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Uber Lays Off 400 (nytimes.com)
515 points by moltensodium 22 days ago | hide | past | web | favorite | 297 comments



Hot take: This seems like it's directly related to the IPO itself. I'm imagining this cause and effect:

Need more users pre IPO to juice the growth story -> Hire more marketers -> Cut costs post IPO

I'm not arguing it's effective, but it's certainly a reasonable outgrowth of the various goals they've had over the last year or two.


I mostly agree, except I'd probably frame it a bit differently:

> Need more users pre IPO to juice the growth story

Or, "VCs tell us we need to spend their investment quickly in whatever areas will generate a hockey stick growth in valuation. We can always fix our business model when we're ready to."

> Cut costs post IPO

Or, "We no longer answer to our VCs. Now we answer to the public market who cares a lot more about the fundamentals of our business. Now we need to improve our fundamentals to push our market cap upward."


I don't disagree with what you're saying, but I think there is a more cynical take that Uber exemplifies.

The VCs do everything they can to drive up the valuation, except make money. They then sell their shares to the public markets for an incredible profit and let them deal with the problem of actually making money.

I fear venture capital (and Silicon Valley) is much more about value extraction than value creation these days. I am still somewhat young so I have a limited frame of reference - maybe it was always like this.

Obviously you can find examples to support either side. Amazon and Facebook weren't the money making machines (for all the talks of Amazon not making a profit, AWS clearly does and their free cash flow is insane) they are today when they went public. But there are far more companies that didn't turn out that way.

Travis Kalanick was very clear that Uber could not survive without self-driving cars. And that doesn't seem to be panning out.


Facebook was already profitable pre-IPO and was forced to go public because of some security law involving the number of investors.

But the number of tech startups that go public is small. Only one YC backed company has ever gone public - Dropbox. And it seems to be proving Steve Jobs right. It was never a product, it was a feature. It still doesn’t have a clear road to sustainable profitability.

Even out of the few that have gone public within the last 10 years, most of the tech darlings still haven’t become profitable.


PagerDuty (YC S10) is also a public company: https://www.marketwatch.com/story/pagerduty-stock-skyrockets...


And they lost $12 million last year so just like Dropbox. They still aren’t profitable.


> But the number of tech startups that go public is small. Only one YC backed company has ever gone public - Dropbox.

I think the real irony is that AirBnB is their biggest darling, and it's not a tech company. The history of that company is very interesting, going back to Paul Graham making a note of them being the first founders without a technical background to get into YC (the third cofounder who is technical was added to the roster later on, or at least given the title).

That said, I have high hopes for Stripe, Ginkgo Bioworks, Gusto, Docker, Gitlab, and some of their other companies (not that they'll necessarily go public, but that they'll become real companies - I'd argue this describes twitch).


How will Docker and Gitlab become self sustaining when other companies like ElasticCo, Mongo, etc couldn’t?


I think Docker is ubiquitous enough that there is a real market for it. It even plays well with Kubernetes. I don't know enough about their pricing model and churn to comment on their viability with much certainty.

Maybe I'm being too optimistic with Gitlab. I know next to nothing about their business, other than hearing good things from people who have used it.

That said, I doubt I would've seriously considered investing in any of them except for Stripe until the previously listed companies had shown significant traction. I'm actually somewhat pessimistic about AirBnB's valuation 5-10 years from now compared to today.

But then, I thought for sure the iPhone was going to flop. So what do I know?


Docker as a technology is ubiquitous, but the tech landscape is littered with money losing companies trying to profit off of open source software.

Docker is just as much in danger of being clobbered by the cloud providers as ElasticCo, Mongo and all of the other open source companies. AWS is making money off of us running Docker. Docker itself is not making any money from us.


I think that this is correct. The barrier to entry for producing software is very low because in many cases, coding does not require any capital. It should be a highly competitive industry with many alternatives to choose from, but it's not; this is because of VCs.

VCs use their capital and connections to create moats around their investments to make their industry unprofitable for all competitors.


> I fear venture capital (and Silicon Valley) is much more about value extraction than value creation these days.

If you think about it, most of the venture capital goes in financing duds. That's an unfortunate truth about entrepreneurship. So a VC is more or less forced to extract as much value as possible from the successful ones. Not saying it is right or wrong but stating the way things are working.


Once upon a time, successful businesses were also profitable.


> The VCs do everything they can to drive up the valuation, except make money. They then sell their shares to the public markets for an incredible profit...

The VCs are still locked in and haven't been able to sell afaik? The public markets have 6 months to figure out fair price before they get theirs


Softbank has used it's collateral in WeWork & Uber to take out secured loans.

Effectively bypassing the lockup period, and insuring any downside to the share price for the cost of the interest on the loans, while maintaining the opportunity for any upside.

They've effectively done one better than just selling the stock.


LabRats is a pretty good book, which talks about this phenomenon


This is why I'm staying out of much of tech and the current stock market.

We were taught as children the market returns 7%/yr. People took this too seriously.

This has all the signs of the housing bubble.


In the meantime, the market is up 20% since January and PE ratios for the largest companies are still reasonable. Uber’s success or failure has no bearing on the broader health of the market.


If public markets care about fundamentals why can VCs exit into the public market with fake hockey stick growth?


Because during the initial window of exit, "All companies look like this" is a plausible narrative.


Is it normal to have layoffs a quarter after your IPO?


Layoffs are "more normal" at more tech companies at more lifecycle stages than many people realize.

If you're interested in tech layoff data covering people who work in the San Francisco Bay Area, read an analysis that I published: https://medium.com/layoff-aid-blog/tech-layoffs-are-surprisi...


This doesn't surprise me per say. The number is nevertheless smaller than the number of engineers they hire, and they only had a handful major services to offer.


> Making robberies into larcenies. Making rapes disappear. You juke the stats, and majors become colonels. I've been here before.


Profitability doubts after the IPO? Everyone in the world knew they were never close to profitability pre-IPO, this is just the reality of being a publicly traded not profitable company. Can't funding round yourself out of this one anymore.


Well you can... the terminology is just different

They’ll say “saudi investors bought into secondary offering at X share price” instead of “round completed at Y valuation!!!” Which is just X share price of last purchase multiplied by total shares in existence

Public companies can do secondary offerings from treasury or from creating brand new shares from nothing (dilution)

Liquidity is one of the benefits


> “saudi investors bought into secondary offering at X share price”

I think Beyond Meat are currently demonstrating the perils of doing a secondary offering whilst the company is unprofitable.


so that was hilariously well timed with my post but very strange: its some investors doing the share sells, but having the company announce it (and selling just a tiny amount of shares in it too). The company doesn't make the bulk of the money here, so why announce it at all? The investors just used the company to advertise that they have shares to sell

so this is more of a hilarious red flag of incompetence, if one planned to add to a position in this

but it does the prove the point that the company and shareholders have many financing options: the issuer is unscathed here, they will create shares and exchange it for $50,000,000 or maybe $40,000,000 due to the 20% drop from announcing it, oh no. Those private shareholders are still planning to make 9 figures.


But then what's the planned payout for those secondary investors? Liquidating on the market would plummet.


Companies do this all the time (issue new bonds or equity). There's really not much of a difference between public and private markets, in principle.

Planned payout is, and has been the same ever since limited liability companies were invented by humanity: excessive cash flows plus liquidation value of corporate assets at end of life. Hoping on anything else is speculation (nothing wrong with that, but it is just speculation, i.e. trying to sell to the greater fool).


Right, but that specific activity is all visible on the financial filings, so how is that the same as the pre-IPO funding rounds that Uber was burning through?

If you take out a ton of debt while burning through cash reserves then your market price plummets. Same with issuing new equity, through dilution. At least pre-IPO, the investors could lock in favorable pay outs on their funding rounds - now this is all visible to the public investors.


