So, if they don’t own or maintain the cars, and the drivers get their cut from the fares, what is responsible for the huge financial drain that has them teetering on collapse?
What customers can pay for goods and services constitutes a ceiling on what goods and services may be bought. Which in turn creates a cap on profitable investments.
Yes, existing companies are benefiting from cheap labor, and making more money. For whom? Mostly for the investor class. OK, so the investor class has more money.
This doesn’t expand the pool of potentially profitable investments; it expands the pool of money available to be thrown at investments. This drives up share prices as a larger pool of money chases those shares, and drives up the P/E ratio*. Which means that investors are getting less of a payoff from stocks.
Now if the pool of profitable investments were growing faster than the pool of money available to be invested, what would happen? The P/E ratio would go down, not up. Supply and demand.
- Currently the S&P 500 P/E is about the highest it’s been in the past century, excepting the dot-com boom/bust and the 2008/2009 collapse. (P/E ratios can counterintuitively go sky-high in a crash, when earnings drop even faster than share prices do.)
I think Uber is more interested in owning the intellectual property for driverless vehicles rather than the vehicles themselves. Once Level 5 autonomously piloted vehicles become viable, the ideal scenario is that they are offered on either a subscription basis—e.g. you pay a base level plus a per use fee beyond the base, similar to how you pay for cellular service—or they are purchased by private owners but then sublet to a ride-sharing company while the owner isn’t using it; essentially, being an Uber driver without having to drive, and the owner getting a return on investment while the service collects an overhead charge per use. Such a service could even be used for local package delivery, as a substitute for busing in areas where the low population density makes bus routes costly to maintain, and as backup to emergency vehicles.
However, there is nothing unique about this concept to the Uber model, and it is pretty clear that Uber’s attempts to develop autonomous piloting technology is far from mature. Other companies and even automakers are already offering the subscription lease option with current vehicles, and applying that to autonomously piloted vehicles is a pretty obvious evolution of that, especially if these companies can finance their capital investment through the assured income of subscriptions. Uber, on the other hand, relies on a strict per-use profit model and their “surge pricing” to cover loses during slower periods, and really depends on the individual owner-operators to eat overhead operating costs, both of which are really dependant upon a lack of competition. (Yeah, okay, Lyft…when was the last time you used a Lyft?) And they’ve been successful at this becaues their pre-existing competition, taxi services, are frankly awful even if you live in a major metropolitan area where they are prevelant enough to be no more than moderately inconvenient. It isn’t a viable plan long term against competition without some pretty radical changes.
Stranger
Step one put taxis and mass transit out of business.
Step two merge with Lyft and then charge whatever you want for “public” transportation.
Step three Profit
I remember a story a few years ago where a memo was leaked that said they have future plans to begin operating at a profit once regulated transportation industries are gone.
What if the Uber founders and decision-makers don’t really have a tradition end-game? They saw that a sclerotic industry could be shaken up by information technology like many others have been. Sometime, someway, someone was going to open a can of creative destruction on personal transportation so why not them? Through that process, they would accomplish something valuable and (perhaps more important for them) become rich and influential through it. You can get richer even if the company you founded or managed goes bust 1-2 decades later.
If, say, Tesla or SpaceX goes bust in the future, won’t it still have been worth it for Musk during that time? Won’t it still have improved the energy, transportation and spacelift sectors for humanity as a whole?
Why so many investors pile on? They may be using the greater fool investment strategy.
Uber could make sense, but I don’t think they are doing what they need to in order to succeed. The posts above make great points about their end game is trying to be the dominant service that connects people to transportation (ultimately mostly self-driving cars). IMO the best equivalent we have today to that would be something like Visa or Mastercard. Where they take a relatively small percentage overall and you don’t start your own Visa (or least also use Visa) because the percentage is low enough and the number of existing Visa users is high enough that it makes you more money to work with them than to start your own. If Uber wants to go that way and be the Visa of transportation though, they should be focused relentlessly on partnering with everyone, and most importantly driving down their costs and the percentage they take until it is low enough that it won’t make sense to start your own uber. But I don’t see that cost focus especially.
Uber subsidizes driver pay with large fare guarantees and signup incentives. UberEATS is also likely subsidized. This is also combined with aggressive promotional fares and advertisement. The entire system is to keep afloat long enough to fund and develop viable autonomous technology.
