11 ms·

Understanding Uber’s Bleak Operating Economics

147 points by Cbasedlifeform 10y ago

baybal2 10y ago
My gut feeling is that the next few Enrons will be from the valley
- samfisher83 10y ago
  Enron screwed a lot of "normal" people. A lot of employees bought their stock. Uber will just lose the VCs money.
  - arbuge 10y ago
    Startups indeed do not typically require employees to shell out hard cash for their equity, but one could argue that they're just extracting payment in employee time instead.
    - georgespencer 10y ago
      > one could argue that they're just extracting payment in employee time instead. Uh, they get a salary.
      - db48x 10y ago
        But usually a lower salary than otherwise.
    - freddyc 10y ago
      At almost every start-up that I've been involved with, the approach has been to grant employees ISOs which have a strike price (albeit very low) that the employee must pay if they want to exercise the options. They then have to run the AMT gauntlet and take on the potential tax risk. So while employees don't have to pay for the option itself, I'm not sure it's entirely accurate to say that employees don't have to shell out hard cash for the actual equity.
  - jfim 10y ago
    And employees with stock options/RSUs/paper dollars.
  - branchless 10y ago
    They can get some of that venture goodness. Agreed that enron was far more pervasive.
  - sailfast 10y ago
    Sure, but what about companies that have gone under as a result of artificially subsidized transportation for a number of years? These companies and those jobs will not necessarily be easy to rebuild.
  - neom 10y ago
    VCs have LPs and LPs are typically "normal" people's wealth pooled and invested, teachers pension funds, universities etc.
  - maxxxxx 10y ago
    The VCs are not losing their own money. They lose the money of your pension funds and your city's investments. The VCs will be fine.
    - hkt 10y ago
      I don't know how it works in America, but there are strict rules in the UK about where money like that gets invested. It ain't with VCs. Think gilts and blue chip. I'd be surprised if even America was mad enough to let pension funds go for VC.
      - maxxxxx 10y ago
        I know for sure that cities invest in private capital and VC. Otherwise they could never reach their income projections and would have to raise funding. That would mean either higher taxes or lower pensions which both are a no-go so let's just take higher risk.
        hkt 10y ago
        That's crazy. Politics can really break incentives.
tyingq 10y ago
"Uber passengers were paying only 41% of the actual cost of their trips" That's worse than I had imagined, assuming the analysis is correct.
- baybal2 10y ago
  Moreover that, quite a few people actively exploit that and "drive themselves" for profit.
  - __derek__ 10y ago
    I'm not sure what you mean by that. Could you explain?
    - engx 10y ago
      I assume he's referring to the guaranteed boost rates which range from 1.1 to 2x the fare. So a passenger could pay $30 for a $60 ride. It's not practical since you'd be losing the increased rates and still having to drive, netting like $10/hour. There are GPS hacks that can supposedly spoof your rides though.
    - baybal2 10y ago
      A guy has 2 phones with different Uber accounts: driver, and passenger. He hails himself, and immediately picks up a hail from himself from his driver account. At some times, the rate for a ride is less than the driver payout as Uber subsidises rides from time to time. Another schemes are when people exploit "first ride free" and referral bonuses. All of this refers to rather casual cheating, done by non-technically literate people to offset the cost of their own driving or supplementing their normal income from Ubering. People who do Uber frauding professionally are in the different league. These are the guys whom engx is referring.
- Animats 10y ago
  That's the key issue. How long before Uber runs out of cash? They've raised around $15 billion.[1] How much of that is left? The experience of Austin, TX, where Uber and Lyft pulled out rather than fingerprint their drivers is indicative. Within weeks, there were seven companies replacing Uber. It just isn't that hard to replace Uber.[2] When Uber goes under, it will be a speed bump, not a disaster. Amazon lost money for a long time, but they were building infrastructure - huge warehouses and giant data centers. That's ordinary industrial growth, like building a steel mill. Now that's paying off. What physical assets does Uber have? They don't even own the cars. [1] http://www.vanityfair.com/news/2016/06/why-is-uber-raising-so-much-money http://www.vanityfair.com/news/2016/06/why-is-uber-raising-s... [2] http://www.512tech.com/technology/tested-seven-austin-post-uber-lyft-ride-hailing-apps/D6OMshqRSE0exTmJt8m94M/ http://www.512tech.com/technology/tested-seven-austin-post-u...
edblarney 10y ago
This is a very interesting article - thanks for some actual reporting. Note: Uber could be in violation of NAFTA and many other trade deals - as they maybe 'dumping' a product (in this case a service) on other markets, massively unprofitably, in order to put competitors out of business, after which they will ostensibly reap monopoly profits. I'm still not quite sold on Uber, I think there is some interesting value here ... but there are some dubious issues. If Uber falls it will be painful for other entrepreneurs - they are definitely keeping some 'animal spirits' going among investors. A lot of institutional money is in Uber, if they pull out of other things ... well valuations will get harder for companies looking for bigger C and D rounds for sure :)
- creaghpatr 10y ago
  That's a good point. I wonder how things will shake out for Uber if NAFTA is renegotiated. In any case, one game-changing regulation or political event could wipe out tens of billions in perceived value. If, for example, a small cluster of European countries banned Uber for whatever reason, it could make the entire house of cards collapse if they don't cross the self-driving car chasm fast enough.
  - nerdponx 10y ago
    Like Sweden? https://news.ycombinator.com/item?id=13079323 https://news.ycombinator.com/item?id=13079323
  - edblarney 10y ago
