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By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants
Uber is Staggeringly Unprofitable, Is the Industry’s High Cost Producer, and Cannot “Grow Into Profitability”
This is the third of a series of articles that will use data on industry competitive economics to address the question of whether the Uber’s aggressive efforts to completely dominate the urban car service industry has (or will) increase overall economic welfare.
The capital markets, which ignored the industry for over a hundred years, have made massive investments in Uber and related companies. Are these markets benefiting society by allocating capital to more productive uses? A judgement that a Uber-dominated industry would enhance overall welfare requires evidence that:
Uber can (or will soon be able to) earn sustainable profits in a competitive market
Uber can operate urban car services significantly more efficiently than the traditional operators they have been driving out of business,
Uber has introduced major product/technological/process breakthroughs that create huge competitive advantages incumbents could not match,
Uber can earn returns on the $13 billion its investors have provided within the normal workings of open, competitive markets, while ensuring that the gains from its efficiency and service breakthroughs are shared with consumers.
The first article presented evidence that Uber is a fundamentally unprofitable enterprise, with negative 140% profit margins and incurring larger operating losses than any previous startup. Uber’s ability to capture customers and drivers from incumbent operators is entirely due to $2 billion in annual subsidies, funded out of the $13 billion its investors have provided. That P&L evidence shows that Uber did not achieve any meaningful margin improvement between 2013 and 2015 while the limited margin improvements achieved in 2016 can be entirely explained by Uber imposed cutbacks to driver compensation.
The second article presented a breakdown of the taxi industry’s cost structure, and demonstrated that Uber was the industry’s high cost producer, with a significant cost disadvantage in every cost category except fuel and fees where no operator could achieve any advantage. It also explained that Uber could not “grow into profitability” because there were no significant scale economies related to any of these cost categories. Both findings were completely consistent with the P&L evidence in the first article showing huge operating losses, and no evidence of the rapid margin improvement shown by past digital startups, whose businesses could exploit major scale economies.
Any Major Business Model “Innovations” Should Have Already Had Major P&L Impacts
This article will focus on the question of whether the Uber business model is based on breakthrough product/technological/process innovations.
It must be emphasized that “competitive advantage,” as used in these articles, refers strictly to advantages powerful enough to transform the industry’s competitive dynamic, allowing one company to profitably grow much faster than its competitors. Consumers might prefer certain product attributes offered by one company, but unless they significantly alter market and profit shares within the industry, they do not constitute “competitive advantages”.
Unlike previous tech startups, Uber has never made any specific, detailed claims about the sources of competitive advantage that might explain its rapid growth. While it has discussed aspects of its business model, Uber has never presented evidence about their efficiency/service impacts that independent outsiders could review. There have been scores of articles in the business press speculating about possible explanations for Uber’s rapid growth, but all ignore the billions in subsidies that have funded growth to date, and none were based on any hard evidence about their impact on industry competition.
Since there are no formal, documented claims about Uber’s competitive advantages that can be confirmed or challenged, this article will review a set of the most common undocumented claims found in media coverage.
If Uber had actually implemented transformative change, evidence of the transformative impact should have already appeared in the financial data presented in the previous two articles.
Uber has been operating since 2010. If Uber had dramatically redefined the product and the market, one would see obvious, tangible evidence of how its service was dramatically different from traditional taxis, and one would see huge demand growth in response to the totally new product offering. If Uber had found ways to produce urban car service significantly more efficiently than incumbents, one would see obvious, tangible evidence of its lower production costs and one would see superior profitability or at least strong, steady margin improvements on a clear path towards sustainable profitability.
In fact, there is no evidence of any of those things. One can observe product and service advantages over traditional operators, but these can been entirely explained by massive subsidies. Uber users pay only 41% of the cost of their service; it has gained share because competitors need to charge users 100% of their costs there is no evidence that taxi customers in a competitive market would pay more than twice as much for the service quality advantages Uber investors have been subsidizing.
