
Understanding Uber’s Bleak Operating Economics - Cbasedlifeform
http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-one-understanding-ubers-bleak-operating-economics.html
======
FailMore
Really good article.

Some thoughts on Uber Eats...

I used to be an analyst at a VC firm that invested in a food delivery startup
(which went broke). Food delivery is not a very attractive business in terms
of its profitability, but it is an extremely attractive business if you want
to show fast top line revenue growth.

Why so? Food delivery is great because the full order value can be taken as
the top line revenue. If someone orders a £80 meal for four, that's another
£80 to add to your top line even though your net revenues were ~£8, if that.

The institutional investors Uber will need to attract at IPO will be expecting
Uber to have a typical tech company profile - extremely fast growing revenue
and healthy losses. Strangely, from the IPO documents I've seen, accounting is
very opaque for public companies vs private companies - meaning Uber Eats
revenue is unlikely to be separated.

I think there is a possibility Uber is being forced to gear up to an IPO, top
line revenue growth from the taxi business is not enough to justify the
valuation, so the board has decided to move Uber into food to drive big
numbers - but not profitability.

~~~
troydavis
Savvy investors do split this revenue into two buckets:

1\. Gross merchandise volume (GMV), or what passes through the marketplace:
[https://en.wikipedia.org/wiki/Gross_merchandise_volume](https://en.wikipedia.org/wiki/Gross_merchandise_volume)

2\. Fee revenue, which is what the marketplace actually retains

This knowledge is common among investors, like item #6 on
[http://a16z.com/2015/08/21/16-metrics/](http://a16z.com/2015/08/21/16-metrics/).
It may not be common among, say, individual private wealth management clients
of Morgan Stanley who funded their SPV
([http://www.nytimes.com/2016/02/05/business/dealbook/deal-
sho...](http://www.nytimes.com/2016/02/05/business/dealbook/deal-shows-
investors-are-willing-to-make-a-blind-bet-on-uber.html)), but they chose to
invest without _any_ revenue reporting at all, so it's probably not what made
the difference.

~~~
FailMore
Right, but I think the reporting would be the same in this case as both Uber
Eats and Uber (taxi) are marketplaces. I don't think Uber will be breaking
down it's revenue into these two marketplaces when it IPOs, but yes - it will
be the GTV showing big growth.

------
bbarn
Another big point that he didn't make, which helps his argument a bit, is that
Uber is no longer novel. It's spread and network effect have stopped, and gone
are clean cars and a positive experience, replaced with mostly beat up city
cars and drivers with no practical professional driving experience.

It's akin to delivering pizzas now, the only people doing it are not realizing
the negative value proposition it offers and are desperate for fast money.

I was a big fan of it at first, but now I've gone back to using cabs because
A. I know in this city at least (Chicago) cab drivers have to pass a basic
exam showing they know how to drive people around in the city, and roughly
that they know where they are going. B. It's the same price. C. It's not hard
to find a cab any time but very off peak where I live and work and socialize.

Too many drivers that were stuck staring at the GPS in the car, not knowing
where to go, what route to take. Too many filthy cars, smelling like cigarette
smoke. Too many insinuations that I needed to tip. Too many times I've been
cut off or hit by or gotten stuck behind an illegally parked Uber when I was
driving. The list goes on.

~~~
IshKebab
I think a more important factor is that Google Maps shows competitor taxi
services. I guess they have to pay a fair bit to get that advertising, but
probably not _that_ much and it means there is not much value to being a well-
known brand.

Still, this article claims customers pay 41% of the true cost which doesn't
seem right - there's no way 'normal' taxis are more than double the price of
Uber, at least in the UK.

~~~
morti
Depends where you are I guess. Where I live, it seems about right, assuming
there is no surge tax.

At 1.0x it usually costs at least a third less. The hard thing is getting the
regular rate

------
edblarney
This is a very interesting article - thanks for some actual reporting.

Note: Uber could be in violation of NAFTA and many other trade deals - as they
maybe 'dumping' a product (in this case a service) on other markets, massively
unprofitably, in order to put competitors out of business, after which they
will ostensibly reap monopoly profits.