Yup, also from selling bonds.


Raising debt is just as visible on public filings as burning the cash, and gets baked into the market price. It's also hard to do with as few of assets as Uber has.


The market price of shares is less consequential than you think, for an issuer.


> The marketing team had more than 1,200...

I fully admit that I'm not in marketing, so there are surely nuances I don't know. But that scale of marketing department is orders of magnitude above any other place I have worked, with the possible exception of IBM in the 90s. Just maybe... this was a reasonable move.


Uber's marketing / customer acquisition cost is their highest non-driver line item by a significant multiple.

They spent ~$3,200,000,000 ($3.2 billion) on sales & marketing in 2018 of which ~$1,800,000,000 is direct media / HR cost to drive customer acquisition.

In 2019 this number, as of the first quarter, has gone up substantially to a >$4b run rate.

With a burdened cost of $150k/yr for every single member of the 1,200 marketing team that makes up $180m of the total.

Uber operates in 600+ international major markets.

1200 employees (5% of organization total) covering and executing nuanced marketplace approaches for a budget of that scale is not out of range.

(1) https://qz.com/1592971/uber-ipo-filling-reveals-how-it-spend...


Echoing twic's disbelief here. A quick googling turned up Coca-Cola's global advertising budget as being $4 billion/year [1].

>Coca-Cola has made a yearly commitment to large ad spends. In 2017, the beverage manufacturer spent $3.96 billion, in 2016, $4 billion, and in 2015 $3.96 billion on global advertising.

But I'm not sure if that's a comparable figure, as "advertising" is only a subset of "marketing". Still, if the latter is basically just the former plus salaries, it still suggests Uber is overpaying and/or has some inefficiencies in how they operate here.

[1] https://www.investopedia.com/articles/markets/081315/look-co...


I think driver incentives falls under marketing spend at Uber. Driver Incentives are they will pay driver $X to make $Y trips. Essentially riders are paying $5 and drivers are making $6. I believe this is where most of the money is burned at Lyft as well.


UBER masks this real number across many of their general line items.

EG they put ~$300,000,000 of the "Driver Incentive" cost into "Cost of Revenue" line item that represents:

- "Any amount paid to a driver that exceeds the revenue earned by that driver (for instance, if a driver’s earnings from a trip exceed the fare for that trip). Excess driver incentives jumped by about $300 million in 2018 from the previous year, largely due to Uber Eats."

And then they stick $1,800,000,000 into "Sales & Marketing" representing:

- "Discounts, promotions, refunds, and credits for customers,"

- - - -

A popular criticism of UBER is that their unit economics are not sound - eg they can't make money at scale on a per ride basis.

So this giant $2.1b glut of Driver Incentives and Customer Incentives is one of the areas to deeply study and build a position around if you'd like to be an UBER stock holder :)


In terms of unit economics, UberX is still (mostly) sound -- the rider is paying a fare based roughly on time/distance, and the driver is paid a fare that's also based roughly on time/distance; it's very rare to see a rider paying less than what a driver gets paid. (Even after taking into account the various driver incentives.)

Where the unit economics get completely messed up is Uber Eats. In my local market (Wellington NZ) the eaters are paying a flat delivery fee of $5.99 to $7.99, while the drivers are being paid $5 per pickup and $1.35 per km. This results in drivers earning anywhere from $5 to $20 for each delivery -- and that's without even taking into account any driver promotions. No wonder Uber had to come up with an "excess driver incentives" line item!

Sometimes Eats will have the driver pick up two orders at the same time. This lets Uber collect two delivery fees from the customers while only paying the driver a single pickup fee plus the kms from restaurant to customer A to customer B. In theory this should work in Uber's favour. But their system all-too-frequently will make insane assignments, such as batching together two orders for customers that live in completely opposite directions. There will be situations where the customers have each paid, say, $7.99 for delivery... and the driver ends up earning $30 from the trip!

So this is cutting very deeply into the 35% commission that Uber charges restaurants on the total order value. They're trying to hide the insane unit economics of Eats by spreading the various revenues and costs around different line items...


Back the day I had a short stint at a bus charter business. There we also tried to reduce costs by bundling travel group's individual itenaries and match that against available busses to reduce empty rides. The result would have been that groups might have different busses on different days. Nice idea, in theory.

Turned out that avoiding empty trips in transportation is hugely dependant on volume by time and region. It is also a very hard problem to solve as you need to match availability data from busses (which needs to be collected in a scaleable way), trips (which need to be in the correct regions and times) and then simply come up with an optimization algorithm to sort it all out. Peace of cake... Not. Especially if you want to link that to your pricing already during customer booking instead of after-the-fact discounts.

One might suspect that the transportation industry which has the volumes and the cost pain of empty trips might already have solved it if it woupd have been that easy.


The elephant in the room for ride sharing is unit economics (and, closely related to unit economics, the race to self-driving).

Hiding $1800m of ride discounts under Sales and Marketing feels deceptive. If a store advertises "summer sale, 30% off!" for a month, you can reasonably call that marketing spend.

Uber is different. If my flight's leaving in 1h30m, I pull out my phone, open Uber, type in LAX, open Lyft, type in LAX.

Say Uber is $17. Lyft is $20. I pick Uber. If there's a "promotion" going on under the hood to produce that $17 number, is that marketing? It's really just price competition in a cutthroat, negative-unit-economic market.

Given that, Uber laying off 400 people has a dual effect. It's cutting sales spend. It's also creating news to distract from the fact that >50% of the sales spend is really per-ride losses.


Really good point there. If Uber can charge $1.01 for something it pays $0.99 for, then it might have a sound business model. But if it's in a perpetual state of offering discounts down to $0.98 to keep users buying rides, then it probably doesn't, and to relabel the underpricing as a marketing effort is just obscuring that.


I am not a shareholder, but I think market share is the short term goal. The incentives can be phased out as prices increase a bit after competition cools off.


A criticism of this "model" is that building a ridesharing app and cloud backend is now not that hard.

So some developers with VC money can develop an app, launch in a city, and force Uber to cut prices, because people will be happy to install a FastRyde app and get rides for $3 less than Lyft/Uber.


And that is exactly what is happening in Paris, for instance. There are a ton of different apps there. Kapten is one of them. They simply cut their commission by 15% compared to Uber, pay the drivers 7.5% more and make the rides 7.5% cheaper, basically. Since they don't have as much legal costs and marketing costs as Uber, it seems to work out for now. I really don't see how Uber will be able to prevent this in other places too...


The big question is driver retention and how much Uber subsidizing drivers is required. Maybe Uber spends 0 extra, drivers drop out of the system, ride prices increase, and drivers return as riders stop using Uber, bringing it to some sort of equilibrium. Maybe not.

These retention numbers, for any business that needs returning customers or service providers pretty much make or break all the customer/provider acquisition economics.


In London Uber is unravelling already. Here Citymapper is the default transit app and Uber is just one of the options listed. The transfer cost for a customer changing app is 0. We keep saying we’re “not sure” whether Uber will have customer retention... no, of course it won’t! Unless they change their model, they’re the biggest VC folly in recent times. Just proves how overheated the market become when F/A/G acquired everything in the market that competes with them, leaving ridiculous Vc money to flow to dumb ideas like Uber.


no VC money anylonger, now it's stock market money, i.e. our pension funds


Wait, you guys get pension funds?


> The big question is driver retention and how much Uber subsidizing drivers is required.

In Australia we've got drivers advertising other services directly to riders. Most of these are probably subsidizing rides to enter the market, but how long can uber continue losing money as competitors try and enter the market?


> market share is the short term goal.