If “innovations” are not powerful enough to transform product or operating economics, then they are not relevant to a discussion of how industry competition has been transformed, or whether that transformation will actually improve economic welfare. This article will consider many of the innovations that Uber supporters have suggested as possible sources of Uber’s transformative, disruptive competitive power. The question is why any of these might drive dramatic profit improvement in the future, when they have had no apparent impact in the past six years.
Unlike Uber, Amazon Proactively Publicized Its Many Legitimate Competitive Advantages
It is useful to compare the public claims and perceptions about Uber’s growth with the case of Amazon, which like Uber, was seeking to drive a massive set of incumbent competitors out of business in order to achieve long-term industry dominance.
Amazon’s business model was focused on “disrupting” a book retailing industry that had high prices, high margins and high costs. By contrast, Uber cannot explain how it will realize billions in profit from an industry selling a commodity product with razor-thin margins that had already cut costs to the bone. Unlike Uber, Amazon proactively provided outsiders with compelling, verifiable evidence of the sources of its (potential) efficiency and scale advantages. These included the huge savings from eliminating “brick-and-mortar” retail locations, enormous scale economies in warehousing and distribution, sophisticated software that not only processed customer orders but dramatically simplified product search and identified customer-tailored buying suggestions, increased leverage with publishers and other suppliers, and huge scale economies that allowed it to expand geographically and into new markets at negligible marginal cost once its basic selling and warehousing/distribution infrastructure was in place.
The huge scale economies meant it could rapidly drive down unit costs as it grew, building strong loyalty through rock-bottom prices, and making it virtually impossible for existing (or new) entrants to ever match its efficiency levels. Amazon’s efficiency claims could be readily verified by objective outsiders who were expert in the relevant retailing, warehousing and ecommerce fields.
Amazon’s digital platform meant it could expand into other lower-margin businesses but did not invest heavily in these new businesses until it had secured a sustainable position in its core business. Unlike Uber, Amazon encouraged an active public discussion of its business model in order to build credibility and support in the financial community. While many observers were uncertain about Amazon’s long term profit potential, and questioned specific practices, there was universal agreement that its ability to rapidly capture share from industry incumbents was based on legitimate competitive advantages.[1]
Uber Has Not Been Exploiting Powerful “Sharing” or “On-Demand Economy” Efficiencies
Two of the primary narratives constructed to “explain” Uber’s growth were that it was pioneering the development of the “sharing economy” and the “on-demand economy.” Both narratives extrapolated wildly from claims that had no real-world economic basis, and that have never been successful exploited in any other setting.
The alleged basis of the “sharing economy” was that cars were only used 56 minutes a day on average, and that “ridesharing” companies like Uber were creating huge value by exploiting the 97% of the time when cars were idle.
This ignored the fact that the overwhelming majority of personal items had much lower utilization, and that “sharing” businesses had existed for decades but because personal ownership and control had huge value almost never expanded beyond tiny, obscure niches (tuxedos, bowling shoes), and in the rare cases with broader demand (car rentals) prices were always substantially greater than the comparable cost of direct ownership.
“Sharing economy” claims misrepresented a rare, marginal opportunity (borrowing otherwise idle garden tools from a neighbor) as something that could drive the economics of a global-scale industry. Yes, an isolated individual with a truck and a few hours of free time might be able to deliver a few packages at lower cost than the average UPS delivery van, but it is ludicrous to argue that independent truck drivers responding to delivery requests from a cellphone app in their spare time could drive UPS out of business and serve its entire national market at lower cost.
An individual with nothing else to do could decide to use his car to serve Uber passengers for a few hours on Saturday night, but Uber could never replace all existing taxi capacity nationwide with guys driving their personal cars for a few hours when it happened to fit their schedules. Serving the global car service market requires massive fleets of full time drivers and dedicated vehicles. Uber is no more a “ridesharing” company than United Airlines is a “planesharing” company.