    Canada is way to weak to get anything with NAFTA. We don't even win cases against America that are cut-and-dry. The problem with trade agreements, is that ultimately, issues are grey, and therefore political. Making an 'anti dumping' case against Uber is a little bit of a stretch, meaning - Americans will tell us (Canadians) to f* off. If we try to enforce even more material issues, then we get the threat of other things (border fees, travel visas, no pipeline approval). There's 1% chance NAFTA will be re-negotiated. A) I don't think Trump actually dislikes it, he's just being populist. B) He would not negotiate in a fair manner. Way back, when it was done, it was done in the spirit of trade. It was an intellectual thing. With Trump, it will be 'America first' - not about the value of open trade. Even if Canada is forced to the negotiating table, we will have a very weak hand, and our strategy would probably be simply to delay, delay, delay until someone other than Trump is in charge. There are basically zero other Presidential Candidates who would be against it. Also - maybe Trump doesn't like it ... but he's not going to do a trade deal on his own. 99% of Republicans and probably 80% of Democrats are 'for' NAFTA. They have powerful constituents. The moment negotiations started, a lot of CEO's will be screaming bloody murder, and Trump would listen. But as far as Uber-NAFTA - I doubt there will ever be anything raised.
rdlecler1 10y ago
This feels like a straw man. They hammer on the costs and then hand wave around the driverless car potential. Of course Uber is driving for driverless cars and they're applying a simple formula. If the Customer acquisition Cost (CaC) is less than the p net present value (NPV) of that customer over that customers lifetime the you should spend to acquire customers. Driverless cars will increase NPV even if the economics don't make sense today.
- tyingq 10y ago
  The article does skip any analysis of the model with driverless tech. I couldn't find much out there that breaks down what the cost difference would be. One article[1] suggests driverless would drop the cost from $3/mile to $1.20/mile. I'm not clear on whether that's enough to counterbalance "Uber passengers were paying only 41% of the actual cost of their trips" I suspect it would require not just driverless, but also a fairly steep hike in what they charge. Especially to overcome X (5,10,20?) years of subsidies waiting on driverless to be viable...that's a pretty big hole. [1]http://www.fuelsinstitute.org/News/AdditionalResources/2016/May2016.shtm http://www.fuelsinstitute.org/News/AdditionalResources/2016/...
  - petra 10y ago
    Benedict Evans got the cost of driverless cars to something like 0.40 cents/mile if I'm not mistaken. Also another option for Uber should have been shared trips, which should have(?) network effects , but they don't seem to do very well at that , compared to the competition .
    - tyingq 10y ago
      >Benedict Evans got the cost of driverless cars to something like 0.40 cents/mile if I'm not mistaken. The article I mentioned was referring to roughly a "retail/end customer cost per mile", where Benedict Evans is probably referring to internal / wholesale costs. Either way, it's probably the same conclusion, cutting costs by roughly 50%.
    - aetherson 10y ago
yalogin 10y ago
This is a great article. The biggest point here is unlike facebook, google and Amazon there is no chance to magically find billions of new users and scale up for Uber. So the chance of turning a profit can only happen with driverless cars, which is atleast a few years away. I did not realize they are desperate to get self driving cars. Wonder how long they can sustain if their self driving car project hits a snag.
- jayjay71 10y ago
  There is absolutely no way Uber will have fully self-driving cars in a few years (a car that picks you up without a driver). If anything is going to save Uber, it's going to be Otto. Self-driving trucks are a much easier technical problem and the market is the better part of a trillion dollars just in the US.
  - Hydraulix989 10y ago
    Right, "driverless cars" are still at least 10 years away, probably 20.
    - BipolarElsa 10y ago
      I don't think we'll have anything close to a pure "driverless car" until at least middle of the 21st century, if not later. People have been making wild predictions for hundreds of years. Most of them aren't true. The "autonomous vehicle" hype circlejerk on HN is friggin' strong as a 1000 Suns. I'm sorry to say this, but it's just not going to happen on the timeline that you want it to. Give it a century, then we'll see. You're basically asking for the computer to be a human and anticipate dangers on the road and have instincts like a human. That's H U G E. I'm sorry but you guys need a major dose of salt with your claims. Major. EDIT: What do I mean by "pure driverless car"? I mean a couple things: completely unaided driving...that means if I go into a large parking structure with a toll booth at the beginning, the car should be doing all the work. "Driverless car" only on freeways and some minor roads just doesn't cut it. When I think driverless, I think "no more steering wheel" ...if we can get there, then we'll talk.
  - 10y ago
jpeg_hero 10y ago
The author makes some interesting points, that I haven't seen made elsewhere, although I think they could have been made much more briefly and cogently. Also the Author makes the curious choice to use the metric of "EBITAR" rather than the standard metric of "EBITDA" with no mention of the "rents and restructuring" that his metric exudes. This makes me think he is not all that familiar with financial analysis. Lots of his article is "Uber's aggregated financials suck and they aren't getting better." This is pretty useless without more data on current per city or per unit economics. Also, maybe give Uber credit for splashing some cash to grow 10x in 1 year? That won't happen again. The per ride subsidies are the most worrisome. I took an $11 Uber ride the other day, if that was a $22 Uber ride I would have definitely thought about it twice! But you can't really throw headquarters cost into that subsidy calculation- which he seems to do. For me, the analysis of Uber really comes down to that old chestnut of low user acquisition / user behavior. If every time a consumer wants to do a web search they go to your site (google) and if every time they want to sell their junk they go to your site (ebay) you'll generally have a good business. If there is one thing that Uber has taught us is that the product of "car rides hailed by an app" does have huge and sustained demand. Will the consumer be trained to always go to Uber? Or will the regional nature of the business and low barriers to entry (easy consumer and driver app switching) allow small regional apps to sprout up take flow / demand from Uber.