I'm still not quite sold on Uber, I think there is some interesting value here
... but there are some dubious issues.

If Uber falls it will be painful for other entrepreneurs - they are definitely
keeping some 'animal spirits' going among investors. A lot of institutional
money is in Uber, if they pull out of other things ... well valuations will
get harder for companies looking for bigger C and D rounds for sure :)

~~~
creaghpatr
That's a good point. I wonder how things will shake out for Uber if NAFTA is
renegotiated.

In any case, one game-changing regulation or political event could wipe out
tens of billions in perceived value. If, for example, a small cluster of
European countries banned Uber for whatever reason, it could make the entire
house of cards collapse if they don't cross the self-driving car chasm fast
enough.

~~~
edblarney
Canada is way to weak to get anything with NAFTA.

We don't even win cases against America that are cut-and-dry.

The problem with trade agreements, is that ultimately, issues are grey, and
therefore political.

Making an 'anti dumping' case against Uber is a little bit of a stretch,
meaning - Americans will tell us (Canadians) to f __* off.

If we try to enforce even more material issues, then we get the threat of
other things (border fees, travel visas, no pipeline approval).

There's 1% chance NAFTA will be re-negotiated.

A) I don't think Trump actually dislikes it, he's just being populist.

B) He would not negotiate in a fair manner. Way back, when it was done, it was
done in the spirit of trade. It was an intellectual thing. With Trump, it will
be 'America first' \- not about the value of open trade.

Even if Canada is forced to the negotiating table, we will have a very weak
hand, and our strategy would probably be simply to delay, delay, delay until
someone other than Trump is in charge.

There are basically zero other Presidential Candidates who would be against
it.

Also - maybe Trump doesn't like it ... but he's not going to do a trade deal
on his own. 99% of Republicans and probably 80% of Democrats are 'for' NAFTA.
They have powerful constituents.

The moment negotiations started, a lot of CEO's will be screaming bloody
murder, and Trump would listen.

But as far as Uber-NAFTA - I doubt there will ever be anything raised.

------
rsp1984
_Uber is currently the most highly valued private company in the world._

No, they're not. 37Signals is [1]. Kidding aside, the term valuation in the
context of a private company is always quite a bit whacky. Who determined that
valuation? VCs with their liquidation preferences? Please.

 _If rapid growth could not drive major margin improvements between 2012 and
2016, there is no reason to believe that Uber will suddenly find billions in
scale economies going forward._

Sorry what? As if Uber isn't already getting all the benefits of scale
economics. Their losses are due to their hyper-aggressive growth plans and the
stiff competition. The end game isn't saving money due to economies of scale.
That's already happened. The end game is driving everyone else out of business
and dominating the market in every region of the planet. _That 's_ when the
profits would come in.

[1] [https://signalvnoise.com/posts/1941-press-
release-37signals-...](https://signalvnoise.com/posts/1941-press-
release-37signals-valuation-tops-100-billion-after-bold-vc-investment)

~~~
astrange
I'm late, but Uber has the same problem as cleaning services - they can't
drive the drivers out of business unless they succeed at self-driving fleets,
and they have no monopoly advantage as long as someone else can convince
people to install their app. So it's easy to replace them until you lose money
yourself.

There's a reason other taxi companies haven't formed global corporations.

------
tyingq
_" Uber passengers were paying only 41% of the actual cost of their trips"_

That's worse than I had imagined, assuming the analysis is correct.

~~~
Animats
That's the key issue. How long before Uber runs out of cash? They've raised
around $15 billion.[1] How much of that is left?

The experience of Austin, TX, where Uber and Lyft pulled out rather than
fingerprint their drivers is indicative. Within weeks, there were seven
companies replacing Uber. It just isn't that hard to replace Uber.[2] When
Uber goes under, it will be a speed bump, not a disaster.

Amazon lost money for a long time, but they were building infrastructure -
huge warehouses and giant data centers. That's ordinary industrial growth,
like building a steel mill. Now that's paying off. What physical assets does
Uber have? They don't even own the cars.