Uber has always claimed it designed so that people could just “push a button and get a ride” and hundreds of other startups have pursued this “on-demand” model in other fields such as food delivery or office supplies. But the operational costs and challenges of taxi service (and delivery/logistical services) have been known for decades, including huge demand peaks, unplannable volatility (demand spikes when it rains), and empty backhauls.
Mitigating these costs requires advance knowledge of customer demand, and integrated, centralized operations planning. Package delivery companies can arrange trips to minimize unproductive backhaul mileage, and can shift lower priority deliveries to off-peak times. The instant gratification that “on-demand” services are supposed to provide make all these costs and challenges worse. Resource utilization plummets because more drivers and vehicles must stand by to serve the Saturday night peak, but driver assignments can’t be optimized because people who wanted to just “push a button and get a ride” wouldn’t book their trips in advance, and Uber’s business model eliminates the possibility of centralized operations planning.
For these reasons, none of Uber’s many attempts to expand into other “on-demand” services, such as UberEats, UberRush, UberFresh or UberEssentials have demonstrated any ability to expand outside of narrow niches, and none of the many other startups focused on “on-demand” services have become profitable, growing businesses.[2] The basic economics of “on-demand” services—designed for a narrow set of customers willing to pay a premium for immediate service whenever they feel like it—are fundamentally incompatible with Uber’s goal of providing a major portion of urban transport infrastructure.
Uber Has Not Expanded the Market for Urban Car Services
Although nothing in Uber’s business model or actual financial results suggests either near-term profitability or the existence of major scale economies, Uber and its supporters regularly argue that its valuation is justified by its nearly unlimited growth potential.[3] Bill Gurley, one of Uber’s original investors argued that using Uber would soon become cheaper than driving your own car—its market potential should not be based on the size of historic taxi demand but the size of the entire urban ground transportation market. But Gurley failed to disclose the magnitude of current losses and did not explain how Uber could ever produce taxi service as efficiently as current operators, much less how it cut costs to the point where its prices would be fully competitive with car ownership and transit services.[4]
Uber’s Use of “Independent” Drivers Is Not an Innovation and Does Not Increase Efficiency
As discussed in the second installment of this series, the use of independent contractor drivers is not an Uber innovation, although Uber takes the longstanding practice a step further by shifting vehicle costs and capital risks onto its drivers.
Independent contracting transfers wealth from labor to capital but does not improve efficiency or service; when introduced in New York in the late 70s/early 80s fleet owner income increased on a per shift basis by 72%, while hourly driver take-home pay fell 23%.[5] Independent contracting makes the integrated network revenue and capital asset management that is central to every other transport mode impossible. Independent contracting would destroy all airline, freight and transit networks since no one would show up to operate trips that were critical to network efficiency but had poor trip revenue.
Uber’s App Is Not a Powerful Technological Breakthrough
Many consumers seem to like Uber’s ordering/dispatching smartphone app, but it has not had any material impact on cost efficiency, and has not done nothing to help Uber’s huge corporate cost disadvantage. It offers some useful functionality, but since this software can be (and has been) easily replicated, it could not create a long-term advantage.
Hundreds of other consumer industries have migrated from telephone ordering to smartphone and internet ordering (pizza delivery, airline booking), but there is not a single case where this had any material impact on industry competition, much less created tens of billions of dollars in corporate value. The major emphasis on the app in pro-Uber articles appears to be symbolic; the app implies the existence of magically new “on-demand” efficiencies (just push a button and your car appears).
Highlighting the app also implies that Uber is a “technology company” that has completely “disrupted” industry economics, and is not simply a traditional company like Domino’s Pizza that is utilizing smartphone ordering. Needless to say, none of these articles are written by anyone with actual expertise in ecommerce or urban transportation, and none provide any evidence supporting the claim that the app represents breakthrough technology that gives Uber a powerful competitive advantage.