- tyingq 10y ago
  >the Author makes the curious choice to use the metric of "EBITAR" rather than the standard metric of "EBITDA" That was Uber's curious choice, not the author's. They were the only publicly available numbers from Uber. Edit: One of the screenshots of what Uber shared: http://images.gawker.com/1372623315394702184/c_scale,fl_progressive,q_80,w_800.jpg http://images.gawker.com/1372623315394702184/c_scale,fl_prog... It's missing the info needed to calculate EBITDA.
FailMore 10y ago
Really good article. Some thoughts on Uber Eats... I used to be an analyst at a VC firm that invested in a food delivery startup (which went broke). Food delivery is not a very attractive business in terms of its profitability, but it is an extremely attractive business if you want to show fast top line revenue growth. Why so? Food delivery is great because the full order value can be taken as the top line revenue. If someone orders a £80 meal for four, that's another £80 to add to your top line even though your net revenues were ~£8, if that. The institutional investors Uber will need to attract at IPO will be expecting Uber to have a typical tech company profile - extremely fast growing revenue and healthy losses. Strangely, from the IPO documents I've seen, accounting is very opaque for public companies vs private companies - meaning Uber Eats revenue is unlikely to be separated. I think there is a possibility Uber is being forced to gear up to an IPO, top line revenue growth from the taxi business is not enough to justify the valuation, so the board has decided to move Uber into food to drive big numbers - but not profitability.
- neom 10y ago
  Awesome analysis, thanks for that. :)
- deleted 10y ago
  [deleted]
- spraak 10y ago
  From a very low level validation of Uber and Uber Eats finances being interwoven: my Uber Eats orders always show up in the Uber ride app and say that I took a Volkswagen GTI somewhere
  - adamson 10y ago
    Are you serious? That's a really odd way of implementing that accounting trick
- simulate 10y ago
  Great insight into Uber Eats. Do you have suggestions for reports or other public analyses of this category or adjacent categories like on-demand delivery (e.g., Google Shopping Express, Instacart, Amazon Fresh)?
jakewins 10y ago
Of course Uber has $2B in annual losses, that's by design. Do you think they would take $13B in VC capital and then not spend the money? The profit margin is stable at around (100%) because it is kept there artificially, balancing how much of the expansion is paid for with revenue and how much is paid for with VC money. The rest of the article was super interesting - but the conclusion of what Ubers current losses means I think seems off.
BIackSwan 10y ago
There is too many assumptions to make a case either way. There is zero info about actual unit economics available publicly. We don't know which cities are without subsidies (on both driver and rider) and which ones are, only Uber has it available internally. Heck, due to the growth in a city, the economics themselves change as the company scales in a city. Only Uber can actually project out to a certain reasonability (which are almost always different from reality even after that). Projections are just broad strokes to see if something will definitely not work rather than a proof that it definitely will. All these arguments could have been made for Google, Amazon, Facebook etc at a certain point in the company's life, and then BAM - in a couple of years there was some "magic point" where the whole company became a cash minting machine. Also, Amazon is not a "pure software" company - there is a huge operations backend which was scaled along with the company. People tend to look at a given snapshot in time and confidently proclaim that it won't work - ever. But the world is a complex place - nobody has a fking idea what's gonna happen next. Instead of finding reasons to proclaim "This is not gonna work - ever.", it would be better if we can ask - "Okay, it looks like it doesn't work in the current phase - but what are these people doing which makes it possible to work." In short, its moot to discuss why Uber will fail - atleast right now - there isn't enough data that we can confidently project to make that conclusion. Its better if this sort of analysis is done in hindsight because right now there are too many variables which are changing too fast for anyone to make any prediction about anything.
- curiousDog 10y ago
  Very well said. I remember all the bright kids from my college having to decide between Google/Amzn/msft or Facebook pre-ipo. News articles at that time had similar proclamations based on leaked revenue estimates. Most of them that joined FB are now multi-millionaires. Which is not to say that Uber will be successful, but there's just too many unknowns to make a conclusion either way.
bbarn 10y ago
Another big point that he didn't make, which helps his argument a bit, is that Uber is no longer novel. It's spread and network effect have stopped, and gone are clean cars and a positive experience, replaced with mostly beat up city cars and drivers with no practical professional driving experience. It's akin to delivering pizzas now, the only people doing it are not realizing the negative value proposition it offers and are desperate for fast money. I was a big fan of it at first, but now I've gone back to using cabs because A. I know in this city at least (Chicago) cab drivers have to pass a basic exam showing they know how to drive people around in the city, and roughly that they know where they are going. B. It's the same price. C. It's not hard to find a cab any time but very off peak where I live and work and socialize. Too many drivers that were stuck staring at the GPS in the car, not knowing where to go, what route to take. Too many filthy cars, smelling like cigarette smoke. Too many insinuations that I needed to tip. Too many times I've been cut off or hit by or gotten stuck behind an illegally parked Uber when I was driving. The list goes on.
- IshKebab 10y ago
  I think a more important factor is that Google Maps shows competitor taxi services. I guess they have to pay a fair bit to get that advertising, but probably not that much and it means there is not much value to being a well-known brand. Still, this article claims customers pay 41% of the true cost which doesn't seem right - there's no way 'normal' taxis are more than double the price of Uber, at least in the UK.
