
The Wheels Come Off Uber - itamarst
http://www.nakedcapitalism.com/2017/06/wheels-come-off-uber.html
======
cs702
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.

[1] [https://www.feld.com/archives/2017/06/lessons-internet-
bubbl...](https://www.feld.com/archives/2017/06/lessons-internet-bubble-
growth-vs-profitability.html)

~~~
clairity
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).

~~~
cs702
FYI, the OP links to a 10-part series of posts about Uber's economics by
someone with decades of experience in the transportation industry. Here's a
link to part one: [http://www.nakedcapitalism.com/2016/11/can-uber-ever-
deliver...](http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-
one-understanding-ubers-bleak-operating-economics.html)

~~~
Animats
From that series:

 _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._

That's Uber's big problem.

~~~
curun1r
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.

[1] [https://shift.newco.co/this-is-how-big-oil-will-
die-38b843bd...](https://shift.newco.co/this-is-how-big-oil-will-
die-38b843bd4fe0)

~~~
Flenser
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:

[https://news.ycombinator.com/item?id=13079767](https://news.ycombinator.com/item?id=13079767)

------
Noxchi
It's a question if uber can race to self driving cars fast enough.

That's really the only way their financial model can make sense.

They should really be seeing this as essential to their survival, like nuclear
bombs in WWII.

Nazi Germany had maybe 1000 people working on their version. USA had
180,000(!).

I suspect in this analogy, uber is not USA. Someone else will get this rolled
out first. But I'm not 100% sure.

~~~
Analemma_
> 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.

~~~
TheSpiceIsLife
> 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.

~~~
ghostly_s
Oh really? So drivers are sending their maintenance bills into Uber and
getting reimbursed for them?

------
dr_
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.

~~~
lmm
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.

~~~
samstave
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.

------
andriesm
Is it just me or is this author overlaying a very strong political bias over
the story of Uber?

~~~
slantedview
You can hold political bias and still present a strong analysis.

~~~
malandrew
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.

~~~
sidlls
True. Do you have reason to suspect that's the case in this instance?

~~~
malandrew
Many reasons, but I can't/won't elaborate.

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.

[https://en.wikipedia.org/wiki/Scenario_planning](https://en.wikipedia.org/wiki/Scenario_planning)

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.

[https://en.wikipedia.org/wiki/Anchoring](https://en.wikipedia.org/wiki/Anchoring)

~~~
r00fus
It's not the source's responsibility to be 100% unbiased. It's your
responsibility as a reader to detect and adjust for the bias.

Consider applying your advice to your own meta-analysis. If you can't
elaborate on your judgement, perhaps it's you who have blinders on?

~~~
malandrew
> 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.

~~~
ithinkinstereo
If you go through their 10-part series, they go over counter-arguments that
invalidate their analysis.

More importantly, if you're going to dismiss their arguments, it would be nice
to offer counter-analysis for why you think they're wrong.

------
alejohausner
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.

~~~
emodendroket
Is this satire or what?

~~~
r00fus
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.

~~~
alejohausner
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?

~~~
emodendroket
Frankly you could find lots of posts like this on HN which are entirely
earnest.

------
MooBah
Uber will live on.

Just talk to the drivers - you will get it.

Uber can continue churning their workforce for at least 15+ years as
automation continues to whittle down the blue collar workforce.

~~~
ohsnapman
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.

------
blisterpeanuts
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.

 __* updated to remove publicly traded

~~~
mikeash
It's easy to disrupt a crony-capitalist, monopolistic system by selling your
product at a loss, but you can't make a profit that way.

~~~
tedsanders
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.

Source: [http://www.nakedcapitalism.com/2016/11/can-uber-ever-
deliver...](http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-
one-understanding-ubers-bleak-operating-economics.html)

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.

~~~
stoolpigeon
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."

To me that sounds like selling rides at a loss.

~~~
tedsanders
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.