Uber’s Surge Pricing Does Not Increase Efficiency
Some Uber supporters have falsely claimed that its use of surge pricing[6] is a major breakthrough comparable to variable pricing systems in airlines, hotels and other travel industries. From his 30 years in aviation, the author has extensive experience with how modern pricing tools can actually improve industry efficiency and consumer welfare. Uber’s Surge Pricing lacks most of the market information critical to the benefits these systems create, used extremely crude (if not arbitrary) decision rules[7], and cannot achieve comparable efficiency impacts because urban car service market dynamics are totally different.
A comprehensive discussion is not possible here, but because people buy airplane tickets and hotel rooms well in advance, and have complete information about all of the price/schedule options in the marketplace these systems allow demand from both highly price sensitive and highly service/schedule sensitive customers to be satisfied while dramatically reducing capacity and operating costs. Airlines avoid buying planes for everyone whose first inclination is to fly on Friday evenings, and can offer huge discounts to people with schedule flexibility.
But research has long demonstrated that the timing of taxi demand is highly inelastic, (people want a cab at a very specific time)[8] so variable fares will not change demand patterns, improve taxi utilization or increase total revenue. All forms of urban transport have similarly inelastic demand; the Long Island Rail Road has had peak/off-peak pricing for a hundred years but rush hour is still rush hour. No level of taxi discount will get anyone to shift their Saturday night plans to midday Tuesday. Uber’s surge pricing simply raises fares (up to eight times normal levels) without prior warning. Given the short notice this does nothing to increase total taxi supply, but merely redistributes drivers to higher fare areas.[9]
More importantly, Uber’s surge pricing reduces overall economic welfare because the sociological distribution of urban taxi demand is bipolar; 43% is from people earning less than $20,000 (and 55% from people earning less than $40,000), most of whom do not have cars while 35% is from people with incomes greater than $100,000.[10] Studies show most of the lower-income demand is driven by jobs and services that cannot easily be reached by public transit, or trips at hours when public transit does not operate. Surge pricing reduces wait times for wealthier people returning home from restaurants and nightclubs by eliminating all service for lower income people working late night shifts that have no transit options. A pro-Uber paper by a major libertarian think tank simply dismissed these as “people who do not really need a ride.”[11]
Uber Has Not Solved the Problems of Serving Peak Demand or Low-Density Neighborhoods
The market perception that Uber’s offers superior service quality is entirely explained by unsustainable subsidies that boosted driver compensation and car capacity far above the levels that could be justified by passenger fares. By offering compensation substantially above previous market levels, Uber could obviously offer more professional drivers and newer, cleaner vehicles. However, passengers were only paying 41% of the actual costs to provide this level of quality, and there is no evidence that taxi customers in a competitive market would pay more than twice as much for the service quality advantages Uber investors have been subsidizing.
No one can explain how this quality advantage can be sustained as Uber cuts wages, and more drivers figure out their true take home pay, after accounting for vehicle costs and capital risks.
The industry’s biggest service problems—limited and unreliable car availability when demand is highest (you can’t get a cab after dinner on Saturday night, or after your late evening arrival at LaGuardia, or when it is raining), and poor service to lower-density neighborhoods (including but not limited to low income neighborhoods) exist because the true cost of providing peak period and low-density neighborhood service is substantially higher than the fares taxi riders expect (or are willing) to pay and nothing in Uber’s business model reduces the cost of these services.[12]
Every form of urban transport faces the problem of extreme demand peaks that are very expensive to serve; the taxi demand peak occurs in the evening, with especially extreme peaks on Friday and Saturday night. This is largely driven by (largely lower income) people working evening and night shifts when transit service is unavailable and people travelling to dining and entertainment venues.
The profitability of individual taxi trips varies widely depending on the associated empty backhaul costs, but taxi operators (including Uber) have no way to know the exact backhaul cost associated with each trip in advance, and no way to adjust fares in line with true incremental cost of each trip.
The true cost of an early morning airport trip (which will have an empty backhaul because no flights have arrived) is nearly double the cost of a later afternoon trip, when return fares are ready and waiting, but both trips are priced identically. The economic cost of trips to neighborhoods with low demand density (where backhauls are rare) will be much higher than trips within a city’s high demand core (downtown, shopping/entertainment districts, wealthier residential areas).