[1] [http://www.vanityfair.com/news/2016/06/why-is-uber-
raising-s...](http://www.vanityfair.com/news/2016/06/why-is-uber-raising-so-
much-money) [2] [http://www.512tech.com/technology/tested-seven-austin-
post-u...](http://www.512tech.com/technology/tested-seven-austin-post-uber-
lyft-ride-hailing-apps/D6OMshqRSE0exTmJt8m94M/)

~~~
toomuchtodo
Uber's value will have been generating mindshare for consumers about
ridesharing services. Not good for them, but we who are fond of consumer
excess thank those investors for burning their dollars up with Uber instead of
in a barrel.

~~~
Animats
$15 billion is a lot to pay for "mindshare".

Uber is starting to look like the Webvan of transportation.

------
yalogin
This is a great article. The biggest point here is unlike facebook, google and
Amazon there is no chance to magically find billions of new users and scale up
for Uber. So the chance of turning a profit can only happen with driverless
cars, which is atleast a few years away. I did not realize they are desperate
to get self driving cars. Wonder how long they can sustain if their self
driving car project hits a snag.

~~~
jayjay71
There is absolutely no way Uber will have fully self-driving cars in a few
years (a car that picks you up without a driver). If anything is going to save
Uber, it's going to be Otto. Self-driving trucks are a much easier technical
problem and the market is the better part of a trillion dollars just in the
US.

~~~
serge2k
> Self-driving trucks are a much easier technical problem

People keep saying this. Wouldn't you still have to solve the hard problems? A
truck that spends 99% of it's time on interstates still have to deal with that
1%.

~~~
ksk
What if you bunched up multiple rides? Like a leader truck which has a human
operator and multiple driver-less follower trucks that simply follow the
leader.

~~~
toomuchtodo
Going to need drivers for each of those trucks after you exit the interstate.

------
BIackSwan
There is too many assumptions to make a case either way. There is zero info
about actual unit economics available publicly. We don't know which cities are
without subsidies (on both driver and rider) and which ones are, only Uber has
it available internally.

Heck, due to the growth in a city, the economics themselves change as the
company scales in a city. Only Uber can actually project out to a certain
reasonability (which are almost always different from reality even after
that). Projections are just broad strokes to see if something will definitely
_not_ work rather than a proof that it definitely will.

All these arguments could have been made for Google, Amazon, Facebook etc at a
certain point in the company's life, and then BAM - in a couple of years there
was some "magic point" where the whole company became a cash minting machine.
Also, Amazon is not a "pure software" company - there is a huge operations
backend which was scaled along with the company.

People tend to look at a given snapshot in time and confidently proclaim that
it won't work - ever. But the world is a complex place - nobody has a fking
idea what's gonna happen next. Instead of finding reasons to proclaim "This is
not gonna work - ever.", it would be better if we can ask - "Okay, it looks
like it doesn't work in the current phase - but what are these people doing
which makes it possible to work."

In short, its moot to discuss why Uber will fail - atleast right now - there
isn't enough data that we can confidently project to make that conclusion. Its
better if this sort of analysis is done in hindsight because right now there
are too many variables which are changing too fast for anyone to make any
prediction about anything.

~~~
curiousDog
Very well said. I remember all the bright kids from my college having to
decide between Google/Amzn/msft or Facebook pre-ipo. News articles at that
time had similar proclamations based on leaked revenue estimates. Most of them
that joined FB are now multi-millionaires. Which is not to say that Uber will
be successful, but there's just too many unknowns to make a conclusion either
way.

------
baybal2
My gut feeling is that the next few Enrons will be from the valley

~~~
samfisher83
Enron screwed a lot of "normal" people. A lot of employees bought their stock.
Uber will just lose the VCs money.

~~~
arbuge
Startups indeed do not typically require employees to shell out hard cash for
their equity, but one could argue that they're just extracting payment in
employee time instead.

~~~
georgespencer
> one could argue that they're just extracting payment in employee time
> instead.

