FWIW this assertion (which isn't really core to the central thesis of the post, but still) is wrong. That number comes from
but the author of that story misread the data. Uber only counts their cut as revenue not the full cost of the ride.
Despite this repetition (now corrected, thx!) of this incorrect data I find the overall thesis of the post compelling! As a disinterested bystander, it will be interesting to see how it all plays out.
EDIT: It turns out the original 41% statement comes from http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver... not from the Financial Times. It can be hard to trace these things back sometimes.
"As long as I don't have to pay, I don't care what the cost is! Wait, why is everyone looking at me all funny?"
Farebox ratio = fares / total cost of operations
Total cost of operations = fares - profits
Farebox ratio = fares / (fares - profits)
Farebox ratio = 3,661 / (3,661 - -987) = 3661 / 4648 = 78.8%
"Uber passengers were paying only 41% of the actual cost of their trips."
What you have calculated is that Uber passengers paid 78.8% of the cost of operating the company in 1H2015.
The cost of operating the company isn't the same thing as the cost of all their trips. The company does a lot more than provide trips.
I can't imagine that Uber loses money on each additional trip. If that was true, the boycotts are helping Uber!
So if you have a coupon and use it, it's quite likely that Uber makes a loss. But for most other rides, the driver will usually get a bit less than what you pay. It's just not enough to cover the company costs.
Would those be essential at this point? Seems like everyone who wants a ride-sharing app has one, so their marketing expense should be substantially down by now.
Startups typically keep the salary expenses controllable by compensating via equity (which does not have to be reported as expense unless one is doing GAAP), so it seems that it should be under control as well.
I've talked with 2-3 Uber drivers in LA area. They seem to be getting 65% to 75% of what passenger pays. I think many of the core Uber markets are fairly profitable. This would imply that majority of the burn is focused on growth in new markets.
Some potential problems with extrapolating the data:
* Small sample size.
* Uber rides cost more in California, observed 65% to 75% might not hold in other mature markets.
What's at issue here isn't that Uber drivers don't get to take home X% of what the passenger pays, but rather that the cost Uber charges passengers isn't enough to keep the business afloat without a significant amount of VC funding.
1. Run their operating business
- Maintain data centers
- Maintain a global web infrastructure
- Maintain the app
2. Run campaigns to compete in markets with strong local competition
- Europe (Hailo, Car2Go, etc)
- Asia (Didi, Ola, Grab, etc)
3. Finance their ongoing operations
- Equity financing expensive
- Debt financing hard to get at this stage and cost money too
4. Hire and retain top talent
5. Legal fees and licensing
6. Rentals for global offices
7. Fund and maintain fleet businesses
8. Invest in R&D (self-driving technology & talent)
9. Entertain M&A
So it looks they have a lot of costs on their plate which their operating business can not cover.
Service and hardware businesses have completely different cost structures as compared to tech companies.
Think about it - standard deduction is about about 50 cents per mile for vehicle costs, and actually having a human in the seat probably costs more than 50 cents per mile ($ per hour divided by average speed), and the average drive is about 5 miles. We're talking well over $5 in wholesale operating costs for each ride. Times literally a million rides per day.
The cost of a few programmers and servers is tiny in comparison.
These are all things Uber does not do. It comes out of the cut the driver takes home, not Uber's revenue.
According to the CEO, self-driving cars are "existential" to Uber's success. They may need something that disruptive to meet the company's sky high valuation.
You go to work at 9am and while at work 9.01am to 4.59pm your car drives around making you both money. The same applies for when you return home 6.01pm to 8am the next day.
No drivers, only Auto-bots ;) and paying customers!
(makes me wonder how much Insurance companies will be making from this setup)(and if they are ready/preparing their numbers for this type of business)
I don't want to imagine what it'd be like at 8am after giving lifts to people coming home after a night out
If you find the car filthy, I'm sure a customer would too, so it's in their interest to fix it and I'm sure it's even easy to automate the cleaning process :-)
That said, they probably set machines in very high traffic areas to terrible odds to catch as many suckers as possible.
A machine that's truly random will result in everyone losing money slowly and reliably after a large number of pulls. So not fun. A machine built to have the odds wander around over a period of time will be more unpredictable with a greater earnings spread
Also, for video poker and card games, the wins and losses are distributed as if it were a real deck of cards shuffled between hands. There are strict regulations there too, and payout percentages based on the rules of the game and the payout values for each type of poker hand.
For progressive Jackpots, the chances of you hitting the Jackpot on two successive pulls are the same as you hitting the jackpot on two pulls far apart. The payouts are different, but as you said, that is not hidden information.
Slot machines are able to use psychological tricks, I believe, such as showing "almost hits" with a higher probability than them actually occurring. "Oh, if that one symbol had just changed, I'd be a millionaire right now!"
State law allows them to change the odds after a machine has been idle for four minutes, and then they must not allow anyone to play the machine for four more minutes. During that time, the screen must indicate a change is being made to the game's configuration, said Travis Foley, laboratory manager for the technology division of the Nevada State Gaming Control Board, who is overseeing the Treasure Island test.
(How many people do you suppose play lotteries week in week out never winning back a fraction of what they out in, but dreaming about and planning what they're gonna spend the $10,000,000 jackpot on?)
As to odds. If you have a 1% chance to win 99$ and play 90 times you are likely to be up 9$ and have a lower odds of being down 90$ And even lower odds of being up 108$. Over long enough time frames you still lose money, but it feels very different from losing 0.01 cents per pull.
The fact that it has been widely reported is a sad statement on the innumeracy of journalism.
- 41% of Uber's corporate expenses are paid for by the customer, 59% by investors
- 100% of non-corporate costs (driver, car, fuel, maintenance, etc) are paid for by the customer and 0% by investors.
But this instead somehow got interpreted as "the customer only pays for 41% of the ride cost". Which is completely false.
I will add that I suspect that some corporate expenses are going to the driver in the form of bonuses or minimum per hour earnings (Uber has had a lot incentive programs for drivers). This, kinda, goes to the cost of a ride. I have no idea how much money this is overall. A lot maybe.
except that revenue != income. (http://smallbusiness.chron.com/net-sales-revenue-vs-net-inco... )
> Net sales, or net revenue, is the money a company gets from doing business with its customers. Net income is profit -- what's left over after the company has accounted for all its revenue, expenses, gains, losses, taxes and other obligations.
Uber almost certainly counts the revenue. This is a standard silicon valley way of getting a higher VC valuation.
This is important because if the money is flowing through Uber's pockets then Uber has the ability to adjust the diversion of revenue into income. ( and the VCs know this )
Look at the random silicon valley startup marketplace that reports how many millions of dollars they sold. All revenue - but the income may be pitiful.
It does not, as you can plainly see if you look at the nakedcapitalism link. Revenue is a separate, and much smaller, number than total passenger payments.
(1) which is not the same thing, at all, as the total amount customers are paying for rides
(2) which is not the same thing, at all, as the cost of providing all uber rides
> (1) which is not the same thing,
> at all, as the total amount customers
> are paying for rides
If they suddenly had 10x as many rides or would shed coupons and R&D, they'd probably be profitable. But they'd also lose their edge they hope to have over Lyft & Co.
NB: There are of course areas where they offer rides below the driver's cut, but that's probably rare after they exited China.