Uber bought market share by subsidizing rides. That can't go on forever. Or much longer, without more capital. They're already borrowing heavily, having run out of equity sources. The business model hype is supposed to be that they push taxis out of business, then raise rates. Or self-driving cars will somehow save them. Both are unlikely.
Completely ridiculous. The model was not to raise rates in the future. The whole reason they could raise so much money was that they showed as they reduced rates, they induced more demand. They also had data showing increasing lifetime customer value. I recommend reading Brad Stone's The Upstarts. If they can have higher profits/customer while having lower rates than other companies, then they actually have a moat. I don't think they got to the moat, though.
If you have costs that scale sublinearly with volume, such as software development or idle driver time, then margins really do improve with volume. Many successful businesses use economies of scale as an sustainable competitive advantage against competitors.
In fact, the central concept of venture capital is premised on the idea that businesses start out unprofitable but become profitable as volumes scale.
To what extent any of this is the case for Uber is worth debating. So feel free to have that debate, and bring forth new information or new arguments that support your thesis.
> If you have costs that scale sublinearly with volume, such as software development or idle driver time, then margins really do improve with volume
And if you're subsidising rides below cost because you're trying to grow your market and you have piles of VC cash so you don't care that you're burning through money, then eventually you're going to run out of that money and will be in trouble if you can't raise any more.
Time will tell whether Uber was building a sustainable business or just burning through VC cash.
Uber was just burning through VC cash based on the idea that 'if you're the biggest jerk on the block in every possible sense, capital will decide you're going to be the winner because you're meaner than everybody else'.
Winners don't quit, so Uber is dead to capital now: it was always based on maximum evilness and all the stuff about disrupting and ridesharing was mere window dressing.
Note to capital, wherever it is: this is what you get when you go by personality rather than studying the fundamentals of a business. You can't simply pick the most toxic individual or company, claim they're going to kill everybody else, and then prop them up with valuation. The valuation didn't fail but your pet Dr. Evil did, and that was your proxy for maintaining the 'killer' behavior. Unless or until capital can be personified as evil AIs that cannot die, this was never really an optimal strategy for capital.
Only if you are in #1 in a pie that isn't getting bigger. Ridesharing is most definitely not a developed market globally. There is a lot of room to increase the size of the pie.
Ridesharing is definitely not a developed market globally because in most of the rest of the world the margins on organising transport around cities are already measured in cents rather than dollars. These markets are not going to be more profitable for Uber than the ones they started in.
Particularly not if you can't set up an operation in an Western city with expensive taxi services without losing money on every ride you operate even before centralised overheads are taken into account.
This suggests to me that marginal rides are profitable, even if they aren't profitable enough to cover fixed costs of software development or investments into new geographic markets.
Thanks for the source and the reply. It's good to know that in 2014 they had promos in developed city markets that dropped their gross margins into negative territory.
Nonetheless, my impression is that this is more the exception than the rule, based on the financials I linked to earlier.
If you're losing money on every ride, then your aggregate profit on all rides will be in the negatives. More volume just makes the total loss bigger, because that's more money you've been giving away.
But are they losing money on every ride? I thought the whole point of subsidizing rides was(as OP comments pointed out) to raise demand, both for drivers and riders, they first entice both ways with the promise of lower rates and higher payoffs, then slowly increase their cut of the pie against the driver's payoff and increase the rates on riders.
I'm not saying this will ever offset their increasing losses, but that is what always seemed the long term goal of monopoly.
> I thought the whole point of subsidizing rides was(as OP comments pointed out) to raise demand, both for drivers and riders, they first entice both ways with the promise of lower rates and higher payoffs, then slowly increase their cut of the pie against the driver's payoff and increase the rates on riders.
Right, and by the logic that decreasing prices raises demand, increasing prices will decrease demand.
That's my point, and the point of critics that are often ignored. Their customers will bail the moment they start getting charged the $25 their $10 ride actually costs. And that increase will be to break even. Not make any money. Just break even.
Uber will never achieve a monopoly. There are buses, bicycles, and used cars for $1500. People aren't going to pay $600 per month on a ride hailing service. I've already ditched Uber, and so have many of my peers, in favor of alternatives that save money. And that's without significant price hikes yet.
The fundamental economics of having a private driver have not changed. An app doesn't change what it costs to pay someone to drive you everywhere. I hate being critical because it's often a waste of time, but Uber is sincerely one of the worst investments that Silicon Valley has ever produced.
> Completely ridiculous. The model was not to raise rates in the future.
I'm not sure if you're disputing OP's idea that Uber subsidizing rides is (at least in part) of an effort to kill the taxi industry, but my logic is, if you don't have any competition, why wouldn't you raise rates?
One possibility, because increased rates could result in your user base using your service less often?