Taxi drivers struggling to make a living often refuse trips to these low-density neighborhoods, a problem that can be exacerbated by fear of crime and racial prejudice. If taxi companies set fares in line with true service costs, prices to low density neighborhoods would likely increase 50-100% and peak period prices would be 3-5 times normal levels.[13] As noted, Uber’s surge pricing does not increase efficiency; it simply prices taxis out of the reach of many current users, reducing both total taxi demand and overall economic welfare.
Uber’s $69 Billion Valuation Has Not Been Driven by the Potential to Expand Into Other Markets
Claims that Uber’s huge valuation is justified by growth opportunities beyond the urban car service such as delivery services, carpooling, transit services and “driverless cars” ignore the massive subsidies current operations depend.
Without sustainable car service profitability, Uber cannot expand into other businesses with even lower margins and earn an adequate return on capital. As discussed earlier, many of these claims assume non-existent “on-demand” industry economies. Amazon could easily enter new markets because the digital and warehousing/distribution systems they had built for bookselling could be adapted to other retail markets at very low cost, but it did not move into them until the financial viability of its core business had been firmly established.
Uber has made “driverless cars” a top strategic priority in 2016, but there is no evidence that this drove its rapid valuation growth in prior years, and it is unclear why investors would wager billions on the prospect that it will eventually be able to design and build highly sophisticated vehicles more efficiently than competitors such as Google, Tesla, Toyota, Mercedes-Benz, Ford and General Motors. Additionally, all of these competitors can realize returns from investment in new software and manufacturing processes at each stage of development, while Uber gets no benefit until the (highly uncertain) point when maximum level of automation is achieved, [14] and the cost of drivers can be eliminated. Uber’s sudden, huge emphasis on the financial potential of cars without cars at some unspecified future date suggests it may want to distract attention from its inability to operate cars with drivers profitably.
Uber Has No Material Sources of Competitive Advantage That Would Allow It To Earn Sustainable Profits in a Competitive Market
Will the growth of Uber increase or decrease overall economic welfare?
The first post in this series laid out the P&L evidence of Uber’s staggering losses. Uber has grown because consumers have been choosing the company that only makes them pay 41% of the cost of their trip. There is no evidence that taxi customers in a competitive market would pay more than twice as much for the service quality advantages Uber investors have been subsidizing. Incumbent operators have been losing share and filing bankruptcy because they cannot compete with Silicon Valley billionaire owners willing to finance years of massive subsidies as they pursue industry dominance.
The second post laid out evidence of the cost structure of the urban car service industry in order to demonstrate that Uber was the industry’s high cost producer, with structurally uncompetitive costs, and none of the scale economies needed to grow into profitability.
This post reviewed a wide range of claims about potential sources of competitive advantage, and found that none were based on actual evidence of industry economics, and none of the claimed sources had ever had major competitive impacts in any other industry, or ever created tens of billions in corporate value. The findings from the three posts are entirely consistent with one another, and consistent with the conclusion that Uber could never generate sustainable profits in a competitive market.
The critical caveat here is “in a competitive market”. Uber’s investors did not put $13 billion into the company because they thought they could produce urban car service more efficiently that incumbents, and use those efficiencies to earn outsized profits under “level playing field” competitive conditions. Since Uber’s entry in 2010, the urban car service market has had the polar opposite of “level playing field” competitive conditions, with small scale incumbents with no access to capital struggling to cover their bare bone costs facing a behemoth company funded by Silicon Valley billionaires willing to subsidize years of multi-billion dollar loses.
Needless to say, Uber’s managers and investors are very smart people and have always been aware of Uber’s losses, structural cost disadvantage, and their lack of product/efficiency based competitive advantages. The next article in this series will discuss that Uber’s strategy for earning returns on its $13 billion investment was always based on eliminating both competition, and any regulatory/legal obstacles to the exploitation of anti-competitive market power.
