A lot of very good points being made already in this thread but I will try to distill it down as simply as I can from my observations.
Two things:
Google and Facebook both were losing lots of money until they figured out the endgame of how to make it. Uber is in the same position- work hard until the money making plan is clearly elucidated.
The single thing that makes the most valuable companies in the world valuable is that they are in a person’s hand, used, or purchased by 1B+ people every day. Amazon, Apple, Google, Microsoft have huge market caps compared to DuPont, IBM, Ford, Shell because they have such an enormous DAILY user base. Uber plays into the same “used by all” game but for transportation. No company has come close to their cultural relevance or market insertion previously.
Those two things inflate Uber’s investor interest tremendously. VC’s want opportunities that can be in everyones’ hands as those are the billion dollar companies but there really aren’t that many things that have universal appeal. Look at the legal marijuana industry which is certainly booming, but it doesn’t attract that much VC investment because it will never be worldwide nor used but a segment of the population. Google and FB both sell information and ads, can Uber somehow do the same thing?
The more interesting question to look at is now that the bike share startups are by-and-large flailing, is Uber and Lyft that different? Certainly some of the bikes tried to sell advertising space but I never saw anyone actually advertising on non-city program bikes. The dockless bikes (similar to car2go and ReachNow) are a step in the right direction but the successful business model is still lacking.
I think the solution to all of these transportation problems is the Schweeb which is the greatest cycling idea ever and would totally work in some urban places.
Google figured out how to monetize their search engine dominance. Amazon knew how to monetize it, and managed to dominate the market, and has figured out how to lock people in. Uber has monetized their app, but how are they going to get bigger?
Cabs have sold advertising forever - it hasn’t helped them. Plus drivers would have to get a big chunk of the revenue, since it is there car. Put too many ads inside the car and make the experience unpleasant and you’ll drive business to Lyft.
I assume they collect information on origins and destinations already. They could build business by sharing this with drivers so the drivers know where to hang out. The Lyft drivers I’ve had (who also do Uber) don’t seem to have this info though.
Forgive my ignorance, but how the hell does Uber lose money?
The driver incurs the expense of maintaining a vehicle. Uber just takes a cut of the driver’s fee.
How does a company like that lose money? All Uber does (from what I can tell) is what ebay does, it brings buyers and sellers together and then takes a commission. How do you lose money in that marketplace?
I understand that Uber gets a 20% commission on rides. They pay most of that back to drivers as bonuses for meeting impromptu goals like giving 100 rides, or 20 rides in a day, or driving for ten hours. If Uber doesn’t pay those bonuses, drivers quit and the service has fewer cars to offer. With fewer cars, wait times are longer and service is worse so customers switch to competitors.
They also lose a chunk of revenue to user discounts. Uber frequently offers discounts to users who seem to be dropping their frequency of use or who Uber believes could be enticed to use it more.
The remaining revenue goes to advertising for drivers, advertising for users, paying software developers, lobbying, fighting lawsuits, administration, and other overhead. With costs like that, how can they make a profit?
People have a very poor idea of what profit means for corporations because they analogize it to households. To a business, saying you made a profit this year means basically saying “Across every single division of our company, we couldn’t find a single project to invest in that we believe could make us a better risk adjusted return than keeping money in a bank account”.
If you’re a company in a growth area, you shouldn’t be making a profit! There’s almost always a more lucrative internal investment opportunity than just banking the money. Uber’s revenues are still growing by something like 60% annually. All of the money they’re earning is getting plowed straight back into growth. At the point where they start naturally reaching a saturation point, then they decrease the money spent on growth and start producing monster amounts of profit instead for shareholders, at least that’s the hope for the current crop of investors.
Google, Amazon and to a point, Microsoft have huge sections of their respective horizontal markets (or the horizontal markets they created for themselves). Dupont (chemicals), IBM (computers), Ford (cars) and Shell (gas/oil) are more vertical.
What does Uber need to do to take not just more of the market share, but to cast a wider net? They’ve already got a pipeline right to people’s phones. Could they use that app to call up Lyft or local Taxis (and get a percent of the fare)? How about running discounts for local businesses (ie use Uber to get to [local bar] get a half price drink, of which the bar owner would pay to run).
If they want to bring in more money without a ton of extra expense, it’s going to be to use that app. In my head, that means either some kind of premium service (ie Amazon Prime) or cutting deals with local hotspots, like groupon. I think the latter could work well. Imagine tell your Uber app that you want to go to a bar and you see that a different one right down the block is running a 2 for 1 deal.