Creating a monopoly then jacking up the price. Not doubt shafting drivers and their customers.


But Uber's business model doesn't have lock-in potential. So if a price change happens, people (drivers and customers) will just switch to a different app.


I have sympathy with your view. Do Uber even care about that? It's selling the prospect of a lock-in that got them the IPO.


To me this only works out if they are a monopoly bribing politicians to allow them to keep being the only smartphone-app-based taxi and food delivery service in town.

As others mentioned, its not hard to clone Uber. They don't even have the network effect of Facebook or Twitter. No one cares if their friend uses Lyft and they use Uber, they just care about the one time they make a journey, and how much it costs (along with safety I suppose, but that is an extra cost Uber try very hard to avoid).

The drivers are free to run whatever apps they want simultaneously, because Uber only works when exploiting them as "contractors" free to choose when and how they work.

I think Travis Kalanick was right, they need self driving cars, now...


From their S-1:

>Driver incentives. Driver incentives refer to payments that we make to Drivers, which are separate from and in addition to the Driver’s portion of the fare paid by the consumer. For example, Driver incentives could include payments we make to Drivers should they choose to take advantage of an incentive offer and complete a consecutive number of trips or a cumulative number of trips on the platform over a defined period of time. Driver incentives are recorded as a reduction of revenue to the extent they are not excess Driver incentives (as defined below).

>Driver referrals. Driver referrals refer to payments that we make to existing Drivers to refer new Drivers onto our platform. Driver referrals are recorded in sales and marketing expenses, as they represent the receipt of a distinct service of customer acquisition for which there is evidence of fair value.

https://www.sec.gov/Archives/edgar/data/1543151/000119312519... (pp. iii)


Also in comparison with Coca-Cola, Uber is supposedly counting discounts and sales to riders in a way that inflates revenue, which does not sound to be the norm. https://www.lctmag.com/news/733960/uber-lyft-use-accounting-...


Uber blew as much as $3.2 billion on advertising alone in 2018 on its way to one of the biggest US IPOs on record https://www.businessinsider.com/uber-shelled-out-31-billion-...


Yes, I joined the thread in response to a comment that cited the $3.2B/2018 figure.


> Uber operates in 600+ international major markets.

Maybe it’s because I’m from a small country, but can a single country have more than one “major international market”?


It means cities/metro areas.


Does it really? I would not have said so. I work as a consultant for a major international (I wont say who ) company and they only quote 190 or so "international markets"


They must be counting multiple markets per country. There aren't that many countries in the world and there are a significant number of countries where Uber doesn't operate all. As an example, afaik they no longer operate anywhere in south east Asia.


I don't think it's necessarily standard to use it that way, but it makes sense for Uber because their areas of operation (markets) are defined by cities (i.e. you can't just call an Uber in the middle of the country; it has to be within one of their operating cities).


Read this sentence as "600+ major markets, internationally".

A "major market" is basically a city/metro.


Have you got the right number of zeroes there? Three billion per year?


Yep - $3.2b is the headline cost of sales and marketing in 2018.

In 2019 that number as of Q1 has shot up to a $4b+ run rate:

https://investor.uber.com/news-events/news/press-release-det...

- -

Even more interesting in that number.

The accounting department came up with a nice way to mask their "unprofitable rides" and call them "customer discounts".

This is the line item for costs where they pay a driver more than they collect from a customer.

So they put the "customer discounts" number, which represented $1,400,000,000 in total expense, into the marketing budget.

Leaving ~$1,800,000,000 spread for all other sales & marketing activities.

I am very in the weeds in the 2-sided logistics marketplace customer acquisition data if you have other questions :).


What’s your take on the sustainability of these subsidized rides? Will drivers still drive if this incentive is taken away? What are some of your favorite interesting insights from that data?


(1) What’s your take on the sustainability of these subsidized rides? -=>

The gigantic and unsustainable CAC numbers experienced by Uber, Lyft, and others is due to the present level of competition for these drivers & customers. This demand has been inflated for years fueled by Vision Fund and other late stage VC money with their winner takes all approach.

This cost has now been handed off (in the USA anyways) to Lyft & Uber stock holders. Somebody is going to run out of capital or experience a precipitous drop in stock valuation that will force the market's hand here and reduce demand and re-normalize.

It is financially unsustainable for this # to keep climbing as a percentage of revenue barring a massive change to the cost structures.

The only massive change imaginable in the structure was when Travis got away for a few years claiming autonomous would cure all, this is obviously not going to happen in the timeline he was pitching.

I think that the CEO taking a hard position and firing 400 people in his marketing department is a good indicator that when they next report earnings CAC is going to be a huge mess and maybe shed some light on how UBER plans to navigate that downshift.

(2) Will drivers still drive if this incentive is taken away? -=> Yes, following my comment above I think that the current CAC and retention numbers will normalize (for one or other other of the major players) and that the delta savings will be pushed back into increased driver wages.

(3) What are some of your favorite interesting insights from that data? -=> Outta steam sorry :)


>This demand has been inflated for years fueled by Vision Fund and other late stage VC money with their winner takes all approach.

Do you think it is even possible to have a winner takes all in the global hire car market? The barrier to entry is exceedingly low.


It sounds like prices should be higher. They sure appear unsubsidized in Australia.


I don't see aresant saying "per year" but just in 2018.


They even cited a source


Just fire half of them to save half the money.

Marketing has large budgets to spend (multiple of their salaries) on marketing campaigns. They're usually incentivized to spend as much as possible on whichever marketing campaign they can come up with, with little accountability on whether it brings any ROI.

It's the equivalent of software engineers wanting to use the latest tools for resume building, no matter the situation. The difference is that marketing lives on spending money, hence cutting headcount there has a big multiplier on cost savings.


I don't know when was the last time you got involved in anything marketing but if anything, marketing teams are fairly metrics driven nowadays.


Good ones are.


I don't know when is the last time you got involved in marketing but if anything, the metrics driven culture is precisely a free pass allowing to justify any decision whatsoever, through a careful selection of data points and scale, whether intentional or accidental. God forbids having to point out to your manager that he mixed up the X/Y axis and sales have been decreasing month over month, not increasing.

By the way, a lot of marketing is still not quite metrics driven. Unlike the internet, when spending money on national TV, sports teams, tube station ads, there is little feedback that can be captured.

And even on the internet, how do the new junior marketer learns that google/facebook ads don't have a positive ROI for his use case, assuming he's measuring at all? That's by spending a few million dollars in vain.

Anyway, that is not to say that marketing is useless, it's an important aspect of some businesses. The capital costs involved are fairly high though and can quickly spiral out of control. A big part of the marketing/advertising industry is a scam operating at a loss, an elaborate conduit to transfer money from the client to the advertiser.


Since we're talking about tech startup marketing budgets, it's a good time to reread http://www.paulgraham.com/yahoo.html

By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of "Eureka!" I was shouting "Sell!"


Makes me think of my days working on a facebook app in 2007-8... every single app had the same revenue stream - selling installs to other apps. The price per install was crazy high, and this was before Facebook started enforcing rules about shady practices, so every app would do things like "Install this other app, and we give you these perks in our app"

It was ridiculous. There was no real money, just app developers paying each other for installs.


The same thing has been true of mobile games for a while. A lot of the ad inventory displayed in free games is ads for more free games -- sure, there's some real revenue from in-app purchases, but there's also a lot of money getting passed from hand to hand for ads.


I think that 'some' real revenue probably dwarves most industries tenfold. Look at what something like Candy Crush makes in IAP, the top 5 players could probably support the entire ad industry themselves in perpetuity without breaking stride.


40% of all invested VC dollars go to Facebook and Google in the form of customer acquisition costs


90% of all new ad spend goes to either FB or Google because they actually work for acquiring customers at scale. Every other ad provider squeezes into the last 10%.