But they’re not funding research into autonomous technology with their current service, instead they’re burning cash at an astounding rate. If they want to fund autonomous vehicles they should shut down their current operations and use their current investment to focus on that.
And nothing about their current business of acting as a middleman between owners/operators of vehicles and customers who want a ride makes them particularly well positioned to operate fleets of driverless vehicles.
They have absolutely no experience with managing and maintaining fleets of vehicles. They’re a software service. They maybe might end up as the software service that everyone who owns vehicle fleets uses to connect with their customers, but if they were trying to be that they’d be focused on relentlessly driving down their margins. Instead they’re tossing bundles of hundred dollar bills into a furnace.
I agree that there really isn’t much link between developing self-driving cars and the Uber service. Inventing the Uber app doesn’t provide any particular skills that translate to developing self-driving cars. These are entirely separate enterprises. It might make sense to separate them.
I assume that Uber is concerned that that if they don’t develop self-driving cars, the winner in the self-driving car future will be the company with all the autonomous car patents. The autonomous car patent holders can extract economic rents from driverless cars by charging use fees that are only slightly less than it would take to pay drivers instead. Uber’s plan is to become profitable by eliminating driver pay. If they have to pay user fees that are nearly as expensive as paying drivers, autonomous cars won’t improve their cost structure the way they hope. One solution is to become the autonomous car patent holder who can capture that value. That solution flows only accidentally from the weakness in their plan to monopolize ground transportation.
There is no reason that Uber will have to own fleets. Their business today is connecting car owners who want to drive with passengers. In the driverless future, it will be connecting car owners who don’t have to drive with passengers.
This latter business is actually much simpler for Uber than their business today. They can deal with a smaller number of driverless car owners who own multiple cars and they don’t have to worry about driver screening.
Amazon began operations in 1995, and didn’t turn a profit until 2001. Look at them now. It is possible to win the long game.
You seem pretty fired up by this, Lemur866.
One concrete measure you can take is to short Uber. If they’re as overvalued as you think, you’ll make a killing.
(1) Uber is a private company that defies being shorted.
(2) “Markets can remain irrational a lot longer than you and I can remain solvent.” (uncertain author)
Sure, it’s a big expense that they don’t have now, but in turn, they wouldn’t have to pay the drivers, while riders would still pay the same thing.
As for who ‘them’ are, it really doesn’t matter. They could be paying Tesla, some other car manufacturer or a leasing/fleet management company. As far as Uber is concerned, they pay X dollars per month and in turn they get Y well maintained driverless cars.
Similar to not having any employees. It’s one less concern.
And, in theory, each driverless car could probably cover what two or more drivers could do since it could run 24/7. It doesn’t need to sleep or go to it’s other job.
My reason for specifically stating that they would lease them is because then they’d be responsible for considerably less. They can let someone else handle the maintenance and repairs and they won’t have tons of money sunk into such a new technology.
And, as I mentioned earlier, it wouldn’t surprise me if the manufacturer would love to have Uber leasing their cars since all the miles and time on the road would be great for beta testing.
Not just specific to them, but a lot of businesses grow way to fast and end up getting themselves in trouble. I’ve seen some places expand and then find themselves spread so think they don’t do a good job followed by (in a and/or type of way) business not doing as well as they hoped and now they don’t have the money deal with all the expansion.
Similarly, I’ve seen at least one business, that’s nationwide in scale, and launched a new product but didn’t know about some regulations. At least in that case, they simply discontinued that product and managed to keep moving forward.
Another though, regarding leasing vs owning. I have a friend that owns a large produce business. He ships stuff all over the country. He owns, off the top of my head, something like 40 trailers and 20 tractors. A few years ago he started paying a trucking company for at least some of his hauling. He said it’s much easier to call up the trucking company, tell them when to pick up and where to drop off and get a bill. With that, he knows exactly how much it cost to ship that load, no question about it. Nothing matters other than the number on that bill. On the other hand, when he ships in his own trucks, he has to factor in wear and tear, repairs, weather related slowdowns, overtime and who knows what else.
I don’t know if uber would think that way, but it’s a sound idea.
Sure, I can easily imagine how Uber could become profitable if they focus on reducing their margins in providing their service and focusing on their core business as a middleman. But they aren’t doing that as far as I can see.