I agree that not making a profit right now isn’t the problem. Looking at their (voluntary, they are private) reporting their 2018 Q1 & Q2 losses are down to 304 and 404 million respectively. So they’ve got a lot more runway then when they were burning 1 billion+ a quarter. The issue is how do they turn that profitable (at a level justified by their current valuation) when they decide that they’ve reached the growth saturation point.
From what I can tell from the outside, a lot of their investment in growth is encouraging drivers to start driving by paying sign-up and other bonuses. And encouraging riders to start using the service by handing out discounted rides. But drivers are perfectly happy to drive for Lyft & other services at the same time so how much can you cut driver compensation/raise effective fares before the competition steals all your drivers/riders?
I also question how suitable the Uber model of ‘lots of cars available so wait times are short’ and ‘prices are cheaper than taxis (baring surges)’ will work in medium and smaller markets. The taxi companies in my smaller city of 300k weren’t massively profitable before Uber came to town. How much of a return on investment are they going to be able to generate on their expansion out of the major cities?
That’s just it- someone will have to own the fleets of self-driving taxis, AND someone will have to handle the dispatching and positioning. Presumably Uber’s plan is to definitely be the second provider, and potentially be the first.
The big thing I suspect will be the positioning of the vehicles; people aren’t going to have brand loyalty when self-driving car service is a commodity, so it’ll probably come down to who’s there the fastest with a reasonably clean car. That’ll take fairly sophisticated machine learning and predictive analytics capabilities, and Uber is already building a data store that they can use to predict where to position the self-driving cars to best respond to car request patterns versus some outfit who owns a bunch of cars and wants to leverage that by becoming a dispatcher.
They claim to be unit profitable in their mature markets. They could become massively profitable tomorrow just by cutting marketing expenses to the bone and stop expanding into new markets/services. It would be a dumb move though because their valuation would crater. Investors are buying into growth, not profit.
I guess it depends on what you consider “massively profitable” - if you take a look at their balance sheet, sales & marketing and R&D combined do account for nearly half of their expenses… but even if you were slash those to zero, they would have still lost money over the first half of 2017. Of course, a huge amount of their gross revenue gets rolled back into passenger and driver incentives, but if you cut those, whose to say that they’d be able to maintain their current rates of revenue, as they lose both drivers and passengers to competitors? It’s not clear at all that Uber could be making tons of money just doing what they are doing now but stopping their investment into growth. Unless you think they have already establish monopoly-level power such that they could reduce the passenger and driver incentives without losing market share to competitors?
Growth is good and all, but when it comes down to the end-game, will Uber be anything different than just a big taxi company? Ultimately, if Uber wants to provide higher returns to their shareholders than a taxi company, they either need to squeeze more money out of their customers (ie. raise prices - things like surge pricing help with that) or squeeze their drivers even more. Neither of those options seem like a sustainable path, given that they leave room for competitors to dig away at them. Amazon has been able to branch into very profitable areas such as Amazon Web Services - does Uber have any plan to do anything like that, or are the destined to just be the biggest taxi company, giving maybe 5-10% returns in the long run?
This is my issue with the Uber hype. I have zero doubt that Uber or an Uber-like company can be profitable. But they/their investors are putting so much money into being an enormous taxi/delivery company that there has to be some plan to (massively) profit off of the scale. Since driver/car expenses don’t really benefit from massive scale, and dispatch can’t be that expensive, it has to be some kind of data/advertising play. And from the outside I don’t know what it is.
I disagree. You should be making a profit because profit is how to weather an unprofitable time. Yes you should be putting that money into R&D, but its also important to keep your debt ratios reasonable and have short term and long term assets. A company that spends as fast as it earns - or spends faster than it earns - is going to be in trouble just like a credit card happy family.
Now, early in the startup stage, before you are mature, you may be investing more than you make in infrastructure and R&D and marketing. But Uber has had a decade to go from startup to profitable company - their technology doesn’t need huge investment (unless you think that they should be investing in self driving cars, but for reasons already outlined in this thread, and others - like they got caught stealing Google’s research - that’s - IMHO - a stupid decision for them).
I haven’t looked at Uber’s balance sheet because they aren’t a company I’d do business with - much less own (the Dudebro culture, the Weymo issue, inadequate background checks of drivers - I think they are not ethical). But after nine years, I’d like some confidence in profit - or a firmer position in a disruptive market - if I were going to invest. (i.e. I owned Amazon pre-profit - but there wasn’t any stopping them. Uber is its own worst enemy, it will shoot itself in the foot and has significant competition.)