Not sure this is true anymore. The market is so big, those two can't cover it all.


Curious what percentage goes to AWS...


If you look at Uber/Lyft, quite a lot...


This is no different than what happened with Yahoo and AOL before the dot com bust.


Most modern ad spend is tracked to ROI. Yahoo and AOL was not.


tracked to does not necessarily imply "limited by."


Source?


Thank you for this. Lovely read! :-)


Your comment reminds me of something Dan Luu had written about.

https://danluu.com/sounds-easy/

> I can't think of a single large software company that doesn't regularly draw internet comments of the form “What do all the employees do?"

Granted he's mostly talking about engineers, but I'm sure someone more knowledgable about marketing could write an almost identical essay.


A really simple way to think about this.

The promise of software at scale is that the marginal costs of selling one single additional unit are basically $0.00

As a result if your product sells for $500 you can spend $495 and still make money.

This leads to all sorts of adventures in driving that additional marginal unit sale such as:

- Localization - eg Microsoft Office is available in 102 languages! So now we need a local market product manager, sales team, distribution team, translator, QA, etc, etc.

- Enterprise - Huge swaths of money spent on conferences, thought leadership, any bullshit you can think of to potentially get a decision maker CTO to befriend somebody on your sales team.

- Government! - Selling to the gov't is extremely profitable but extremely long and complex sales cycle. Now we're hiring lobbyists, contract specialists, etc, etc.

- Support - Happy users are your mostly likely next buyers

etc etc


> I can't think of a single large software company that doesn't regularly draw internet comments of the form “What do all the employees do?"

I also can't think of a single large software company that doesn't, in the long run, survive by either endlessly buying and extracting all the value out of smaller software companies, or creating a moat that makes it almost impossible for new competitors to emerge.

Having worked for a small software company that got acquired by a large one that used the former survival strategy, and therefore witnessed firsthand the subsequent doubling of headcount and simultaneous halving of overall productivity, I can offer one of what I assume are several possible answers: Paperwork. And lots of it.


I don't think large companies just "extract value" from the small ones. They prove that the small company had a great idea and make the idea successful by providing sales, marketing and support that the small.company wouldn't be able to provide (if for no other reason than reduced risk and existing customer relations).


It might depend. In the case I experienced, sales, marketing and support were already in place and quite successful beforehand, and the acquiring company did an admirable job of teaching all three how to do less with more.

To take the example of support, pre-acquisition, the support team had a reputation for being one of the best and most knowledgeable in the industry. That reputation went up in smoke rather quickly when the acquiring company decided to merge support into their existing support vertical and adopt its existing policies, including things like requiring the support and the product development teams to communicate through JIRA instead of using informal channels like instant messages or (in exceptional cases) pulling a developer into the call.

The end result was that the mean time to find a resolution for the non-routine issues went from hours to days. Ironically, while management claimed this would reduce disruption for the development team, it actually increased the time that developers had to spend on supporting the support team, since it made communication so much more difficult. Which, in turn, means that it slowed down both customer support and product development by bogging them both down with paperwork.


Or killing that small company to protect one of their own products.


Up to a point these arguments make sense, after that the much better explanation is Parkinson's Law.

Of course all these employees are doing something. People will always invent more unnecessary work if the budget is there.

If the budget isn't there, the unnecessary work just isn't done and nobody notices.


The "marketing manager" role at Uber is an operations role and part of a local operations teams. Your main job is not "brand marketing" but attracting new drivers and managing local incentive spend.

They've most likely (wisely) decided to centralize those decisions, so not a huge surprise.

FWIW, the operations teams (small, local, non-technical teams stationed random cities around the world) built Uber into what it is today. Scaling/automating those jobs was always an inevitable.


Why is it wise? It wouldn't surprise me if some of the best strategies for this kind of ops is location specific.


Most of Uber's early virality came from local teams being forced to innovate to survive. Ice Cream, Eats, Pool, Puppies, rentals all came from those folks who're now being laid off


Uber's business model has the same problem as Groupon's, which is that they don't really have economies of scale. Every market requires a new team of people to run promotions to attract drivers and customers and match supply with demand.


"Do things that don't scale" ... and then cash out before the market notices.


Yes. Seems to be a mostly variable cost business. That means you need to lower your per unit cost. This might be their plan.


I can understand why every new market requires an operations team on the ground, but marketing ought to be centralized.


I could see there being localization challenges, especially when you start talking about multiple countries. Not just languages; cultural nuance, idioms, and political awareness all matter.


This is precisely why you have regional marketing teams. It's all situational, but IME a dedicated team for a region (APAC, EMEA, etc.) is better at executing than a single centralized global team. Typically the operational aspects can be delegated to the regions who know the individual markets best, while things like branding stay central.


Does that particular aspect require full time staff in-situ, though?


Just the legal aspects of regulation would. See Uber's struggles in London.


Where better to get expertise in a region's culture than the region?


By hiring a local business to do it, rather than hiring a set of full-time staff yourself?

For a company that's about the gig economy, they make some strange staffing choices.


I'm not sure. There is a big billboard ad here in Sydney, which seems to be coordinated with a radio and online marketing campaign, around saying how 'safe' Uber is. Could campaigns like this all around the world be centralized into a smaller team?


It's not quite that simple. The needs and responses of a local market can be completely different from one to the next.

Because of differing cultures, we respond very differently to color palettes, design aesthetics, safety concerns, cool factors, etc. And since the entire point of marketing is to sell, then the the brand's visuals, branding strategy, responses to concerns, etc, all have to be completely customized for the local market in order to engage customers.

For example one common difficulty tech companies often encounter while trying to enter Japan was how difficult it was to acquire and retain users compared to anywhere else. Some gave up, some would keep trying, and surprise—it would magically work out when you hire a local ad team, local designers, art directors, etc. Western companies' sleek, advanced designs are easy to use and navigate, but the locals understand that culturally, the Japanese society resists change. They are used to early day yahoo/geocities level of banner ads and flashing gifs on a page so that they can feel certain that what they are using can be authentically catered to the Japanese people and supported. Overly simple designs like a Bootstrap framework was simply too frightening, new and confusing.

Same can be applied to pretty much anything from fashion, beauty, food, retail of any kind, to things like Uber, which specifically has its own complexities to solve while trying to enter a taxi-efficient market like that; a completely different marketing problem to solve than say Australia's safety concern as you mentioned.

TL;DR: Can't easily centralize marketing because local cultures and needs are always different; and you need locals to know what locals will want/engage with.


I'm in Japan at the moment and I was talking to someone the other day about design. There's a contrast that always strikes me. On the one hand there's this very restrained aesthetic in so much of traditional Japanese art and culture. On the other hand, most display advertising and a lot of signage in general looks like something knocked out by a random intern with no design experience at all turned loose on a desktop publishing program and told to go wild.


A small centralized team will have a challenge trying to coordinate billboard, radio, and online ad campaigns in dozens of cities in dozens of countries. There will be different language, culture, legal, and logistical issues in every market.


I think it could be yes. We have the exact same campaign for Uber in Berlin right now (in German language of course). But the essence of the campaign is identical.


That roaring sound you hear is the majority of the world's population wailing about how Silicon Valley companies don't understand that San Francisco is a tiny portion of the wide world.


Localization is a big deal, or you're going to make an epic cultural faux-pas. What if "Uber" means something lewd or offensive in the local language? What if your marketing team cranks out English copy that doesn't translate well, or at all?


It might be centralized, but not entirely automated, at least not yet. Thus each city requires headcount.


Marketing runs the world now, because we've reached a point where companies really, really have to convince people to spend their money on whatever useless product is being pushed.