  - morti 10y ago
    Depends where you are I guess. Where I live, it seems about right, assuming there is no surge tax. At 1.0x it usually costs at least a third less. The hard thing is getting the regular rate
  - serge2k 10y ago
    Seattle I'd say it's probably 1.5 times as much for a taxi. Based on last time I actually took one. It's hard to say, Uber pricing has become so opaque. :/
  - 10y ago
neves 10y ago
One great advantage of Uber is that it works the same in any place of the world. Anywhere you travel, you know it will give you a fair priced ride. There are taxi services which only business proposition is to extract extra money of foolish tourists.
- yabatopia 10y ago
  But how often do people travel abroad? And Uber covers only major, well–known cities in select countries, a far cry from any place on the world.
neves 10y ago
Uber will work when we start to get autonomous cars. So they will fire everybody and retain all the profits.
brentm 10y ago
I have maintained the viewpoint for a while that if Uber's valuation is based on the inevitability of driverless cars and the reclaiming of that 80%+ revenue they are in trouble. Driverless cars even when the tech is ready will take many years to clear the political hurdles necessary for wide enough usage to help Uber. The same people that put Trump in office are not going to happily accept tech that will be painted in the political light as a tool to remove tens of thousands of jobs from the economy. The politics is going to be almost as big of a hurdle as the tech itself. (Not to mention that removal of the driver opens up Uber's competition many competent tech companies with deep enough pockets and direct access to the masses.)
rsp1984 10y ago
Uber is currently the most highly valued private company in the world. No, they're not. 37Signals is [1]. Kidding aside, the term valuation in the context of a private company is always quite a bit whacky. Who determined that valuation? VCs with their liquidation preferences? Please. If rapid growth could not drive major margin improvements between 2012 and 2016, there is no reason to believe that Uber will suddenly find billions in scale economies going forward. Sorry what? As if Uber isn't already getting all the benefits of scale economics. Their losses are due to their hyper-aggressive growth plans and the stiff competition. The end game isn't saving money due to economies of scale. That's already happened. The end game is driving everyone else out of business and dominating the market in every region of the planet. That's when the profits would come in. [1] https://signalvnoise.com/posts/1941-press-release-37signals-valuation-tops-100-billion-after-bold-vc-investment https://signalvnoise.com/posts/1941-press-release-37signals-...
- astrange 10y ago
  I'm late, but Uber has the same problem as cleaning services - they can't drive the drivers out of business unless they succeed at self-driving fleets, and they have no monopoly advantage as long as someone else can convince people to install their app. So it's easy to replace them until you lose money yourself. There's a reason other taxi companies haven't formed global corporations.
oli5679 10y ago
From an antitrust perspective, predatory pricing is only a violation under EU/US law if firms are pricing below marginal cost. That's not to say Uber might not be pursuing a predatory strategy, but that it falls within both jurisdictions' safe harbour of legitimate practice.
TheSageMage 10y ago
What attempts are there to bring the tech that makes Uber popular to the Taxi industry? My limited experience with taxi's in Las Vegas and San Francisco have left a lot to be desired when compared to Uber. The fact that the app gives me metrics about my trip, including driver location and cost, go a long way in my use of Uber.
ruggeri 10y ago
(I hope this comment is useful. Perhaps I am just confused by the article). Interesting article. The article emphasizes that the $2B loss that Uber runs is effectively a subsidy for riders. But that isn’t necessarily necessarily 100% true. If Uber loses $2B/yr because it pours $2B in a hole and sets in on fire, that isn’t a subsidy to riders. If that’s the case, then Uber can stop losing money simply by stopping doing that. What percentage of the $2B is spent on growth (minus subsidy to ride cost; e.g., advertising) which can be shut off eventually? What percentage is spent on software, which is a fixed cost and actually infinitely scalable? What percentage of engineering headcount can be laid off/replaced with cheaper people as the service approaches feature completion? Uber spends about $2.1B in sales and operating expenses. I don’t know what the breakdown is inside these. But if it can turn off some of those expenses as growth slows, and if others are fixed as it grows, then is there no hope? The article doesn’t give Uber enough credit for offering a definitely superior product, IMHO. Uber doesn’t necessarily need to be price competitive with previously existing companies, which were garbage. The accountability of Uber drivers, the ability to call a car to a specific location within minutes, these are things that, when I lived in Chicago, simply did not exist at all. That said, there’s a limit to how much Uber can charge extra. If it needs to charge double the prices of previously existing competitors, then the extra service isn’t worth it, and Uber wouldn’t be worth anything. I don’t understand how Uber could possibly need to charge that much more than existing companies. Yes, it misses out on the “fleet effect;” but if the largest cost goes to driver compensation, the economy of running a fleet is maybe a small percentage of overall costs. Yes, Uber needs to build and maintain software; but that ought to be a fixed cost (and mostly in initial years!). I guess it comes down to this: I don’t understand the contention that Uber has no meaningful scale economies (the software, right?) or how it could be possible that Uber’s model needs to cost significantly more than pre-existing competitors. Since I can’t see inside of what Uber spends its revenue on, I don’t know how much it would need to raise its current prices. But if Uber costs, say, 10% more than pre-existing taxi companies, I would still expect to be worth >>$0. I can’t speak to $70B. (Also, I offer no opinion on long-term defensibility of Uber's business to new entrants).

