Is Uber going to make it - the gig economy and modern financing

Great Debates
41

Try this.

Uber pays the driver $X/ride. The true economic cost to the driver for providing the ride is capital cost of his vehicle, maintenance, fuel, and insurance. Plus, if we’re being economically honest, workmen’s comp, and unemployment insurance.

The driver is losing out: $X doesn’t cover his true costs leaving him an actual net profit of less than the minimum wage for his work. The driver is subsidizing some combo of the rider and Uber itself exactly to the degree he’s making less than the fair market wage (or maybe minimum wage) above his costs.

Meanwhile, the passenger is paying $Y. $Y is greater than $X. And Uber takes the $Y-$X as income for itself. Which is all well and good; ordinary businesses charge more than what they pay their labor whether employee or contractor.

But ($Y-$X) * (all the rides all year) add up to *far *less than Uber is spending on operating their business beyond paying the drivers. That cash hemorrhage is being subsidized by the investors who’ve ponied up a vast pile of cash in hope of collecting profits later.
IF Uber is to turn the corner something must change.

To the degree much of their excessive outlay is provisions for growth that outlay *could *shrink down as they saturate the market.

But far more likely the truth is they’ve got an angry tiger by the tail. At $Y per ride the riders love them, the drivers are getting gypped, and the investors are temporarily making up the shortfall. OTOH at 3 * $Y per ride, the drivers would be getting an economic wage, the investors would be getting an economic ROI, but the ridership would collapse, taking the whole edifice down with them.

Uber’s hoping for a miracle where they can somehow either convince the drivers to keep losing money, or they can squeeze the other costs out. The self-driving car is IMO that Hail Mary pass. But I think that’s a busted flush in the timeframe they have left.

Just like so many of the “pure internet plays” of the late 1990s, these guys are burning through investor cash at a furious pace hoping magic happens. It won’t.

42

I buy all this, except - surely the drivers feel that the level of compensation is worthwhile, or there would not be any drivers?

43

Not all the drivers are very business savvy. Some think that if they’re clearing $4/ hour after buying today’s gasoline they’re ahead. Not considering the tires, brakes, depreciation, etc.

I don’t use Uber often but I always ask the driver how it’s working out & try to tease these economic factors out. Most of them are about as above: “I refill the tank at the end of my shift and I make $3 to $4/hour after that.”

The other issue is the whole minimum wage argument. Is a $2/hour job actually better than no job at all? Are those the only two actual societal alternatives, or are there other alternative political / economic arrangements that ensure the lowest wage is big enough and puts everyone who wants a job into a job?

Do we really *need *to operate the country in a way that these are the people who’re subsidizing billionaires?

44

It was a little pricey for me but I am thinking because it was a saturday night.

45

I heard some podcast recently that calculated that Uber drivers make something like $2.50 an hour on minimum fare rides, and they often fail to take into account the cost of maintenance of their cars and income taxes. All they think about is the cost of gas. Over time, it means they are likely losing money on average. I’ll try to figure out where I heard that one.

46

Lyft seems to be a lot cheaper than Uber and offers discounts.

47

Yup, that’s all too common in a lot of delivery jobs. People do figure it out but there’s always a new guy to take his place. And a few realize early but figure they’ll get out before brakes and tires become a business expense.

48

Yes but also, massive advertising in overseas markets, recruitment networks for drivers in overseas markets and financing for vehicles. In many countries they are providing loans to help people buy vehicles that meet their standards. Also, their legal costs must be astronomical, essentially they have to fight battles in every country, every state and every city to overcome whatever taxi regulation laws or medallion system is already in place.

The thing is the Saudi national sovereign wealth fund already put 3.5 billion into Uber. In any crisis, that wealth fund with very very deep pockets is likely to bail them out in return for more and more ownership, unless as I said, Uber stops growing and starts to shrink in numbers of drivers and customers.