Ever notice there isn't marketing for potatoes, bread, rice, etc. ? People buy those things anyway. The latest smartphone? gotta convince everyone to buy it.

At my last company engineering spent $10m installing fiber into some remote community. The marketing for that project was $15m.

So the marketing around "doing something" costs more than actually doing it.


Quoted film budgets are usually about half the actual budget as a rule of thumb, because they don't mention the half spent on marketing.

That's why films are often known as flops even when they make their "budgets" back. You're not in the money until you double the budget.

edit: Also, considering the vast majority of that marketing money is spent before the film comes out these days, and all the sales are made within a month - as much is spent on convincing people that a film that nobody has seen is going to be good as is spent on the film.


15 million? How can local ads for a fiber network be so expensive? Just pay a bunch of kids to hand out flyers. Fiber is usually something people want.

If your numbers are correct it sounds like some kickback scam.


Fiber might be something people want, but it's also something people have been falsely sold so many times. In the late 2000s, my cable company said they were putting in fiber, and i got a cable modem. AT&T called adsl2 (and sometimes simply rebranded adsl1) U-verse and sent people around neighborhoods saying it was fiber.

How are normal people supposed to know fiber to the home is actually fiber?


> Fiber is usually something people want

According to this survey[0], only 25% of people even know what "fiber-to-the-home" means. Not a perfect proxy for "fiber" itself, but I imagine most non-technical people are not aware of it.

[0]: http://www.bbpmag.com/Features/0714feature-ConsumerSurvey.ph...


The marketing department is twice the size of engineering, and they just contract out all the work to external agencies anyway. So they are just a team of middle-men to agencies who charge WAY more per hour than the most experienced Engineer on the team of people who actually built and designed the thing.

Gotta pay all those salaries somehow.


There's plenty of marketing for potatoes (Idaho), pork, milk, pistachios, avocados, beef, chicken etc... Usually trade groups but still.


I do recruiting and I had a client tell me they wanted a Design Manager from a specific set of companies. This included Uber. When I looked at how many Design Managers Uber had, I was blown away. I remember them having 50+. Seemed crazy.


My guess is: a specialized marketing team per country. Also remember they have to market to both sides: rider acquisition and driver acquisition


Uber has stalls in popular areas like shopping malls in all major cities. I see at least half a dozen Uber employees trying to sign people up to be drivers all the time. Considering the number of international markets they operate in and the nuances of each market, I don't think it's as that surprising.


When you grow as fast as Uber has been, you accumulate a TONNE of fat. Multiple teams hiring people for the same role, creation of roles that have no real value, too many middle managers, etc.

It’s so hard to not get into this state during rapid growth, and to get out of it, and return to being a focused, lean, efficient (and eventually profitable) company, layoffs are basically the only answer. Often LOTS of layoffs. In a few years, I’ll bet many other departments at Uber are hit the way marketing just was.


Marketing is all they are.

The driver aren't employees. The cars in the fleet aren't their assets. The insurance is handled by someone else and there is no licensing.

Uber, itself, is just an app with a giant marketing department. The app itself isn't even that different than it was in 2011. 99% of the functionality that people actually use is exactly the same as it was when they started.


The "just an app" critique is often repeated and makes no sense. The app is just the interface.


The interface is all their is. The drivers aren’t employees, and the cars aren’t theirs.


Doesn’t Uber also lease cars to drivers? I was surprised to see in the Bay Area that so many drivers had fairly new cars. I asked one about it and he said that Uber leased it out. Presumably a portion of the driver’s income goes directly towards the car.


100 percent of their income goes to the car until its paid off for that month, and the interest rate they charge to lease the car is downright usury. $200/wk to rent a Hyundai Elantra that Hyundai leases out at under $200/mo.


Not exactly true. If you drive full-time for Lyft or Uber you MUST change the oil of your car EVERY MONTH. Leased Hyundai's don't see that kind of stress until a year goes by so the Lyft/Uber car is getting destroyed at least 4x more quickly.


Depreciation curves aren’t linear. At $20,000 which is the list price of the car (which is almost certainly overstating it) you’re depreciating the car to zero after two years. Even a beat to shit two year old car isn’t worth zero.


The difference being that $200/wk covers everything but gas, lease a car direct from Hyundai and you have a lot more overhead to deal with -- maintenance, insurance, going over the "average miles" in a few months, &etc.


Most lease agreements now include maintenance. Why? Because they don't want you to run the car into the ground since then you'll just return it. Modern cars need oil changes at 10k miles. With a 30k lease you are talking 3 oil changes which is like $50 in wholesale cost. Brakes and tires should last the whole 30k.


Uber doesn’t directly. They just find partners who do.


I hope it included the people responsible for sending me the most abusive SPAM campaigns I have had in years.

1) I never subscribed to these e-mails

2) The e-mails contain a link to unsubscribe in this format: click.uber.com/f/a/<strings>

3) You get redirected to uber.com/unsubscribe

4) They make you manually fill your e-mail

5) When you press unsubscribe:

- It makes a request to uber.com/api/unsubscribe?email=<email-address>&et_job_id=&et_list_id=&et_batch_id=&message_uuid=&content_identifier=

- Response is always 404 Not Found (Tested on Firefox, Chrome, IE, Edge)


Here's an example of the quality of Uber's customer support: https://twitter.com/muks/status/1137237193657868289

This was after I reported that my 72 year old mother was asked to get out of the car by the driver after sitting in it, because he learned of the destination after starting the trip and did not want to take her there. Uber does not show the destination to the driver before starting the trip.

I was probably speaking to a bot, or nobody had the patience to fix the problem.

Edit: I haven't used Uber since that incident.


Uber's engineering is dodgy across the board.

There was a good year or so period where I ran into 4 or 5 critical bugs that stopped me using the service entirely for days or weeks at a time. One of the dumbest was being unable to enter a credit card because the form required a field that wasn't being rendered. 6 months later I switch credit cards and again can't use the app for weeks because it wants a 5 digit postcode even after setting the country to 'Australia', but the server side check was still working and 86'd any combination of bs 5-digit code that was working.

Several times I've had something go wrong with the ordering system itself (on the UberEats side). Once an order was put through twice and two meals showed up on my doorstep. Another time I copped a cryptic error message followed by a Javascript crash and my card was charged but no order was logged upon refreshing the page (which indicates to me that something wasn't properly atomic and maybe some business logic was happening on the front end that shouldn't be? Presumably fixed now, I hope)

Even right now, as I type this, there's a bug on UberEats introduced in the last few days or weeks that's leaking variable names through to the front-end. I've got 'components.BadgeSoldOut.message' and 'components.CartItemCustomization.upTo' all over the place. I'm sure when that gets fixed another one will crop up next week.

404s and broken systems seem par for the course.


I am no lawyer but pretty sure this violates:

https://en.m.wikipedia.org/wiki/CAN-SPAM_Act_of_2003


Sure it does, but ignoring regulations is Uber's schtick. Using their services is the moral equivalent of buying stolen goods.


Love to revisit this piece every few years. Why food delivery will never be profitable: "The Food Delivery Death Star" https://medium.com/@review/the-food-delivery-death-star-85f9...


Pizza delivery is profitable. Pizza comes in a shape easy for transportation, the size and value of the delivery is economical for a delivery business and there's an established culture around ordering pizza for delivery.

The food delivery companies just need to figure out these problems, which a hard, for non-pizza foods.


Also helps that pizzas themselves are dirt cheap to make. Anything that makes them expensive is chargeable. Continuous production is easy and cheap, so doubling your volume by adding delivery is achievable with the same kitchen.


