Err, yes.
They’re not going to pour good money after bad…
It depends, obviously the executives at Uber have to keep convincing the Saudi’s and other big investors that there really is a pot of gold at the end of the rainbow. They may or may not have some secret future plan that keeps the investors pouring in money for the long term. As long as they are good enough at selling their future vision they’ll keep getting money. Elon Musk has been pulling this off for years, if you can sell your vision to billionaires you don’t need a profit, just a vague future goal that they find worthwhile.
Part of the reason I asked was that the Saudi’s do in fact have a reputation (or at least did back a couple decades ago when I was paying close attention) for being real slow to recognize when they were throwing good money after bad.
Which made either of your positions plausible. Just not side by side. 
Although the reputation is not as bad as it was, it is still a reputation they have as the investors.
I was thinking of a perspective of a subsidy to the drivers as the Uber would have to pay even less to a driver if there was not the capital subsidy (if the prices are held constant), although yes I think it is more correct to see the subsidy as mostly for the consumers
That’s not how Uber works.
Really what makes the model disruptive is the app connecting you to a highly mobile and adaptive network of independent livery drivers. Where I live in the Jersey City / Hoboken / Weehawken part of New Jersey that acts as a de facto sixth borough of New York, cap coverage is spotty at best. They mostly hang out at cab stands by the transit terminals and don’t roam for customers like they do in Manhattan. You can call ahead for a car service, but you end up talking to some asshole dispatcher speaking broken English and if you’re lucky, 20 minutes later some piece of shit car will show up, only to get lost because he doesn’t have GPS.
Or I can call Uber (or Lyft) and in 5 minutes a polite driver shows up in a well maintained car and takes me where I want for the same price as a cab.
I think Uber is clearly a valuable company, but the valuations are way out of line. Let’s go with a 30 billion valuation. Furthermore, let’s be lazy and say that a typical P/E ratio is 10, so that Uber needs to generate 3 billion a year, at some point, to be worth that much. Of that 3 billion a year, let’s simplify and say that 1/3 will come from the US and 80% of that will come from the largest metro areas. If you crunch those numbers you end up with Uber having to average:
$80 million in profit in each of the 100 largest metro areas in the United States.
Which is possible, I suppose, except for the fact that if Uber starts making that money then other competitors will jump in. And that hits on the fundamental problem with Uber:
They don’t have a real competitive advantage.
The core technology that powers their software is powered by something owned and provided for free by another company in Google Maps. That means there’s no real barrier to entry and anyone can relatively easily produce an Uber-clone to compete. They can’t compete on service because, by definition, Uber doesn’t actually provide the service. In fact, AFAIK pretty much everyone who drives for Uber also drives for Lyft so the product is effectively the same. Their driver fleet? The minute they realize can make more money working for someone else is the minute they switch apps. Users? The minute they realize they can get the same service for less money is the minute they switch.
At this point, Uber and it’s ilk are nothing more than machines to burn investor money.
Google Maps is provided for free to random people who want to use it in the Google Maps app. I assure you that access to their maps is not provided for free to Uber, which uses it within their own app.
Your general point that Uber has no effective barrier to entry is correct, though.
They have network effects, but network effects are only a major barrier to entry in platform businesses, and Uber is not a platform.
Google Maps for Android/iOS is in fact free to incorporate into your own app. However, upon researching it they exclude a handful of application types, with ride-sharing type apps among them.
I’ll bet. No fools over there in Googleworld.
It would be pretty interesting to see if Uber is closer to making money in its mature markets, or even if it is profitable in some markets.
That are reasons that must be clear to Goldman Sachs, etc to keep throwing money on the fire.
Depends.
I’ve taken Uber quite a few times over the past year or so, mainly between my house and the airport. In a taxi, the trip generally costs around $28-35 plus tip, depending on traffic. In all of my Uber trips, the cheapest was $13.10, and the most expensive was $18.20, with an average cost of just over $15.00.
I always tip the driver about $5-6, giving me an average cost of about $20-21. That means that, even with a relatively generous tip to help out the (underpaid) drivers, i’m still paying at least one-third less for my Uber trips than i used to pay for a taxi, and the service i’ve received from Uber (so far, at least) has been far superior to taxi service, especially when it comes to calling a car to pick me up at my house.