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[1] Stone, Brad, The Everything Store, Bay Back Books (2014)
[2] Griswold, Alison, It’s Time For Uber To Show It’s More Than Just A Glorified Taxi Company, Quartz, 4 Aug 2016. Lacy, Sara, The only Uber of anything is Uber, Pando Daily, 28 Jul 2015. Griffith, Erin, The problem with ‘Uber for X’, Fortune, Aug 2015
[3] “the introduction of Uber and Uber-style apps greatly increases the size of the world taxi market” Yglesias, Matthew, Why Uber just might be worth it at $18 billion, Vox , 7 Jun 2014. [since Uber and Lyft are in a] “vicious match for dominance across the globe, ride-sharing prices over all are sure to plummet” Manjoo, Farhad, With Uber, Less Reason to Own a Car, New York Times, 11 Jun 2014.
[4] Gurley, Bill, How to Miss By a Mile: An Alternative Look at Uber’s Potential Market Size, Above The Crowd, 11 Jul 2014.
[5] Schaller, Bruce, & Gilbert, Gorman, Villain or Bogeyman? New York’s Taxi Medallion System. Transportation Quarterly, 50(1) (1996).
[6] For basic descriptions of Surge Pricing by an Uber Board member and by an independent outsider see Gurley, Bill, A Deeper Look at Uber’s Dynamic Pricing Model. Above the Crowd, 11 Mar 2014. Chen, L., Mislove, A. & Wilson, C., Peeking Beneath the Hood of Uber, Proceedings of the 2015 ACM Conference on Internet Measurement Conference, 496 (Oct 2015).
[7] “the surge algorithm was made of crude heuristics” Efrati, Amir, Surge-Price Builder Leaves Uber, The Information, 17 Oct 2016
[8] In particular, the timing of demand is highly inelastic (people want a cab now, not later) and near-term demand is price inelastic within reasonable ranges. Fravel, F. D. & Gilbert, G., Fare Elasticities For Exclusive-Ride Taxi Services, report prepared for the Urban Mass Transit Administration, U.S. Department of Transportation, (1978); Shreiber, C., The Economic Reasons for Price and Entry Regulation of Taxicabs, Journal of Transport Economics and Policy, 268 (1975). Frankena, M.& Pautler, P., An Economic Analysis of Taxicab Regulation, Staff Report of the Bureau of Economics, Federal Trade Commission, 162-164 (1984); Schaller, Bruce, Elasticities for Taxicab Fares And Service Availability, Transportation, 26(3), 283-297 (1999).
[9] Diakopoulos, N., How Uber Surge Pricing Really Works, Washington Post Wonkblog, 17 Apr 2015.
[10] Schaller, Bruce, Taxi, Sedan and Limousine Industries and Regulations, prepared for the Committee for Review of Innovative Urban Mobility Services, Transportation Research Board, 3-5 (2015) at 8-11; Pucher, J., & Renne, J. L., Socioeconomics of Urban Travel: Evidence From the 2001 NHTS, Transportation Quarterly, 57(3), 49 (2003).
[11] Meyer, Jared, The Manhattan Institute, Uber-Positive: Why Americans Love the Sharing Economy, Encounter Books. Kindle Edition, 21 (2016)
[12] As with driver salaries, Uber has publicized “independent” analysis that claims that it provides better service in low-income neighborhoods than traditional taxis, but failed to explain how Uber could economically provide better service, and concealed the existence of the subsidies that did explain it. Alba, D., Uber Cheaper, Faster Than Taxis In Low-Income Neighborhoods, Wired 20 Jul 2015. http://www.wired.com/2015/07/uber-cheaper-faster-taxis-low-income-neighborhoods/
[13] If taxi companies provided drivers and fleets of vehicles that only operated during these 20-30 peak hours, peak fares would need to be high enough so that the vehicles could earn the same revenue as other vehicles operating 75-100 hours per week
[14] The National Highway Traffic Safety Administration established five stages of car automation, based on categories originally defined by the Society of Automotive Engineers. Taxis would require drivers in each stage prior to category five (“full automation”). Levels Of Driving Automation Are Defined In New SAE International Standard J3016
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Thank you for this series on Uber – it has been very informative. What I’ve been trying to figure out is, what is the endgame? If Uber does somehow manage to gain market dominance, then presumably they’ll raise fares in order to achieve profitability. Wouldn’t that just encourage smaller operators to jump into the market? I suppose that Uber could then push for regulatory barriers to entry for these smaller operators, but that would certainly fly in the face of how they’ve been running their business up to this point.