"When it gets down to it — talking trade balances here — once we've brain-drained all our technology into other countries, once things have evened out, they're making cars in Bolivia and microwave ovens in Tadzhikistan and selling them here — once our edge in natural resources has been made irrelevant by giant Hong Kong ships and dirigibles that can ship North Dakota all the way to New Zealand for a nickel — once the Invisible Hand has taken away all those historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would consider to be prosperity — y'know what? There's only four things we do better than anyone else: music, movies, microcode (software), high-speed pizza delivery"


Snow Crash never goes out of style.


...and fucking delicious


Is it though?

Most pizza delivery is an ancillary service to the restaurant itself. Are there very many profitable pizza-delivery only businesses?

Also you could argue that for the genre of restaurants where delivery is profitable as an ancillary service (pizza, chinese, etc.), they already offer delivery and there isn't any profitable market for the restaurants where they didn't have it before.


> Most pizza delivery is an ancillary service to the restaurant itself.

Are you sure? Seems like the restaurant mostly exists for marketing, awareness, and as a place for people to not come in and eat.

90% of Pizza Hut’s orders are deliveries. 65% of Domino’s are deliveries. Over the entire industry, carry-out and delivery account for over 75% of revenue (delivery alone is 30% or so).

https://www.cnbc.com/2018/12/05/pizza-hut-execs-dissatisfied...

https://www.reuters.com/article/us-dominos-pizza-delivery/do...

https://www.statista.com/topics/1610/pizza-delivery-market/


Is that really profitable though? Your article talks about how Pizza Hut is struggling as it switched to digital delivery.

Also according your statista link, delivery only accounts for 30% of revenue in the pizza industry.


Your intuition is probably spot on. Dominos stock has been doing terribly and pizza delivery will likely cease to exist because it is a constant money loser.


This is...not correct at all. Dominoes stock has been on an absolute tear the past decade. I don't know what charts you're looking at...


They've plateaued this past year with negative growth. Is what dominoes was doing a decade ago really relevant?


They have an excess return compared to the S&P 500 of 200% in the last five years. That’s hardly ten years ago, and the story for Domino’s is still very strong. There’s tons of market share left to eat up and many international opportunities.

Pizza Hut has already moved into EM markets (like Africa) and is gradually expanding. Domino’s could do the same thing, and probably better with their superior tech stack.


I agree. Pizza is a good market. I live in a small town, <8k people, and we have 5 places that deliver pizza, a take and bake, not to mention gas stations and supermarket pizza.


I was making fun of the guy claiming pizza delivery wasn’t profitable.


Dominos has out performed the S&P 500 by like 200% in 5 years. In the last year it returned -2%, so that’s not good, but still a positive story overall.


Lookup the stock of Domino's[0] - they've been on a years long tear by scaling delivery and adopting tech

In theory this could work better for some food delivery companies as they charge the restaurant rather than produce themselves and run the overhead of stores, etc.

[0] http://www.google.com/finance?q=NYSE:DPZ


I think it's pretty obvious that nobody buys a Domino's Pizza because it tastes good! They buy it because someone shows up at your door and gives you food!


I mean, they’re not terrible. I think I prefer them to other Pizza chains. And they have a dope app.


Domino's and Little Caesars are the second and third largest pizza chains in the US. Some of them may have space for a few people to eat there, but their entire business structure is based on delivering pizzas. Sure, they have pick-up options as well, but I wouldn't say that changes them from being developed around the idea of delivering the pizzas.


It's not profitable because every single restaurant does it for itself only.A post office service would never make a dime if it was only covering a small town.Scale it up to the entire city and it becomes very interesting


Back in frontier west, outside US territory (and therefore not served by the Post Office Department or the Pony Express), people would set up highly profitable transportation companies. These companies would make deliveries for local shops but also carry mail, bringing stuff to somewhere served by the Post Office Department or the Pony Express or the Wells Fargo freight routes.

I read all this in a book ages ago but I was skimming through some wikipedia articles that mention some of what I'm talking about if you're interested:

https://en.wikipedia.org/wiki/American_frontier

https://en.wikipedia.org/wiki/Pony_Express#Stations


I mean this was how Wells Fargo started.


Yes, I understand economies of scale, but there is a point where the time and resources spent driving take-out around is not profitable. That's what I mean about certain restaurants and cafes not offering delivery, because even with a third party full time delivery service it's not profitable to deliver certain goods.


Well, Chinese food is also a commonly delivered item in many places--including but not limited to cities. So I'm not sure pizza is all that unique.

That said, a lot of food delivery is some high school kid driving his car around mostly working for tips. You start tacking on the costs of a large delivery-as-a-service company and your costs go up a lot without all that much economy of scale.


Even at a busy Pizza Hut a lot of the delivery drivers will help with making the pizzas, folding the boxes, and cleaning when not delivering. You can pay them X amount with fixed hours and they can stay busy the entire time.

With just delivery services there is a lot of standing around time.


I was recently at an Indian restaurant with my girlfriend, and half to three quarters of the people in the waiting area weren't trying to be seated, they were delivery drivers waiting to pick food up. Most of them sat for upwards of 15 minutes.


Lol but what about the person who makes the pizza? Taking 30% is steep.


Grubhub makes a profit? https://en.wikipedia.org/wiki/Grubhub


If fund raising is any indication of this prediction (my bet is yes), look no further than the two big players in India - Swiggy and Zomato [0] and [1]. Losses are in the range of 70 million dollars or so for FY17-18 [2]

[0] https://www.livemint.com/Companies/9cuyxq0GMXuDWaGuMWYsZL/Sw...

[1]https://inc42.com/buzz/zomato-in-talks-for-1bn-war-chest-to-...

[2]https://www.livemint.com/Companies/cjK3T36vZl1easaVBMXVNN/Sw...


Grubhub has been profitable literally since the late 90s. This article is terribly researched.


Great article, thanks for the link.

But I can't help but notice that these numbers are all for US, and US is a very prosperous country with low income inequality and high-paid workers. In other countries, where labor of low-level workers costs less (compared to the purchasing power of those who order delivery) it could be a completely different picture. Here, I earn a salary which would be around middle-class in US, and yet, my Uber ride usually costs around $3-4 (as opposed to $30 in the article).


Drone delivery will fix that.


Can someone with insight into the matter explain, from a high level, what the big concerns are over Ubers ability to run profitably?

In my naive view they are "just running an app" / acting as a mobility marketplace and they make money on each transaction. Given the traction and market dominance they have this sounds like a really attractive business. So how do they manage to run such big losses every year and which items on the expense side are so crucial for the business that nobody at Uber dares to cut into them?


The big concerns are whether drivers will continue to accept the pay they are offered. In 2018 they spent $837 million on excess pay to get drivers to accept certain trips. Insurance costs are also high, a large portion of their revenue.

Assuming their chart is representative of an average booking, $1 in excess incentives corresponds to a $10 booking. If so, 15-20% of their bookings appear to produce no revenue and cost money through excess incentives. They must be doing this to stay ahead of their competitors and/or encourage people to use the app.

Once the gross revenue picture is done, you have the relatively fixed operating costs. They are spending a fortune on marketing and consumer incentives, as are their competitors.

Overall they lost a bunch of money but made up for it through selling off the Russia/SEA businesses for a few billion. They also marked up their investment in Didi (which I believe they spun off before). But that's a paper increase.

So, they could become leaner. They also may continue to grow their way out of the hole. They do make money on most transactions. But becoming operating-profitable is a matter of putting competitors out of business and increasing demand for rideshare generally. They also need to get people to pay for the currently unprofitable trips. (Personally, I wonder how often they are leaving revenue on the table with their incentives.)


What sorts of trips are not profitable for them?


Trips where they pay the driver more than the customer pays.

They are constantly running promotions to encourage drivers. They are constantly running promotions to encourage riders.