While transportation is something everyone needs, I'm (as priviledged as I am in my salary) not going to pay $20 for an uber if it's $2 on the bus.
I'll take uber when it's $10, compared to $2.
They could possibly raise their rates some, but to answer your question specifically: because there are other factors involved in their price/demand/profit/market share equation, besides just competition.
You're exactly right though, and that's the problem.
People won't pay to use the service if Uber charges what it actually costs to deliver it. They're heavily subsidizing each ride. When you pay for an Uber, they're basically giving investor money to the driver to cover your fare for you. Investors have been paying for your transportation over the past few years.
At some point, they have to actually make money, and the only way to do that is to raise prices. The issue is no one will stick with the app at higher prices. I've already abandoned Uber/Lyft/others for a $300 bike and a bus pass, because it's much cheaper and much healthier. If they double or triple their prices, which is about what they'd have to do just to break even, lots of people will be following suit.
The self-driving car game was supposed to save them, but I don't think they're guaranteed to win that fight. Tesla seems further along than anyone, and I have far more faith in Musk's ability and track record of executing than I do in Travis (or whatever committee is replacing him). Not to mention every automaker is working on self-driving cars right now to boot.
Uber has no guarantee they'll dominate that market, and considering they can't even break even in their current market, I see them as a ticking time bomb.
>The self-driving car game was supposed to save them, but I don't think they're guaranteed to win that fight
Agreed. I'd argue that existing car-sharing companies like Car2Go are better positioned to dominate the "self-driving taxi" market. They've already solved the challenges of owning and maintaining a shared car fleet profitably. The day self-driving technology is ready, they'll already be miles ahead of Uber.
You got green name, so I'm gonna reply here too. You already pay for the bus, does not matter if you use it or not (okay there's a surcharge, cause we ain't no commies). Uber has to compete with that! If you thought VC's are good at throwing away capital...
edit: I forgot what green name means... green btw...
> The whole reason they could raise so much money was that they showed as they reduced rates, they induced more demand.
I've yet to see an Uber driver who started rolling in cash after the rates were dropped. 100% of my anecdotal conversations (and that's not 99.9% rounded up, but a straight up 100%) reminisce about the good ole days.
They don't have any kind of advantage apart from being first mover in the states so no guarantee they will take all the market share in the short term and in the long term if and when AI driven cars come they will be out muscled by car manufacturers who can put millions of cars on the road in a year when they go all in.
If I'm not mistaken, they were losing money on every ride. If they did not intend to raise the rates in the future, they're basically planning to go bankrupt.
And I have a really hard time believing companies plan to fail.
It's a very clear case of dumping, or whatever it's called in English. Unsustainable low prices, suffocate your competitors, raise prices.
At some point, though, every company that wants a sustainable business model needs to make money "on average" on the sum of all items (units of service, e.g. rides) sold. Uber being a local business should be able to do this progressively as its business matures in each city. However, if it is true that they are not profitable in their mature US market where by some accounts they enjoy >80% market share, that implies some substantial flaws in their model. Subsidizing rides in Asia or some smaller city in Europe is ok to gain growth, subsidizing rides in New York or San Francisco is worrying. And autonomous driving implies a completely different business model and economics (driven by the "who owns the car fleet" discussion).
That was never going to work. With self-driving cars on the horizon they will soon be forgotten about as car manufacturers start rolling out their own apps. The switching cost is too low. If Uber thought they could rely on brand recognition to dominate the market it's because they misjudged what market they were in and who the players were. Regardless of what Uber could do in the next 10 years Mercedes and BMW will still be more recognisable names and as soon as they roll out their self driving fleets and ride hailing apps Uber are history. No one will buy Uber if they can build the same thing for what is, in the grand scheme, essentially free.
That is exactly my point for a while now [1]. The investors could have easily picked on taxi company handed them several billions, but they chose Uber. Mainly because of the hype created by the senior leadership team. They seem to have overplayed there hand.
"Uber is an example of what happens when central banks attempt to ‘stimulate’ the economy through misguided central planning. By forcing down market prices and essentially moving spending from the future into the present, they’re hoping to stimulate investment in general. But what they forget (or more likely, choose to ignore) is that these ‘investments’ are likely just bad investments."
I agree with the general dynamic there, but the connection to Uber specifically is tenuous. Risk free interest rates of 0.1 vs 0.5% don't lead VCs to be more or less aggressive with creating and capturing new markets.
Sounds like a '90s startup. Companies acting like this en masse was what caused the 2000 crash. Uber isn't going to make it out of this alive, and they're going to take the rest of the industry with them. I think the whole culture of VCs looking for "unicorn startups" is going to go away when the unicorns all die.
[1] http://knowledge.wharton.upenn.edu/article/growth-vs-profits...