Uh, they get a salary.

~~~
db48x
But usually a lower salary than otherwise.

------
neves
One great advantage of Uber is that it works the same in any place of the
world. Anywhere you travel, you know it will give you a fair priced ride.
There are taxi services which only business proposition is to extract extra
money of foolish tourists.

~~~
yabatopia
But how often do people travel abroad? And Uber covers only major, well–known
cities in select countries, a far cry from any place on the world.

------
rdlecler1
This feels like a straw man. They hammer on the costs and then hand wave
around the driverless car potential. Of course Uber is driving for driverless
cars and they're applying a simple formula. If the Customer acquisition Cost
(CaC) is less than the p net present value (NPV) of that customer over that
customers lifetime the you should spend to acquire customers. Driverless cars
will increase NPV even if the economics don't make sense today.

~~~
tyingq
The article does skip any analysis of the model with driverless tech.

I couldn't find much out there that breaks down what the cost difference would
be. One article[1] suggests driverless would drop the cost from $3/mile to
$1.20/mile.

I'm not clear on whether that's enough to counterbalance _" Uber passengers
were paying only 41% of the actual cost of their trips"_

I suspect it would require not just driverless, but also a fairly steep hike
in what they charge. Especially to overcome X (5,10,20?) years of subsidies
waiting on driverless to be viable...that's a pretty big hole.

[1][http://www.fuelsinstitute.org/News/AdditionalResources/2016/...](http://www.fuelsinstitute.org/News/AdditionalResources/2016/May2016.shtm)

~~~
petra
Benedict Evans got the cost of driverless cars to something like 0.40
cents/mile if I'm not mistaken.

Also another option for Uber should have been shared trips, which should
have(?) network effects , but they don't seem to do very well at that ,
compared to the competition .

~~~
aetherson
The problem with shared trips, I think, is that customers _just don 't want
them_ in any great quantities. They don't want to be in very close quarters
with randos. They don't want to wait while someone else gets picked up or
dropped off.

~~~
petra
>> They don't want to be in very close quarters with randos.

Maybe for shared rides , UBER should only assign vehicles that, allow people
to sit with enough personal space,wider, for example a minivan, but make sure
the middle seat is empty. That, combined with a culture of phone staring may
make the experience neutral ?

>> They don't want to wait while someone else gets picked up or dropped off.

Most of the complaints on twitter are on the first problem you mentioned. So
maybe solving it would make the service "good enough" , for the more cost-
consious custuomers, and that's a big market.

------
TheSageMage
What attempts are there to bring the tech that makes Uber popular to the Taxi
industry? My limited experience with taxi's in Las Vegas and San Francisco
have left a lot to be desired when compared to Uber. The fact that the app
gives me metrics about my trip, including driver location and cost, go a long
way in my use of Uber.

------
jpeg_hero
The author makes some interesting points, that I haven't seen made elsewhere,
although I think they could have been made much more briefly and cogently.
Also the Author makes the curious choice to use the metric of "EBITAR" rather
than the standard metric of "EBITDA" with no mention of the "rents and
restructuring" that his metric exudes. This makes me think he is not all that
familiar with financial analysis.

Lots of his article is "Uber's aggregated financials suck and they aren't
getting better." This is pretty useless without more data on current per city
or per unit economics. Also, maybe give Uber credit for splashing some cash to
grow 10x in 1 year? That won't happen again.

The per ride subsidies are the most worrisome. I took an $11 Uber ride the
other day, if that was a $22 Uber ride I would have definitely thought about
it twice! But you can't really throw headquarters cost into that subsidy
calculation- which he seems to do.