It's not clear that they make very much if riders and drivers are at the regular rate either. They've got to pay the merchant fees for all the card not present transactions, and maybe platform fees to apple and google, too?


They are selling lots of rides at less than the cost to provide said rides. That's how they're losing money.

If the price of the rides were correct, they'd lose market share to competitors, and fewer people would be willing to pay them.


I have no insight into the matter.

My guess is that their traction and market dominance are far more fragile than you think. Because their drivers are contractors and not employees, they can't be forced to only work for Uber, so even though they created the pool of drivers, they have not "captured" them. So a huge cost is the ride subsidies which maintain their market position. Once the ride subsidies end, there is no reason that a locally focused company can't compete for the same drivers and riders.

From what I've read, when Uber started their app technology was borderline magical (pushed the boundaries of what smartphones could do), but since that's no longer the case, there is much less of a barrier to entry.


It's not just an app. Apart from employing tons of highly paid engineers in Bay area and the rest of the world,they have to deal woth less glamorous,offline part of the business: local "recruitment" centres,where drivers have to be recruited,trained,etc.This is the probably in most larger cities.Also, the cost of acquisition of customers is in the tune of $billioms every year.Ads, subsidies, initiatives and etc. Uber absolutely can be profitable, however it feels like im order for it to be one it'd have to sack 70% of their back office,reduce the number of driver and agree to heavily adjusted valuation..


Right now I would assume uncertainty being one huge risk. They have so many laws to follow, and to some certain get around - I wouldn't be surprised if they have teams of high-$$$ lawyers (on retainer) in every single country they're operating in, and probably lobbyists too.

Then there's local competition. Most countries have their own uber-like startups, which may be competitive in other areas.

And as others have mentioned, this business model doesn't scale very well. For every new country they enter, they have to hire new teams, do the marketing, put themselves into the laws of the land.

But I specifically think the law-aspect is the largest risk to them. One local ruling could basically wipe out their margins and business model, and essentially put their investments at a loss in said country.

It's not like they can enter a country with a 100% absence of established Taxi companies - wherever they go, and have gone, there have been opposition that's tried to get them classified as a regular taxi company.


Literally read the rest of the comments in this thread and that should give you a lot of additional information.


It is possible that consumer demand would greatly reduce if they had to pay prices that are sufficient to cover the cost at which drivers are willing to drive.

My general impression is that Uber and Lyft have artificially inflated the size of the ride sharing market by subsidizing rides with investor money.


Does anyone have any idea why Uber isn't profitable? I never really understood that. It's such a ubiquitous service in a large portion of the world.

It seems to me that they have a lot of physical growth, so what is happening to their finances?


You literally cannot profitably transport people at the prices they're offering. Uber is just one big bet that the price point of transportation will fall significantly with the advent of self driving and they'll be there to make the money off that margin.


I think this is utter BS. the reason Lyft and Uber are not profitable is that they keep fighting a war for customers with each other! The last time I compared a taxi to a Lyft it was $17 versus $34. Lyft could easily charge 50% more except Uber is trying to kill them by wasting investor money!


I think it's completely right.

I virtually completely stopped using Lyft//Uber since they increased prices in SF. I know a lot of other people that stop using them also. Most rides are above 15$ which is above what I'm ready to pay to get somewhere in the city. I walk, use my bike or drive whenever possible. The new price point simply doesn't make sense anymore.

And in most places, customers are way more price sensitive than I am.


>You literally cannot profitably transport people at the prices they're offering

That's not my understanding of the figures, which say that they're charging plenty enough to cover the costs associated with the ride, but are blowing lots of money on aggressive marketing. The transportation costs (i.e. driver pay and customer service) are not what's killing them.


"incentives", i.e. discounts/coupons for passengers or pay bumps for drivers, are a huge part of those marketing costs. So while they're rolled under the marketing budget they fundamentally are a distortion of the price they need to pay drivers or amount they need to charge passengers to become profitable.


A lot of these "marketing" costs are clever ways of hiding costs of providing rides as separate line items.


Yes, but if they were all driver incentives, there would be no revenue according to the model they're using. Customer incentives, on the other hand, are hidden in operating costs and not placed in the cost of revenue where they probably should be.


I was in an empty pool ride for 45 minutes taking me from inner Boston to the suburbs and I paid $5. Unless I'm wrong, that's below minimum wage so someone somewhere is subsidizing the difference


Why would they care about self-driving if most of their drivers are making little more than the cost of operating their vehicle?


Economies of scale kick in when you own the fleet. I'm also not sure about the statement "most of their drivers are making little more than the cost of operating their vehicle".


If owning the fleet was valuable, there's not much (probably just labor law and some issues with the mythos) stopping Uber et al from owning the vehicles the drivers drive.

I think self-driving is the cold fusion of the 21st century, but the reason unlicensed taxi companies are pursuing it is because if, by some miracle, it comes to fruition, it might make their business viable, but it would be hard to compete with an automaker running autonomous taxis when you have to buy your autonomous taxis from the automaker you're competing with. If they can build it on top of existing cars, it makes it more possible to compete; and if they end up with an enabling patent, it means they'll probably survive in some form.


Drivers have an acquisition cost in marketing too. And will quit eventually if they keep losing money.


Semantics. Cars don’t cost that much to operate. Uber doesn’t cost that much. The portion going to the human take home pay minus car value depreciation and other expenses is small, but a substantial chunk of it.


Cars cost a huge amount of money upfront and require a tremendous amount of maintenance to operate, and that's before we get into insurance and accidents.

Right now, all of these are fully on the drivers. This will turn around if Uber rolls self-driving cars worldwide.


Having looked into the finances of car share companies I can vouch that the fleet costs are just huge blots of red ink on their finances

Uber wouldn't work if they owned the fleet - it's a huge advantage to just be the app + ops + acquisition costs


Right, eventually the drivers will figure out that they are the losers in this scheme. People really don't understand just how much it costs to own a car, especially one you drive 30k miles a year.


Taxi cab companies are incredibly corrupt as they are run like your local cable TV service! With all the customer satisfaction and low prices and quality service that that entails! I believe that Lyft and Uber can easily beat the corruption of the taxi cab market and still provide rides at a good price and profitably.


Because this is untrue? Even the most pessimistic estimates have drivers making a substantial amount more than 0; the complaints are that they don't make enough to justify their hours of labor. Removing this labor cost would be non trivial, esp once the cost of a self-driving fleet stabilizes.


They do make profit on each ride, but not when you account for administrative overhead (which is huge because of their ridiculous headcount).


Which would mean they do _not_ make a profit on each ride.


randyrand is talking about gross margin; you're thinking about earnings. You can have a positive gross margin and negative earnings. There's no point arguing about whether this does or does not constitute making a profit in some absolute sense - just understand that both are true.


Charitable interpretation is that the parent is talking about Uber's gross margin, which is presumably fairly high.


Let's split the difference:

They make profit from some rides. And the amount of profit matters, too.


People like comparing Uber to, say, Amazon. The major difference is that Amazon benefitted from economies of scale - they spent a lot of time in the red building infrastructure and logistics, but now they reap the benefits by having very good infrastructure and logistics, which only get more efficient the more things they sell.

Uber's main expense is the driver. The vehicles pretty much always stay the same size so they don't actually benefit from economies of scale. And drivers (and customers) are fickle; most drivers and customers have more than one app on their phone. If Uber hikes prices or slashes driver compensation people will just leave. Uber has a growth story if you believe that AVs are just around the corner, but that's a pretty big if.

Uber mostly made it to the IPO with the help of Softbank, one of if not its largest shareholders. Softbank had a $100B Vision Fund. With that kind of money you could be unprofitable for a while and still be a going concern.