49

This much I get, unless I’m missing it, this isn’t the issue I have. I asked for help to understand a response by Ramira:

It seems to me the drivers are subsiding Uber, not the other way around - so what is this thing about “under pricing to drive out competiton”?

Fwiw, what I see in my local market is a critical mass of uptake with Uber, resulting in drivers with Uber dropping off and picking up sooner than when there are many local operators.

The market dynamic I see is less down time/less travelling between jobs

50

No. Think about it this way, Uber has infrastructure costs, advertising costs, legal costs, hosting costs, development and many other expenses. If they took all of those into account and wanted to make a profit they would have to pay the drivers much less. Instead what they are doing is burning their investment capital to keep paying the drivers more. Thus they are losing money every quarter by paying the drivers more than the actual profit they bring in per driver (accounting for all their expenses). That’s subsiding them.

51

Okay, I might be getting there; taking into account all the costs of establishing the product in markets, plus the revenues taken from drivers (20% usually), does not cover Uber’s ongoing costs in that market.

If I am understanding, I still wouldn’t call it a driver subsidy :smiley: Surely it’s more akin to normal start up expenditure. I guess it kind of makes sense if you think of a new store in a new country being subsidised …

52

Sure, if your total costs to provide a service are more than the revenue it makes someone somewhere is paying the difference. In this case its Uber’s investors paying the shortfall. The problem Uber has is that they don’t get economies of scale in the same way that Amazon did as it grows. Amazon lost money for years, but they managed to lower their costs more and more by setting up their own warehouses, datacenters, logistics, tracking technology etc and they branched into new areas, eg their cloud services. Last year they a profit.

Uber gets some of the same benefits but not all, because whether you have 100 drivers or 100,000 drivers they all have to be paid , plus their car running costs, fuel etc all have to be paid. In Uber’s case it’s even worse because each person runs their own car so they don’t even get benefits of fleet discounts etc. Personally I think they’re doomed in the long run, because their core app is actually easy to implement (lots of companies have cabs on demand showing locations now) and they are not going to be the ones to get Autonomous driving first. Whoever it is, eg Google, Tesla, Mercedes, some partnership, they will probably be willing to license the tech to all the different regional Uber competitors. Uber has no lock in, in the way that facebook or even twitter does. Neither the passengers or the drivers have any particular reason to stay loyal, while if you stop using facebook and use a different social network you can’t connect to all the friends that are only on facebook.

53

Yes, the model does not show a sign of having the real economies of scale the way it is set up.

To have the real economies of scale, it would have to either stop warring with the existing taxi cab ecoystems (which have at least some mastery of the economy of scale for the hard assets that are needed for the local deliever [ of the people]) and instead partner with them and assist in bringing added connection efficiency OR it has to become a global automobile asset manager, which means it become like some hybrid of the Hertz and a taxi company.

This requires a huge amount of the capital and a huge investment in the management systems for the management of the park of assets or a huge capital for the funding of a financing model (like the leases of the cars to the drivers) with a sophisticated understanding of the regulation it is a losing strategy to try to go to war with the naitonal credit regulator(s).

If I was the manager of a thing like Lyft, I would be seeking to make the taxi partnerships with the existing taxi system - like what coremelt has cited for the Thailand.

there is the advantage of the international brand for the international travellers, but are they the base which the international model can be built? I do not think the markets can justify this.

The key problem and the key failure is that for the car fleet, it needs the centralized management and the centralized financing and support to achieve the economies of scale (or the constant reliance on a large scale of the financial illiteracy of drivers, but even this needs the capital subsidy, that seems evident).

This is different as coremelt has underlined from the Amazon for the USA market where their model allows for the large economies of scale with centralized distributions, etc.

54

Ah, I misunderstood.

Others have already jumped in, so what follows is partly (wholly) redundant.