147 points by Cbasedlifeform 10y ago

baybal2 10y ago

My gut feeling is that the next few Enrons will be from the valley

samfisher83 10y ago
Enron screwed a lot of "normal" people. A lot of employees bought their stock. Uber will just lose the VCs money.
- arbuge 10y ago
  Startups indeed do not typically require employees to shell out hard cash for their equity, but one could argue that they're just extracting payment in employee time instead.
  - georgespencer 10y ago
    > one could argue that they're just extracting payment in employee time instead. Uh, they get a salary.
    - db48x 10y ago
      But usually a lower salary than otherwise.
  - freddyc 10y ago
    At almost every start-up that I've been involved with, the approach has been to grant employees ISOs which have a strike price (albeit very low) that the employee must pay if they want to exercise the options. They then have to run the AMT gauntlet and take on the potential tax risk. So while employees don't have to pay for the option itself, I'm not sure it's entirely accurate to say that employees don't have to shell out hard cash for the actual equity.
- jfim 10y ago
  And employees with stock options/RSUs/paper dollars.
- branchless 10y ago
  They can get some of that venture goodness. Agreed that enron was far more pervasive.
- sailfast 10y ago
  Sure, but what about companies that have gone under as a result of artificially subsidized transportation for a number of years? These companies and those jobs will not necessarily be easy to rebuild.
- neom 10y ago
  VCs have LPs and LPs are typically "normal" people's wealth pooled and invested, teachers pension funds, universities etc.
- maxxxxx 10y ago
  The VCs are not losing their own money. They lose the money of your pension funds and your city's investments. The VCs will be fine.
  - hkt 10y ago
    I don't know how it works in America, but there are strict rules in the UK about where money like that gets invested. It ain't with VCs. Think gilts and blue chip. I'd be surprised if even America was mad enough to let pension funds go for VC.
    - maxxxxx 10y ago
      I know for sure that cities invest in private capital and VC. Otherwise they could never reach their income projections and would have to raise funding. That would mean either higher taxes or lower pensions which both are a no-go so let's just take higher risk.
      - hkt 10y ago
        That's crazy. Politics can really break incentives.

tyingq 10y ago

"Uber passengers were paying only 41% of the actual cost of their trips" That's worse than I had imagined, assuming the analysis is correct.

baybal2 10y ago
Moreover that, quite a few people actively exploit that and "drive themselves" for profit.
- __derek__ 10y ago
  I'm not sure what you mean by that. Could you explain?
  - engx 10y ago
    I assume he's referring to the guaranteed boost rates which range from 1.1 to 2x the fare. So a passenger could pay $30 for a $60 ride. It's not practical since you'd be losing the increased rates and still having to drive, netting like $10/hour. There are GPS hacks that can supposedly spoof your rides though.
  - baybal2 10y ago
    A guy has 2 phones with different Uber accounts: driver, and passenger. He hails himself, and immediately picks up a hail from himself from his driver account. At some times, the rate for a ride is less than the driver payout as Uber subsidises rides from time to time. Another schemes are when people exploit "first ride free" and referral bonuses. All of this refers to rather casual cheating, done by non-technically literate people to offset the cost of their own driving or supplementing their normal income from Ubering. People who do Uber frauding professionally are in the different league. These are the guys whom engx is referring.
Animats 10y ago
That's the key issue. How long before Uber runs out of cash? They've raised around $15 billion.[1] How much of that is left? The experience of Austin, TX, where Uber and Lyft pulled out rather than fingerprint their drivers is indicative. Within weeks, there were seven companies replacing Uber. It just isn't that hard to replace Uber.[2] When Uber goes under, it will be a speed bump, not a disaster. Amazon lost money for a long time, but they were building infrastructure - huge warehouses and giant data centers. That's ordinary industrial growth, like building a steel mill. Now that's paying off. What physical assets does Uber have? They don't even own the cars. [1] http://www.vanityfair.com/news/2016/06/why-is-uber-raising-so-much-money http://www.vanityfair.com/news/2016/06/why-is-uber-raising-s... [2] http://www.512tech.com/technology/tested-seven-austin-post-uber-lyft-ride-hailing-apps/D6OMshqRSE0exTmJt8m94M/ http://www.512tech.com/technology/tested-seven-austin-post-u...

edblarney 10y ago

This is a very interesting article - thanks for some actual reporting. Note: Uber could be in violation of NAFTA and many other trade deals - as they maybe 'dumping' a product (in this case a service) on other markets, massively unprofitably, in order to put competitors out of business, after which they will ostensibly reap monopoly profits. I'm still not quite sold on Uber, I think there is some interesting value here ... but there are some dubious issues. If Uber falls it will be painful for other entrepreneurs - they are definitely keeping some 'animal spirits' going among investors. A lot of institutional money is in Uber, if they pull out of other things ... well valuations will get harder for companies looking for bigger C and D rounds for sure :)