I speculate that after the traditional fleet operators are driven out, it may be hard to resurrect successors when fares “normalize” since the up-front investment to re-constitute the local taxi fleets may be prohibitive. But it might happen that independent operator collectives form using open-source platforms. If they could offer higher pay to drivers (since would not need to direct profits to non-worker investors), they might be able to compete for both drivers and fares. That would be a pleasing outcome.
This:
http://wagingnonviolence.org/feature/austin-uber-worker-coop/
The smaller operators would be their own drivers.
Uber wants their drivers to get their side hustle on.
The Drivers will learn to give out their own numbers.
‘What I’ve been trying to figure out is, what is the endgame?’
IPO on Nasdaq. Throw out optimistic PR and Uber will be included into the QQQ after the index’s 3-month ‘seasoning period’ .
Then dump shares onto the passive ETF investors and somehow pivot into driver-less cars and avoid the fate becoming irrelevant like Garmin.
I agree that for deep pocketed investors, an IPO is a must. Multiply the value of their private shares on the public market thanks to multiple hype machines (Wall Street banks, fawning media, etc) and then dump the shares for fantastic gains.
I take issue with Garmin being irrelevant though. The company most recently banked nearly $3 billion in revenue, how is that irrelevant? Unlike Uber, Garmin is a technology company that delivers useful products across multiple industries and generates shareholder profits:
https://explore.garmin.com/en-US/annual-report/#/financials-home
Wouldn’t Uber be forced to disclose its financial status with an IPO?
Yes, and the business model would be subjected to closer scrutiny. Closer scrutiny would reveal a business model that depend on drivers who are essentially uninsured (with some exceptions). The cost of riders on traditional auto insurance policies to cover ride-sharing is prohibitive. Hence, many operators are driving without proper insurance. Moreover, UBER’s much-vaunted one million dollar insurance policy doesn’t cover the driver, doesn’t cover you,the passenger, but does protect UBER. When you step into an UBER, you agree to indemnify UBER from any claims over $500.
Am I the only person who has noticed this? Its not like I’m some kind of genius–I just read the fine print.
The liability insurance situation for Uber drivers is something that has puzzled me (I was in the insurance biz for over 30 yr.)
The standard Personal Auto Policy (PAP) is used throughout the U.S. It is tailored to specific state insurance requirements by attachments to the PAP.
The PAP specifically excludes coverage for “public livery” i.e. transportation of people or goods for hire. There is a “business use” classification available under the PAP, but this is for people whose business use is “personal & incidental” such as a sales rep. driving out to make sales calls or a construction worker who may have to travel to various building sites.
Delivering goods or transporting people for a fee is NOT business use but is a separate classification called “commercial” use and requires coverage under a Commercial Auto Policy (CAP).
So, unless that pizza delivery guy/gal or Uber driver has a CAP, they do no not have insurance coverage while performing those paid activities.
You might be inclined to think “I don’t deliver pizzas or drive for or use Uber, so it’s not my problem.” You would be WRONG!
If that Uber driver/pizza deliv. person causes injury to you or damage to your property, and they do not have a CAP in force, you will have to collect for your damages/injuries from the driver personally. How many of these drivers do you think have enough cash on hand to repair your car much less pay your hospital bills?
For an idea of the cost of a CAP, ask your personal insurance agent what it would cost to add a car with a 16 y.o. male driver to your policy. This would approximate the cost of a CAP for “Ms. Goodrisk” (female, 30-60 y.o. with a squeaky clean driving record & excellent credit score).