Collectively the drivers, by being underpaid for their work, *and *the investors, by being under-rewarded for their investment, are subsidizing *both *Uber the corporation which is losing money *and *the passengers who are paying an unsustainably low price for transportation.

Two on one side are paying and two on the other side are gaining and the net balance is zero. For our purposes it doesn’t much matter which of those four entities is paying or gaining the lion’s share.

Ramira’s point is that Uber’s corporate goal is to create volume to ultimately drive out competitors. And you’re right that his point is a *non sequitur *to your specific claim as you’ve simplified it above. But he’s still making a true statement.

Uber does this by undercharging vs. the true economic price, thereby stimulating demand to go to itself rather than competitor X who’s trying to run a sustainable business.

The obvious hope being that once the competitors are dead and Uber has a big enough head start to make competitor reentry in the market impractical, Uber can then raise prices and collect monopoly rents.
Our, or at least my, counterargument is that they may indeed run the competitors off the playing field if their subsidy holds out long enough. But once they try to raise prices to collect on their gamble of the last few years, they’ll discover the high prices kill demand and the whole thing unravels. And just like so many other failed business models, the investors and employees & contractors lose while some batch of consumers (and probably a few executives) got a temporary windfall.

55

Late edit. I left out a key idea. Replace the paragraph above starting with “Ramira’s” with this:

Ramira’s point is that Uber’s corporate goal is to create volume to ultimately drive out competitors. And you’re right that his point is a sort-of *non sequitur *to your specific claim as you’ve simplified it above. But he’s still making a true statement.

It’s not that they’re *spending *$25m a day on subsidies to drivers.

It’s that they’re undercollecting revenue by $25m a day. Which shortfall is in effect a subsidy is going to the passengers, not the drivers.

56

Yeah, except like I said, they have no lock in. If they jack up prices, other companies will enter the market. It’s not possible to monopolise transport in this way, they’re not just competing with other uber like companies, they’re competing with EVERY other form of transport from owning your own car, to buses and trains to those car sharing services where they park cars all around the city and you can rent them by the hour and drop them back off at any other marked point. Their only possible end game is a monopoly on true autonomous vehicles, but it doesn’t look like it’s going to happen, other companies are already too far ahead.

57

I agree. I believe they’re chasing a hoped-for monopoly that will turn out to be a mirage. But I do think that that’s what they are doing: chasing a monopoly. Their behavior otherwise doesn’t make much sense.

The other, more cynical, view is the founders and top management know they’re dealing with an increasingly long shot that’s now beyond redemption. But the harder and faster they flog it right now the more they get paid until the money runs out and the music stops.

Recent corporate history is full of managers who knew, or rationally should have known, that they were heading towards a cliff with the accelerator jammed to the floor. But they were making bank all the way to the precipice and had run out of ideas on how to change anything meaningfully along the way. So they settled in to enjoy the ride while it lasted, confident that their winnings would let them eject nearly unscathed as the vehicle and passengers went over the edge.

58

Collecting $25 million more a day would get them to even. Terrific.

They still spent $25 million a day in 2016. Not undercharged. Spent.

59

Doesn’t matter how deep your investor’s pockets are if they don’t think you’ll ever make a profit. Those Saudi guys aren’t idiots. They’re going to pour good money after bad forever.

In most places, Uber can’t effectively coordinate with taxis because of the way taxis are regulated.

I also expect Uber will not survive. The barriers to entry in the “summon a car from your phone” market are quite small. Self-driving cars will vastly reduce the cost of providing transportation, but there are easily a dozen players that could deliver that service and undercut Uber.

One way to think about it: Is it easier for Uber to design and manufacture self-driving cars, or for Apple/Google/Ford/Toyota to make an app that does what Uber does. I’m pretty sure it’s the latter.

Sure, there are network effects, but those network effects are going to be worth all of nothing if Uber is a year late to the 80% price drop we could see with self-driving cars.

60

I think those sentences don’t go together. Did you leave out a few words or a “not” someplace?