The view that "Uber's main expense is the driver" is essentially backwards. The current economics are more akin to drivers paying Uber to find them business. Drivers pay for all of the physical expenses of a ride (like gas, maintenance, depreciation and financing charges) and provide all of the labor. Since it would almost certainly cost Uber much more to buy the vehicles, pay for the gas and hire the drivers as employees it is fairer to say "Uber's main income source is drivers".

AV only offers a growth story if you believe the drivers' earnings are high enough to more than cover the additional costs to Uber of buying, fueling, and maintaining the AV fleet. With AV prices likely to be significantly higher than traditional vehicles for the foreseeable future and since most studies show drivers' net income near minimum wages this seems pretty unlikely to me.


Amazon was cash flow positive after few years of existence. Uber, as far as I under stand, is still isn't. https://www.reuters.com/article/us-uber-ipo-breakingviews/br...


Well, Amazon also is focused on disinter-mediating everyone. Those people's margins are Amazon's opportunity. Even now they are increasing their fleet into someone else's margins, go check out the Cincinnati airport.


There's nothing that sets them apart from competitors so it's a race to the bottom. If you're a rider you're always going to go to who has the best price and if you're a driver you're going to go to who pays you the most. If they ever hope to be profitable they need to cut labor costs or have a distinguishing factor.


The best way to understand this is to look at their financial statements:

https://investor.uber.com/news-events/news/press-release-det...

Generally, you would go to the 10-K to get a quick snap shot.

I direct you to look at the "CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS"

You can see that they made about 1.4B (in Q1) after paying the drivers but then they spent 2.2B on:

Operations and support, Sales and marketing, Research and development, General and administrative

Note, of these categories, Sales and Marketing was the largest and eliminating it completely (not recommending this) would get them to break even.


Agreed, but like others have pointed out “marketing” includes marketing to drivers with incentives to drive. They’re not running advertisements they’re subsidizing rides on the driver and passenger side and calling it part of their marketing spend.

The problem with Uber is that their technology isn’t that innovative and their platform isn’t that sticky.


The technology only seems "not that innovative" because they've been around for a decade. The whole concept wouldn't be possible without widespread smartphone adoption which occurred in that time. The real problem with the business is the economics don't work. Riders use Uber because it's cheap and driver use it because they get paid enough to make it worth their while (or at least they believe that to be the case). These two things are only the case because they're blowing billions of dollars on subsidies.


They’re trading cash to build their moat (keeping out competitors, investing in self-driving). From what I can tell, at least.


That's the theory, but I have no idea what this "moat" is supposed to be. Apps to hail a cab are interchangeable commodities as far as I can tell.


There's a network effect component for shared/pooled rides.

Upstarts will lose a lot if they offer shared prices without matched riders.


The network exists for non-pooled rides as well. Riders don't have to wait as long if there are more drivers, and drivers don't have to drive as far to pick up a ride if there are more passengers. The increased efficiencies allow prices to be lower as well.


Do that many people share rides with strangers in Uber? I never have.


I can tell you that as a driver, about ~25% of my ride requests in Toronto are Pool requests.

We also have Express Pool where you get picked up / dropped off at some walkable distance from your actual origin/destination to make it even cheaper for the consumer and more efficient for drivers.

At one point Uber was even competing with the bus / streetcar with a special ride type where you would have to be picked up or dropped off at specific points along one street but they discontinued this.

I would definitely consider these sorts of shared rides as a moat.


I thought that promo was only during a weekend subway shutdown.

Just looked at an Uber trip in Toronto, and the breakdown is:

Express Pool: $8.44

Pool: $11.25

UberX: $17.38


This is great info, thank you and i agree with your conclusion.


RU kidding Uber pool and Lyft line rides are often cheaper than public transportation!


It's often about a third cheaper and some people get it as part of commuter bennifits in leiu of parking.


> Apps to hail a cab are interchangeable commodities as far as I can tell.

That's what I keep getting stuck on. It's getting easier to compete with Uber and I don't think that's going to change. They have a well known brand but even that feels like it's on verge of becoming genericized.


Right now it wouldn't surprise me if a lot of Uber inertia was specifically because their competitors are smaller and more localized.

I live in NYC, and there are half-dozen major rideshare apps here in some form - but I often travel to places where, if there is any major service operating there at all, its Uber... maybe Lyft, but certainly not Via or Juno or Gett or any other smaller names.

I don't want to load my phone up with a bunch of different apps and give my data to a bunch of different companies, so guess which app I use even at home where I have plenty of options? Uber. The barrier to entry of getting a new local competitor up and running is small, but the convenience of being able to stick with one provider no matter where you are is big.


I never ride Uber at home but there are some places where it's so entrenched (e.g. Mexico) that there are no real competitor apps. On the other hand, I've gotten better deals there from taxis and they've been more reliable. You can often look up a ride on Uber and negotiate with a taxi driver right then and there. If you don't speak Spanish, though...


> It seems to me that they have a lot of physical growth, so what is happening to their finances?

This is the story of just about every Valley startup. Seemingly greater losses the larger the userbase grows. When asking how this is possible, everyone will answer "you just don't understand, this is a good thing."


A lot of people use it because it's so obvious that they're operating at a loss. That's why the ride is so cheap. If they brought prices up to what they "should" be, volume would go down or the competition would snatch it up.

If Uber wants to take a loss on my ride, I'll be there every time.


> If they brought prices up to what they "should" be, volume would go down or the competition would snatch it up

Last I checked, Uber made money on each ride in New York and San Francisco. The model can make money. I just don't know if it can make money everywhere.


... and if they brought prices up to what they "should" be, I'll just use Lyft. Or if that isn't an option, get to my destination on my own.


Lyft is in the same boat--or arguably worse. I fully expect these services will see significant price increases. One of the consequences will be that both the driver and passenger sides of the network will thin out, which probably means they won't work as well in less-dense areas.


They have to offer significant promotions and sell their rides below the rates of other taxi companies, in order to obtain market share.

They've been doing this to grab market share for the last decade. Undercutting competition is not a profitable business.


Its partially because they are in a war of attrition.


Drug dealers have been known to sell drugs to someone new cheap (perhaps at a loss) to get them hooked, and then once they are hooked jack the price up. Uber is trying to do that with transport.


Do you have a cite for that? I'm skeptical that there are a lot of "I don't know you, have some free drugs" organized loss-leader operations happening.

I suspect this is actually mostly propaganda and exaggeration, and that the actual practice—to the extent it exists—is more like offering a small sample to a well-known existing customer.


> Do you have a cite for that?

I have first hand experience that this does indeed happen...

Drug dealers have a desire to expand their customer base just as much as any other small business but have very limited ways in which to do so.


You're suspicions are correct IME. Direct marketing isn't an option for illegal substances, you have to know someone that knows someone, otherwise the police would just wander around all day waiting for offers. Also at the leaf nodes of distribution there is unlikely to be enough cash reserves to be offering free product or even small samples, the leaf nodes are generally users themselves.

Mostly it seems to be propaganda that drugs can be addictive after a single hit, which is complete BS.


What happens when the consumer realizes this drug dealer has jacked up prices because they're giving product away? They go to the corner and find a cheaper alternative.


Uber wants to be the only dealer in town.


The barriers to entry aren't high enough.


Most Uber rides are priced below cost to try and drive growth. Or at least, that was the original story they told. Lately it seems more like “Uber rides are priced below cost, because if we price them any higher users will flee to a different ride-hailing service, because we have no lock-in or switching costs”. Uber’s entire business model is selling dollar bills for 90 cents and it’s all going to come apart shortly.


I wonder if there's a predatory pricing case there


I don't think so because they have a positive gross margin.


It's a grift that will never be profitable.


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