understand how this article is claiming that ride-sharing is a zero-
sum game. It's not a search engine or social network that "network effect" or
customer experience is the main motivation for customer to choose the service.

People will choose another provider if they offer the service for pennies
less. Heck people switch to Bing search for a few pennies a week in "Bing
rewards".

I'm sure Uber/Lyft competition in the United States is going to be like
Coke/Pepsi competition. It's a low margin business and a lot of people can do
it. Therefore there is no way you can have a "winner take it all" situation.

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dannylandau
Seems like Uber has quite a bit of competition in the US market besides Lyft,
namely: 1) Juno -- [https://www.gojuno.com/](https://www.gojuno.com/) 2) Gett
-- [http://gett.com/nyc/](http://gett.com/nyc/) 3) Via --
[http://ridewithvia.com/](http://ridewithvia.com/)

Seem like all our starting out in NY, but it is just a matter of time before
margins are squeezed to zero.

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ProfChronos
The article is quite superficial on many aspects: i) first, Uber is not in the
sharing economy but in the on-demand: you don't share and monetize an asset
(vs AirBnb), you offer a service activated by demand; ii) in my opinion, Uber
keeps raising funds for multiple reasons and some of them are simply
overlooked in the article: \- from a global market point of view: money
(especially in the form of debt) is historically cheap \- from an investor
point of view: investors are looking for proven business models as VC funding
is slowing down \- from an employee point of view: the multiple funding rounds
maintain/increase the valuation, which preserves the stock-based incentive for
employees (and we know that's a key reason why so many great programmers
joined Uber) \- from a competitor point of view: Uber opens the market and
evangelizes (pays the legal cost, advertises in new markets, etc.) iii) it
never really analyses the on-demand transport economics = is it a "winner
takes all" market structure? The article keeps suggesting it is while it is
clearly not

~~~
jsemrau
So they raise money and subsidize drivers to use their service.

Makes you wonder if Taxi companies would have increased services / hired more
drivers/ lowered prices if the money went directly to them?

Now most of the artificially created suppliers will likely drop out the moment
the driving becomes unprofitable or switch provider as the barriers to entry
in this market are not that high.

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growthape
One important factor is the TEAM. They have one of the finest workforce.
Extremely talented people driving the growth of the company.

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Aelinsaar
It's easy to understand why they'd want this, and as for why people invest...
hope, greed, the usual things.

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tacos
The second there's a Tesla icon on my phone that summons a driverless car,
goodbye Uber. Not sure how they're going to buy and maintain a fleet of cars
below Musk's cost.