In a taxi, i generally had to call about a half-hour before i needed to leave, just in case there was a problem. Sometimes the cab would come immediately, but i also waited over 30 minutes a few times. It has never taken an Uber longer than five minutes to get to my door.
For me, the big deal in this whole business model is more (or, at least, as much) about the predictability and the convenience than it is about the money. What i would like, ideally, is a service that
[ol]
[li]has the convenience and cleanliness and predictability and ease-of-use of Uber[/li][li]has enough government regulation and oversight to ensure that employees are paid fairly and are subject to proper workplace protections[/li][li]does not have so much government regulation and oversight that it creates an artificial scarcity or monopoly that leads to price gouging and lack of competition (a la the taxi industry)[/li][/ol]
I think it would be possible to achieve this goal in a better- and less-regulated taxi industry. I also think it would be possible to achieve this goal in a better- and more-regulated rideshare industry. The specific model is less important to me than the overall set of outcomes, in terms of convenience for customers and fairness for employees. And if this outcome costs me more than the current Uber system, that’s OK by me, although i understand that not everyone will share my opinion on that matter.
Perhaps it’s only to enlarge the pool of potential drivers, but both Lyft and Uber have set up ways to rent a vehicle while driving for them. This would certainly make your calculations easier. No up-front cost, no depreciation, no maintenance, just the rental cost and gas. If you get enough trips, the rental is discounted or even waived entirely, leaving just the fuel costs.
A full-time Lyft driver I had a conversation with in Oakland said he got enough trips in three – sometimes two – days to zero out his rental fee.
Which is kinda what I was trying to say earlier. Everything else being equal I would take the expertise of financiers and moneymen over the experise of the financial press and bods on internet forums. Sure, financiers get it wrong at times but there is a reason financers are in the business of financing and financial journalists are in the business of financial journalism.
True. But financiers also know that their success doesn’t come from a series of safe bets that all pay out just as expected. If so they’d just buy Treasuries & hang out on their yachts with their unlimited hookers & blow.
Instead they make a series of risky bets. Confident that enough of them will be home runs to have a good total return after they absorb their losing bets.
Which means, conversely, they’re also confident that they must make losing bets to find the winning bets. Because, good as they are at picking, they still know that making predictions is hard. Especially about the future. To mangle a metaphor, they accept buying a lot of bathwater to get some babies.
Uber is trying to recreate what the credit card industry did and cause a paradigm shift.
Credit cards are literally vampiric in their effects. They increase a merchant’s costs and complexity(merchant fees, terminal rentals, more complex Point of Sale systems) and liability(having to collect signatures to avoid chargebacks and comply with rules like protection of user CC data). They cause merchants to have to cover the costs and raise their prices, which does cost them some business. But this is offset by the increased demand from customers because of the additional funds they have access to and the convenience/rewards programs the CC issuers provide.
From a CC user’s point of view the credit cards are even worse. They pay ~5% more on EVERYTHING, even if they pay cash, and get maybe 2% back in cash rewards or frequent flyer miles. If you carry a balance or have a card with annual fees you pay potentially astronomically more, up to ~22% per year more for your purchases. A $5 widget can cost you $6 or more if you don’t pay your cc off. The rewards are a fraction of the additional cost and there’s no way to opt out because merchants are forbidden from offering cash prices.
But we’ve accepted this because we think it’s a system we can work with. It has genuine convenience for the customer and brings much more business into the stores for the merchants because for most people control their impulses less when they’re using a credit card than cash.
Uber is hoping their drivers will shrug off the wear and tear costs on their cars and the increased liability of the possibility of workplace injury. They’re also hoping that users will migrate in droves from traditional Taxi services(which are generally very inconvenient and expensive) and pretty soon there won’t be a “taxi price vs Uber price” like there isn’t a “cash vs credit price” anymore.
Credit card companies have successfully gotten us to pay ~5-10% more for absolutely everything, probably more when you consider the vendors and suppliers further up in the supply chain use credit cards to buy the components they use to make the widgets they then mark up to cover merchant fees they pay. But people see the price, with all the credit card costs baked in, as the price. Uber is hoping they can get drivers to see the income, with all the wear and tear and increased liability baked in, as acceptable and then they can continue undercutting Taxis.