Somewhere recently I read that Uber is going to concentrate on bicycle/scooter rentals, which is why the bought Jump (bikes). I’m not sure if who wrote that had some pipeline to Uber internals or was just making a guess.
They bid on the scooter franchise in San Francisco - and lost. So did the two scooter companies already in the market without permits. Acting now and asking forgiveness later is not working any more there.
Yes, what you said makes sense for traditional businesses. But none of that stuff matters for disruptive tech companies IMHO. Uber doesn’t need to be a “profitable company” (at least not yet). They need to position themselves as the leader of the industry they are disrupting (which they have). Investors will continue to throw billions of dollars at Uber because they are the leader in “ride share services” and they will continue to be a leader because investors keep throwing money at them.
Being able to summon a car almost anywhere on your phone is a service that people want. Particularly if you live in a city where you don’t want to always drive or if you travel a lot and don’t really need a rental car. And Uber is the company that is synonymous with that service.
As for “competitors”, other that Lyft (which is much smaller) and local taxis, who competes with Uber? To be successful in this business requires a large, global (or at least national) network of drivers. People don’t want 15 different apps to summon a car and the market can’t support it anyway.
I think the big question for Uber is ‘what does the future of “self driving cars” do to their business model?’
Much as people confuse corporate finance with household finance, I think people also confuse “Silicon Valley” finance with regular company finance because a lot of dot-coms failed in the 90s. A lot of those dot-coms were based off of stupid ideas. Even if they weren’t, investors are looking for the one or two “unicorns” who they think will dominate the future.
Once again, I disagree. The problem with Uber’s disruptive model is that its easy to copy and they don’t have any competitive advantage over Lyft - or even the “ride sharing-like taxi apps” like iHail. So they need to get themselves profitable. Instead, Uber has taken the advantage they had as the first player and big name and squandered it in scandal and making their founders rich. Plus, as the big name and first player, they’ve taken on the lions share of expense in changing government regulation and lawsuits.
And I think the 90s taught investors that those fundamentals exist - even for tech startups. You could invest in Amazon - or you could invest in Pets.com. Just like with traditional companies. There have always been disruptive industries. But lets take an historical disruptive industry - railroads. For every Great Northern or Santa Fe, there were a dozen railroads who managed to bankrupt themselves and end up leaving their shareholders with nothing. The list of failed early automobile companies is huge. Fundamentals don’t change that much - they are fundamental for a reason. You can only continue to lose money if people are willing to continue to invest. I don’t think Uber is the unicorn.
If its so easy to copy, then why did Uber cede the market in China, Russia and Southeast Asia? Uber was more well capitalized than its competitors in each market and dumped a ton of money trying to compete before eventually giving up and taking ~20% of the local competitor as a consolation prize. In all the cases in which Uber was first to market, they’ve been able to maintain their lead, in the cases where they are second, they’ve struggled to gain ground. This should suggest that ridesharing is not nearly as easy to compete in as most people think.
Disclaimer: I consider myself to be WAY out of my depth in this discussion although I’m finding the parts that I can follow to be fascinating. That said, it may be worth noting that Russia, China, and SE Asia are qualitatively more authoritarian environments than the US and EU. A disinterest in “reinventing the wheel” in such environments could account for their willingness to let somebody else take on the task and expense of making the regulatory landscape navigable.
ETA: and if it’s easy to copy, they might have an easier time inserting themselves once the way was cleared.
I think msmith537 has the right take on this. Uber is positioning themselves to be a market leader, THE name in rideshare services, for a time when the automotive transportation industry is in great flux. Automotive transport is being disrupted by rideshare and self driving technologies, both of which are going to stir things up. When the dust settles Uber wants to be leading whatever market remains, almost certainly a form of driverless car for hire.
The $64,000 question is whether driverless car for hire replaces personal car ownership, or merely supplements it the way hired cars do today. Right now, my personal car is idle, sitting in a parking lot, an asset unused. If it could drive itself and pickup fares, at a profit, why wouldn’t I (and millions of other car owners) let it drive around town making me money? Would I even need to be a 2 car family if there was a vast network of driverless for hire cars to take my spouse when I have the car? The combination of self drive and rideshare technologies has the potential to alter the very concept of car ownership, and Uber is looking to be there.