For me, the analysis of Uber really comes down to that old chestnut of low
user acquisition / user behavior. If every time a consumer wants to do a web
search they go to your site (google) and if every time they want to sell their
junk they go to your site (ebay) you'll generally have a good business. If
there is one thing that Uber has taught us is that the product of "car rides
hailed by an app" does have huge and sustained demand. Will the consumer be
trained to always go to Uber? Or will the regional nature of the business and
low barriers to entry (easy consumer and driver app switching) allow small
regional apps to sprout up take flow / demand from Uber.

~~~
tyingq
>the Author makes the curious choice to use the metric of "EBITAR" rather than
the standard metric of "EBITDA"

That was Uber's curious choice, not the author's. They were the only publicly
available numbers from Uber.

Edit: One of the screenshots of what Uber shared:
[http://images.gawker.com/1372623315394702184/c_scale,fl_prog...](http://images.gawker.com/1372623315394702184/c_scale,fl_progressive,q_80,w_800.jpg)
It's missing the info needed to calculate EBITDA.

------
oli5679
From an antitrust perspective, predatory pricing is only a violation under
EU/US law if firms are pricing below marginal cost. That's not to say Uber
might not be pursuing a predatory strategy, but that it falls within both
jurisdictions' safe harbour of legitimate practice.

------
ruggeri
(I hope this comment is useful. Perhaps I am just confused by the article).

Interesting article. The article emphasizes that the $2B loss that Uber runs
is effectively a subsidy for riders. But that isn’t necessarily necessarily
100% true. If Uber loses $2B/yr because it pours $2B in a hole and sets in on
fire, that isn’t a subsidy to riders. If that’s the case, then Uber can stop
losing money simply by stopping doing that.

What percentage of the $2B is spent on growth (minus subsidy to ride cost;
e.g., advertising) which can be shut off eventually? What percentage is spent
on software, which is a fixed cost and actually infinitely scalable? What
percentage of engineering headcount can be laid off/replaced with cheaper
people as the service approaches feature completion?

Uber spends about $2.1B in sales and operating expenses. I don’t know what the
breakdown is inside these. But if it can turn off some of those expenses as
growth slows, and if others are fixed as it grows, then is there no hope?

The article doesn’t give Uber enough credit for offering a definitely superior
product, IMHO. Uber doesn’t necessarily need to be price competitive with
previously existing companies, which were garbage. The accountability of Uber
drivers, the ability to call a car to a specific location within minutes,
these are things that, when I lived in Chicago, simply did not exist at all.

That said, there’s a limit to how much Uber can charge extra. If it needs to
charge double the prices of previously existing competitors, then the extra
service isn’t worth it, and Uber wouldn’t be worth anything.

I don’t understand how Uber could possibly need to charge that much more than
existing companies. Yes, it misses out on the “fleet effect;” but if the
largest cost goes to driver compensation, the economy of running a fleet is
maybe a small percentage of overall costs. Yes, Uber needs to build and
maintain software; but that ought to be a fixed cost (and mostly in initial
years!).

I guess it comes down to this: I don’t understand the contention that Uber has
no meaningful scale economies (the software, right?) or how it could be
possible that Uber’s model needs to cost significantly more than pre-existing
competitors. Since I can’t see inside of what Uber spends its revenue on, I
don’t know how much it would need to raise its current prices. But if Uber
costs, say, 10% more than pre-existing taxi companies, I would still expect to
be worth >>$0. I can’t speak to $70B.

(Also, I offer no opinion on long-term defensibility of Uber's business to new
entrants).

------
brentm
I have maintained the viewpoint for a while that if Uber's valuation is based
on the inevitability of driverless cars and the reclaiming of that 80%+
revenue they are in trouble. Driverless cars even when the tech is ready will
take many years to clear the political hurdles necessary for wide enough usage
to help Uber. The same people that put Trump in office are not going to
happily accept tech that will be painted in the political light as a tool to
remove tens of thousands of jobs from the economy. The politics is going to be
almost as big of a hurdle as the tech itself.

(Not to mention that removal of the driver opens up Uber's competition many
competent tech companies with deep enough pockets and direct access to the
masses.)

------
neves
Uber will work when we start to get autonomous cars. So they will fire
everybody and retain all the profits.

------
jakewins
Of course Uber has $2B in annual losses, that's by design. Do you think they
would take $13B in VC capital and then not spend the money?

The profit margin is stable at around (100%) because it is kept there
artificially, balancing how much of the expansion is paid for with revenue and
how much is paid for with VC money.

The rest of the article was super interesting - but the conclusion of what
Ubers current losses means I think seems off.