creaghpatr 10y ago
That's a good point. I wonder how things will shake out for Uber if NAFTA is renegotiated. In any case, one game-changing regulation or political event could wipe out tens of billions in perceived value. If, for example, a small cluster of European countries banned Uber for whatever reason, it could make the entire house of cards collapse if they don't cross the self-driving car chasm fast enough.
- nerdponx 10y ago
  Like Sweden? https://news.ycombinator.com/item?id=13079323 https://news.ycombinator.com/item?id=13079323
- edblarney 10y ago
  Canada is way to weak to get anything with NAFTA. We don't even win cases against America that are cut-and-dry. The problem with trade agreements, is that ultimately, issues are grey, and therefore political. Making an 'anti dumping' case against Uber is a little bit of a stretch, meaning - Americans will tell us (Canadians) to f* off. If we try to enforce even more material issues, then we get the threat of other things (border fees, travel visas, no pipeline approval). There's 1% chance NAFTA will be re-negotiated. A) I don't think Trump actually dislikes it, he's just being populist. B) He would not negotiate in a fair manner. Way back, when it was done, it was done in the spirit of trade. It was an intellectual thing. With Trump, it will be 'America first' - not about the value of open trade. Even if Canada is forced to the negotiating table, we will have a very weak hand, and our strategy would probably be simply to delay, delay, delay until someone other than Trump is in charge. There are basically zero other Presidential Candidates who would be against it. Also - maybe Trump doesn't like it ... but he's not going to do a trade deal on his own. 99% of Republicans and probably 80% of Democrats are 'for' NAFTA. They have powerful constituents. The moment negotiations started, a lot of CEO's will be screaming bloody murder, and Trump would listen. But as far as Uber-NAFTA - I doubt there will ever be anything raised.

rdlecler1 10y ago

This feels like a straw man. They hammer on the costs and then hand wave around the driverless car potential. Of course Uber is driving for driverless cars and they're applying a simple formula. If the Customer acquisition Cost (CaC) is less than the p net present value (NPV) of that customer over that customers lifetime the you should spend to acquire customers. Driverless cars will increase NPV even if the economics don't make sense today.

tyingq 10y ago
The article does skip any analysis of the model with driverless tech. I couldn't find much out there that breaks down what the cost difference would be. One article[1] suggests driverless would drop the cost from $3/mile to $1.20/mile. I'm not clear on whether that's enough to counterbalance "Uber passengers were paying only 41% of the actual cost of their trips" I suspect it would require not just driverless, but also a fairly steep hike in what they charge. Especially to overcome X (5,10,20?) years of subsidies waiting on driverless to be viable...that's a pretty big hole. [1]http://www.fuelsinstitute.org/News/AdditionalResources/2016/May2016.shtm http://www.fuelsinstitute.org/News/AdditionalResources/2016/...
- petra 10y ago
  Benedict Evans got the cost of driverless cars to something like 0.40 cents/mile if I'm not mistaken. Also another option for Uber should have been shared trips, which should have(?) network effects , but they don't seem to do very well at that , compared to the competition .
  - tyingq 10y ago
    >Benedict Evans got the cost of driverless cars to something like 0.40 cents/mile if I'm not mistaken. The article I mentioned was referring to roughly a "retail/end customer cost per mile", where Benedict Evans is probably referring to internal / wholesale costs. Either way, it's probably the same conclusion, cutting costs by roughly 50%.
  - aetherson 10y ago

yalogin 10y ago

This is a great article. The biggest point here is unlike facebook, google and Amazon there is no chance to magically find billions of new users and scale up for Uber. So the chance of turning a profit can only happen with driverless cars, which is atleast a few years away. I did not realize they are desperate to get self driving cars. Wonder how long they can sustain if their self driving car project hits a snag.

jayjay71 10y ago
There is absolutely no way Uber will have fully self-driving cars in a few years (a car that picks you up without a driver). If anything is going to save Uber, it's going to be Otto. Self-driving trucks are a much easier technical problem and the market is the better part of a trillion dollars just in the US.
- Hydraulix989 10y ago
  Right, "driverless cars" are still at least 10 years away, probably 20.
  - BipolarElsa 10y ago
    I don't think we'll have anything close to a pure "driverless car" until at least middle of the 21st century, if not later. People have been making wild predictions for hundreds of years. Most of them aren't true. The "autonomous vehicle" hype circlejerk on HN is friggin' strong as a 1000 Suns. I'm sorry to say this, but it's just not going to happen on the timeline that you want it to. Give it a century, then we'll see. You're basically asking for the computer to be a human and anticipate dangers on the road and have instincts like a human. That's H U G E. I'm sorry but you guys need a major dose of salt with your claims. Major. EDIT: What do I mean by "pure driverless car"? I mean a couple things: completely unaided driving...that means if I go into a large parking structure with a toll booth at the beginning, the car should be doing all the work. "Driverless car" only on freeways and some minor roads just doesn't cut it. When I think driverless, I think "no more steering wheel" ...if we can get there, then we'll talk.
- 10y ago

jpeg_hero 10y ago

The author makes some interesting points, that I haven't seen made elsewhere, although I think they could have been made much more briefly and cogently. Also the Author makes the curious choice to use the metric of "EBITAR" rather than the standard metric of "EBITDA" with no mention of the "rents and restructuring" that his metric exudes. This makes me think he is not all that familiar with financial analysis. Lots of his article is "Uber's aggregated financials suck and they aren't getting better." This is pretty useless without more data on current per city or per unit economics. Also, maybe give Uber credit for splashing some cash to grow 10x in 1 year? That won't happen again. The per ride subsidies are the most worrisome. I took an $11 Uber ride the other day, if that was a $22 Uber ride I would have definitely thought about it twice! But you can't really throw headquarters cost into that subsidy calculation- which he seems to do. For me, the analysis of Uber really comes down to that old chestnut of low user acquisition / user behavior. If every time a consumer wants to do a web search they go to your site (google) and if every time they want to sell their junk they go to your site (ebay) you'll generally have a good business. If there is one thing that Uber has taught us is that the product of "car rides hailed by an app" does have huge and sustained demand. Will the consumer be trained to always go to Uber? Or will the regional nature of the business and low barriers to entry (easy consumer and driver app switching) allow small regional apps to sprout up take flow / demand from Uber.