I also think it’s a big mistake to focus on the amount that Uber “pays drivers”. Sure, they have to pay their drivers a lot. But they aren’t just paying the driver, they’re paying for the vehicle that the driver brings along. They can’t get the car for free by cutting out the driver.
I can’t imagine many people are going to sign up their autonomous car to go out on it’s own and pick up random people and come back home filled with vomit and dirty syringes. Currently the car owner is right there and can kick out passengers who defile the car. How does that work when the car is autonomous?
Yes, there’s a business model for driverless taxis. I don’t think it’s going to have a very large component of people who own a single car and rent it out as taxi when they don’t need it.
Currently you practically have to own a car if you want to lead a decent life in America. So lots of people own cars, even though that car is a huge investment for them that they can barely justify. So being an Uber driver is a way to get some of that investment back. You have to own a car, so you might as well operate a taxi service with it. But if we have a future of ubiquitous autonomous vehicles that can be hailed easily and inexpensively, the people who can barely justify owning a car today are going to give up on owning their own car. When they need a car, they rent a ride.
So the underutilized stock of vehicles sitting parked 97% of the time starts of vanish. The people who can easily afford their own car can also afford to not have their car thrashed by random fares every night. The people who would risk it have a cheaper alternative, to be one of those random fares instead.
So the autonomous car fleet of the future is probably going to be owned by companies that buy cars cheaply, service them cheaply, hose them out cheaply, and manage them cheaply. But that company isn’t going to be Uber, because Uber knows nothing about managing vehicles, their competency is matching rides to passengers.
Uber might survive and become very profitable, and autonomous cars might be a part of what makes them profitable. But if so it will be because they partner with the vehicle fleet managers and inexpensively manage the user interaction function so nobody has to reinvent the wheel. But they can only do that by actually doing that. If they don’t provide the service more cheaply than an in-house solution then they become the MySpace of ride-sharing.
Given the number of companies developing driverless cars today, it seems unlikely that one of them will win big enough to have a monopoly position. It seems more unlikely that Uber would win even if they continue to develop cars. They’ll lose, and lose a bundle also.
Given the resistance to driverless cars we see in lots of polls, it would seem to make more sense for Uber to partner with car companies to buy early cars, at a discount, and get them on the roads perhaps with drivers who’ll watch.
Hertz and Avis don’t see the need to build cars. GM and Ford don’t see the need to rent cars. What Uber (and Lyft) have is a good platform for connecting cars to passengers on a trip by trip basis.
So why are they doing it? My guess is Silicon Valley hubris - execs who are convinced that they are so smart that they can beat old fuddy duddys like Google and the car companies.
How much do you think “X” is in this situation? Not counting their various incentives, I believe Uber takes a 20% cut from gross booking revenue right now - do you think they’d be able to maintain that for a self-driving car fleet owner? I’d be honestly surprised if it’s as high.
Look at it from the other direction - ie. from the perspective of whoever “they” are (ie. owner of the fleet of self driving cars). If the fleet is owned by a single entity, what is their incentive to pay Uber to be the middleman, rather than develop their own service, or go to the competitor who pays them the best? So with Uber, Lyft, etc. competing for the fleet owners cars, the cost that can be levied for being the middleman should stay relatively low, assuming there is competition. If Uber has a monopoly on dispatch then it’s a different situation.
The manufacturers would love to have SOMEBODY leasing their cars - but why Uber, as opposed to other competitors?
Indeed, if Uber doesn’t have to own their cars, then they don’t have to worry about the costs of maintaining them, etc. Certainly eliminates a lot of headache. But whoever owns the cars DO have to worry about these costs, and logically, will pass these costs down to the customer (Uber), who in turn would have to pass the costs down to the passenger.
For me, there are two main questions:
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What are the actual costs for the value-add service that Uber actually offers - that is, phone app system maintenance, app development, dispatch (matching cars with passengers), marketing/advertising, insurance, and customer service? If Uber is looking to extract a significant profit above and beyond these costs, it seems like it leaves room for a lower-cost competitor to take market share from Uber. Which leads to my second question:
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What is the barrier to entry for a new Uber-like competitor in the phone app dispatch world? ie. how easy would it be for a competitor to establish itself? Apparently Lyft is taking a good chunk out of Uber’s market share in the US, but Uber has done very well globally. It may be that in order to de-throne Uber, it would take billions of $ in marketing costs which few investors would be interested in, so Uber might be able to persist just by being first to market.