If they can get us to accept this Uber version of the world, where we no longer expect companies to cover the cost of the equipment used to provide a service, or healthcare/workers comp, then they will have pulled off the same kind of coup that credit card companies did. The “credit price” is now just the price and the ~5-10% price hike that has happened to bake in all the costs of the credit card model is invisible.
Enjoy,
Steven
Living Social raised ~$1 billion, was valued at $6 billion, and then was acquired by Groupon for a pittance. Groupon reached $16 billion after their IPO and now are valued at ~$2 billion. Irrational exuberance by investors is certainly a thing and it looks like gig apps are the next wave.
Credit cards do provide benefits to society. I think you can argue that these benefits don’t outweigh the costs, but you can’t just ignore them.
A few of those: Lower risk of theft by employees. Lower risk of violence associated with theft (muggings and hold-ups go down because people are carrying less cash around). Lower transport costs (no armored cars and regular trips to the ATM when you use credit cards). Lower labor costs (machines that swipe cards and dispense goods break less than ones that accept money, and don’t need to be periodically emptied). Expanded trust networks (traveling before credit cards was a big fucking inconvenient mess. Still is in places that don’t have good functioning card networks)
Similarly, an Uber-dominated transportation world might have benefits as well. The most obvious one is flexibility. Passengers can get a car must faster and more easily, even in high demand cases. Drivers can set extremely flexible hours. Sure, a $3/hr net job is a shitty deal if you’re trying to make a living at it. But it’s a pretty great deal if you are bored and have an hour or two to kill, or if you can turn your daily commute into a small profit, or you only come out to drive when demand is high and the multiplier makes it worth-while.
Maybe, on net, that isn’t worth x% off the top to Uber. But the analysis doesn’t stop at “Uber driver is a bad full-time job.”
There is no doubt that vendors have to take interchange fees into account when calculating prices, and it is also true that failing to pay off your credit card in a timely manner can end up costing you a bunch of money.
But i’d like to see evidence for your claim that prices overall are 5-10 percent higher as a result of credit cards.
There is overhead in just about every type of financial transaction. If we all started paying cash tomorrow, and the stores all dumped their credit card contracts, they’d still need a way to get our money into their accounts. They’d spend more time counting cash and working out a way to deposit large amounts of cash into their bank accounts. They might do this themselves, which would require paying staff, or they might contract it out to a specialized company, which would charge for the privilege. And they would factor these costs into their prices.
And if every store, from your local mom and pop shop to your local CostCo, started depositing hundreds or thousands or tens of thousands of dollars in grubby banknotes every week, the banks would need more people and/or technology to deal with all that currency, and you can be sure that they’re going to pass the costs back on to the businesses in the form of fees and charges.
I’m not arguing with your basic premise: that interchange fees and interest rates and other costs can add to the price of goods, and serve as a revenue stream for banks and credit card providers. But in the absence of laws preventing it, those financial institutions are going to find ways to make a profit one way or the other.
Basically everything that happens in the process of getting a product into your house adds some sort of cost. When you buy that can of soda, you’re paying for the sugar, the water, the packaging, the labor, the marketing and advertising, the transport, and the various levels of taxation that fall on the different stages of the process. And yes, you’re paying a bit for the network of financial transactions that allow the system to work. It’s why a few cents worth of sugar and water encased in a few more cents worth of aluminium costs you over a buck when you pull it off the refrigerator shelf.
We can surely do better than dismissing this with “Goldman sometimes makes mistakes”. They may be wrong, but they will certainly have a rationale, and it will be fundamentally based. Is anyone privy to the GS research on Uber to see their arguments?
No dude, this is just not right. Like with any business, a taxi driver has fixed overheads - and those have to be covered before they make a single penny.
So take into account passenger insurance, depreciation on the asset, maintenance, repayments/opportunity cost, some accounting for loss of work (sickness, injury, holiday, etc). In my market (London), you are out of pocket maybe $500 a week before the first fare.