tyingq 10y ago
>the Author makes the curious choice to use the metric of "EBITAR" rather than the standard metric of "EBITDA" That was Uber's curious choice, not the author's. They were the only publicly available numbers from Uber. Edit: One of the screenshots of what Uber shared: http://images.gawker.com/1372623315394702184/c_scale,fl_progressive,q_80,w_800.jpg http://images.gawker.com/1372623315394702184/c_scale,fl_prog... It's missing the info needed to calculate EBITDA.

FailMore 10y ago

Really good article. Some thoughts on Uber Eats... I used to be an analyst at a VC firm that invested in a food delivery startup (which went broke). Food delivery is not a very attractive business in terms of its profitability, but it is an extremely attractive business if you want to show fast top line revenue growth. Why so? Food delivery is great because the full order value can be taken as the top line revenue. If someone orders a £80 meal for four, that's another £80 to add to your top line even though your net revenues were ~£8, if that. The institutional investors Uber will need to attract at IPO will be expecting Uber to have a typical tech company profile - extremely fast growing revenue and healthy losses. Strangely, from the IPO documents I've seen, accounting is very opaque for public companies vs private companies - meaning Uber Eats revenue is unlikely to be separated. I think there is a possibility Uber is being forced to gear up to an IPO, top line revenue growth from the taxi business is not enough to justify the valuation, so the board has decided to move Uber into food to drive big numbers - but not profitability.

neom 10y ago
Awesome analysis, thanks for that. :)
deleted 10y ago
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spraak 10y ago
From a very low level validation of Uber and Uber Eats finances being interwoven: my Uber Eats orders always show up in the Uber ride app and say that I took a Volkswagen GTI somewhere
- adamson 10y ago
  Are you serious? That's a really odd way of implementing that accounting trick
simulate 10y ago
Great insight into Uber Eats. Do you have suggestions for reports or other public analyses of this category or adjacent categories like on-demand delivery (e.g., Google Shopping Express, Instacart, Amazon Fresh)?

jakewins 10y ago

Of course Uber has $2B in annual losses, that's by design. Do you think they would take $13B in VC capital and then not spend the money? The profit margin is stable at around (100%) because it is kept there artificially, balancing how much of the expansion is paid for with revenue and how much is paid for with VC money. The rest of the article was super interesting - but the conclusion of what Ubers current losses means I think seems off.

BIackSwan 10y ago

There is too many assumptions to make a case either way. There is zero info about actual unit economics available publicly. We don't know which cities are without subsidies (on both driver and rider) and which ones are, only Uber has it available internally. Heck, due to the growth in a city, the economics themselves change as the company scales in a city. Only Uber can actually project out to a certain reasonability (which are almost always different from reality even after that). Projections are just broad strokes to see if something will definitely not work rather than a proof that it definitely will. All these arguments could have been made for Google, Amazon, Facebook etc at a certain point in the company's life, and then BAM - in a couple of years there was some "magic point" where the whole company became a cash minting machine. Also, Amazon is not a "pure software" company - there is a huge operations backend which was scaled along with the company. People tend to look at a given snapshot in time and confidently proclaim that it won't work - ever. But the world is a complex place - nobody has a fking idea what's gonna happen next. Instead of finding reasons to proclaim "This is not gonna work - ever.", it would be better if we can ask - "Okay, it looks like it doesn't work in the current phase - but what are these people doing which makes it possible to work." In short, its moot to discuss why Uber will fail - atleast right now - there isn't enough data that we can confidently project to make that conclusion. Its better if this sort of analysis is done in hindsight because right now there are too many variables which are changing too fast for anyone to make any prediction about anything.

curiousDog 10y ago
Very well said. I remember all the bright kids from my college having to decide between Google/Amzn/msft or Facebook pre-ipo. News articles at that time had similar proclamations based on leaked revenue estimates. Most of them that joined FB are now multi-millionaires. Which is not to say that Uber will be successful, but there's just too many unknowns to make a conclusion either way.

bbarn 10y ago

Another big point that he didn't make, which helps his argument a bit, is that Uber is no longer novel. It's spread and network effect have stopped, and gone are clean cars and a positive experience, replaced with mostly beat up city cars and drivers with no practical professional driving experience. It's akin to delivering pizzas now, the only people doing it are not realizing the negative value proposition it offers and are desperate for fast money. I was a big fan of it at first, but now I've gone back to using cabs because A. I know in this city at least (Chicago) cab drivers have to pass a basic exam showing they know how to drive people around in the city, and roughly that they know where they are going. B. It's the same price. C. It's not hard to find a cab any time but very off peak where I live and work and socialize. Too many drivers that were stuck staring at the GPS in the car, not knowing where to go, what route to take. Too many filthy cars, smelling like cigarette smoke. Too many insinuations that I needed to tip. Too many times I've been cut off or hit by or gotten stuck behind an illegally parked Uber when I was driving. The list goes on.