Uber does well in the current situation where cars are owned and maintained by millions of independent car owners. No individual car owner (or even reasonably-sized grouping of them) would be able to develop their own app, dispatch service, advertising, etc. and have it be more cost-effective than just giving Uber their 20% cut. But if another big company comes in and decides that they would rather develop their own service rather than give Uber their 20%, that could spell trouble for Uber. This is why Netflix has invested hard into producing their own content instead of being content being the middleman - and this has proven to be essential, with companies like Disney pulling their content and developing their own streaming service.
For now, Uber has been a huge boon for consumers - basically, taking venture capital $ and putting it into the pockets of their customers (based on the savings for Uber compared to taxis, which are achievable primarily through subsidies).
There’s a very interesting paper available here (can download for free) that was original part of a long-running blog series on Naked Capitalism, that appears to be a very comprehensive critique of the underlying economics behind Uber, explaining why they likely won’t be able to achieve improved efficiencies of scale in the way of the Amazon, Google or Facebook. I’d be interested to know if there has been any contrasting analysis done that paints a more favourable picture of Uber.
The problem with that is this. Most cars are only driven a few hours a day. But they are the same damn hours. No company can afford to have the number of cars/drivers necessary to get people to work for long commutes and then stand idle most of the rest of the day.
Given that you need a car to get to work, you also have it for errands.
If we had good enough public transportation so that most commutes are done on it, giving up cars makes a lot more sense. New Yorkers have mostly used public transportation and rented for long trips for ages.
I think this is the biggest issue with the “self-driving cars will save Uber” idea.
Currently Uber gets its fleet by contracting with a vast army of individuals who are, at best, average in their business/financial savviness. When looking at the blogs/youtube videos of drivers it’s unbelievably common for them not to understand how much using their car costs (over the entire lifecycle) and overestimate how much profit/wage they’re getting.
If Uber has to own and operate their own fleet that’s not only a massive capital expenditure, but they have to expand into entire business areas where they currently have no experience. Pretty much world-wide too. If Uber is contracting with other companies those companies are going to be much more sophisticated than Uber’s current contractors and won’t go into business at all if they can’t put together a business plan that anticipates real profit.
Uber only gets to continue its current Goliath dealing with a mob of Davids situation if individuals continue to buy fully self-driving cars and rent them out. But if I’m happy being driven around in a self driving taxi, why would I own the taxi? Only if it’s profitable/better than renting. If it’s profitable on the individual level, how could it not be even more profitable on a fleet level where storage/maintenance can be centralized? And then we’re back to one of the two scenarios in the previous paragraph.
The only plan for Uber investors that makes sense to me, is to hope that by getting there biggest & first with the app that the brand will be good enough to earn better than commodity prices (ie Coke/Pepsi vs RC Cola). The plan for the executives I could see being get enough massive paycheques until the VC runs out/buyout by a bigger sucker happens.
I have no idea, I was just putting it out there. Honestly, I don’t want to guess at exact numbers just to have theories shot down because actual numbers are off.
I don’t know, but at the moment, that’s not really what this is about. That would be a question for a "who should run a rideshare program, Uber or the manufacturer.
But, FWIW, the car maker may want to stay out of it because it’s not their thing. Do they really want to try and force their way into that market just to have to deal with all the headaches? Maybe. Maybe not.
I’m not sure what you mean by that. Unless Uber forces them to sign a non-compete contract, they’d be free to lease to anyone. Uber, Lyft, an end user, rental companies, taxis etc.
Yes, the costs will absolutely be passed down, however, when they lease, they know exactly what it costs them (plus or minus mileage charges), but just like having drivers driving their own cars, it’s very easy to calculate the cost and pass it down. Owning cars makes that more complicated, owning cars with a brand new technology would be near impossible to guess at the costs until some of those cars start hitting 100k miles or so and we can see what wear and tear does to them. Anything unexpected?
There seems to be some overlapping conversations here. What started out as ‘what’s their end game’ has turned into “should they own or lease driverless cars” and “what’s cheaper, driverless cars or 1099 workers in their own cars”.
Hell, I know a handful of people that have worked for Uber (or Amazon) and had no idea they were going to get a 1099 at the end of the year. I don’t know what a ‘paycheck’ from them looks like, but most of them assumed that the taxes were already taken out.
To take it a step further, at least one or two of them won’t think about that the following year, won’t put away 30% of each check, then gets surprised again.