IshKebab 10y ago
I think a more important factor is that Google Maps shows competitor taxi services. I guess they have to pay a fair bit to get that advertising, but probably not that much and it means there is not much value to being a well-known brand. Still, this article claims customers pay 41% of the true cost which doesn't seem right - there's no way 'normal' taxis are more than double the price of Uber, at least in the UK.
- morti 10y ago
  Depends where you are I guess. Where I live, it seems about right, assuming there is no surge tax. At 1.0x it usually costs at least a third less. The hard thing is getting the regular rate
- serge2k 10y ago
  Seattle I'd say it's probably 1.5 times as much for a taxi. Based on last time I actually took one. It's hard to say, Uber pricing has become so opaque. :/
- 10y ago

neves 10y ago

One great advantage of Uber is that it works the same in any place of the world. Anywhere you travel, you know it will give you a fair priced ride. There are taxi services which only business proposition is to extract extra money of foolish tourists.

yabatopia 10y ago
But how often do people travel abroad? And Uber covers only major, well–known cities in select countries, a far cry from any place on the world.

neves 10y ago

Uber will work when we start to get autonomous cars. So they will fire everybody and retain all the profits.

brentm 10y ago

I have maintained the viewpoint for a while that if Uber's valuation is based on the inevitability of driverless cars and the reclaiming of that 80%+ revenue they are in trouble. Driverless cars even when the tech is ready will take many years to clear the political hurdles necessary for wide enough usage to help Uber. The same people that put Trump in office are not going to happily accept tech that will be painted in the political light as a tool to remove tens of thousands of jobs from the economy. The politics is going to be almost as big of a hurdle as the tech itself. (Not to mention that removal of the driver opens up Uber's competition many competent tech companies with deep enough pockets and direct access to the masses.)

rsp1984 10y ago

Uber is currently the most highly valued private company in the world. No, they're not. 37Signals is [1]. Kidding aside, the term valuation in the context of a private company is always quite a bit whacky. Who determined that valuation? VCs with their liquidation preferences? Please. If rapid growth could not drive major margin improvements between 2012 and 2016, there is no reason to believe that Uber will suddenly find billions in scale economies going forward. Sorry what? As if Uber isn't already getting all the benefits of scale economics. Their losses are due to their hyper-aggressive growth plans and the stiff competition. The end game isn't saving money due to economies of scale. That's already happened. The end game is driving everyone else out of business and dominating the market in every region of the planet. That's when the profits would come in. [1] https://signalvnoise.com/posts/1941-press-release-37signals-valuation-tops-100-billion-after-bold-vc-investment https://signalvnoise.com/posts/1941-press-release-37signals-...

astrange 10y ago
I'm late, but Uber has the same problem as cleaning services - they can't drive the drivers out of business unless they succeed at self-driving fleets, and they have no monopoly advantage as long as someone else can convince people to install their app. So it's easy to replace them until you lose money yourself. There's a reason other taxi companies haven't formed global corporations.

oli5679 10y ago

From an antitrust perspective, predatory pricing is only a violation under EU/US law if firms are pricing below marginal cost. That's not to say Uber might not be pursuing a predatory strategy, but that it falls within both jurisdictions' safe harbour of legitimate practice.

TheSageMage 10y ago

What attempts are there to bring the tech that makes Uber popular to the Taxi industry? My limited experience with taxi's in Las Vegas and San Francisco have left a lot to be desired when compared to Uber. The fact that the app gives me metrics about my trip, including driver location and cost, go a long way in my use of Uber.

ruggeri 10y ago

(I hope this comment is useful. Perhaps I am just confused by the article). Interesting article. The article emphasizes that the $2B loss that Uber runs is effectively a subsidy for riders. But that isn’t necessarily necessarily 100% true. If Uber loses $2B/yr because it pours $2B in a hole and sets in on fire, that isn’t a subsidy to riders. If that’s the case, then Uber can stop losing money simply by stopping doing that. What percentage of the $2B is spent on growth (minus subsidy to ride cost; e.g., advertising) which can be shut off eventually? What percentage is spent on software, which is a fixed cost and actually infinitely scalable? What percentage of engineering headcount can be laid off/replaced with cheaper people as the service approaches feature completion? Uber spends about $2.1B in sales and operating expenses. I don’t know what the breakdown is inside these. But if it can turn off some of those expenses as growth slows, and if others are fixed as it grows, then is there no hope? The article doesn’t give Uber enough credit for offering a definitely superior product, IMHO. Uber doesn’t necessarily need to be price competitive with previously existing companies, which were garbage. The accountability of Uber drivers, the ability to call a car to a specific location within minutes, these are things that, when I lived in Chicago, simply did not exist at all. That said, there’s a limit to how much Uber can charge extra. If it needs to charge double the prices of previously existing competitors, then the extra service isn’t worth it, and Uber wouldn’t be worth anything. I don’t understand how Uber could possibly need to charge that much more than existing companies. Yes, it misses out on the “fleet effect;” but if the largest cost goes to driver compensation, the economy of running a fleet is maybe a small percentage of overall costs. Yes, Uber needs to build and maintain software; but that ought to be a fixed cost (and mostly in initial years!). I guess it comes down to this: I don’t understand the contention that Uber has no meaningful scale economies (the software, right?) or how it could be possible that Uber’s model needs to cost significantly more than pre-existing competitors. Since I can’t see inside of what Uber spends its revenue on, I don’t know how much it would need to raise its current prices. But if Uber costs, say, 10% more than pre-existing taxi companies, I would still expect to be worth >>$0. I can’t speak to $70B. (Also, I offer no opinion on long-term defensibility of Uber's business to new entrants).