The first time an important (rich) person is killed while using Uber to get to the airport, that will be the end of Uber.
This is America, the most litigious place on the planet, and they think they can get away with skirting the requirement to carry proper insurance?
Sounds like someone is gambling they can pull off an IPO before disaster strikes.
WTF?
there are been several Uber-Lyft deaths, passengers and drivers, discreetly reported in the news. Presumably Uber/Lyft threw big no-fault settlements to the deceased’s estates with a non-disclosure agreement.
as I’ve heard of no litigation arising from any death/serious injury.
Ubercorn!
I was astonished to see that T Kalanick has a net worth of 6.2 billion us dollar.
How does that happen, does he drive extra shifts at night?
Uber’s competitive advantages are:
Short-termism: wait a couple of years when the newish cars are not as new anymore and drivers need to fix or replace them.
Easy money: Car industry was bailed out making it easy to buy cars. Low rates helped too. If rates go up, wouldn’t drivers be stuck buying more expensive cars?
I wonder how easy it will be to attract new money to buy all those self-driving cars if firm profits are still in the red… Uber will need to buy these no?
I see a commercial for drive with Uber, or hear one on the radio, all the time. Not to use Uber, but to drive for them. Who is the customer here? It appears to be the driver. What is the driver buying? A little extra cash that will not pay for their expenses. Why hasn’t Uber been investigated yet when this all appears to be a scheme to steal from drivers for their cars and time until they realize they are a loss leader?
I had this conversation with a family member that uses it all the time, that the drivers cannot be covering their costs. All his argument entailed was that taxis stink. So do airplanes now, and they are dragging home profits. Where are Ubers profits? It’s just insanity. I feel like we are in 1999 right before the crash and companies like Uber and Twitter are the Pets.com of the day.
The cult of cheap … where the end game is one big firm with a few rich executives, their minions and everyone else is minimum wage.
‘What is the driver buying?’
the equivalent of a payday loan—-as if one is an Uber-Lyft driver w/the wrong cost structure, she’ll quickly go ‘upside-down’ on her car loan, especially given the post-2010 trend of 60 to 84-month car loans.
and to be politically incorrect, it infuriates me to no end that there’s one Uber radio ad using an obvious African-American voice actor to presumably target the African-American community. (there’s also another one aimed at single moms which bugs me too)
I hate when companies take advantage of people’s desire to get ahead in life when in reality the people are being set up for failure.
“I feel like we are in 1999 right before the crash and companies like Uber and Twitter are the Pets.com of the day.”
You are not alone in that feeling…
Big turnaround of drivers and the more fares they soak up they improve their margin. Most of the flexible cost is dumped on the driver and the bulk of the fixed asset (cars) cost also. The more Uber cars on the streets the better for Uber, if it’s viable for the drivers isn’t their issue. This is how reregulated Taxi in Sweden works, dispatch companies take mainly a fixed fee and the more taxis on the street the better for them. And there is no regulations on how many taxis is allowed on the streets.
But airports, train stations and big hotels only allow selected dispatch companies taxis in their Taxi lanes and on airports and train stations (public owned) they also have to pay fee to enter the lane. This due to “free market” reregulation of Taxi, drivers literary fighting over customers, taking exorbitant charges of gullible foreigners “free market” did also mean free pricing.
This series has been well done – Thanks to the Writer and Yves
would like to see more subjects at this depth like the economics of traditional cost avoidance of the Commons in the Airbnb Model which has many similar characteristics as Uber – ie: offloading responsibilities under the guise of Dispatching.
Clearly the Taxi Industry in NYC and the Consumer is better off “without” Uber’s potential monopoly dominating the business. Once the Dispatching core function (which is not proprietary) is transferred to a different business model, the Drivers, Medallion Owners, Citizens who pay the taxes to support the road and systems, will be better served.
Before this started post 2010 – Bloomberg was well on his way for standardization of Taxicab architecture – that is – similar construct to the black cabs in London with better storage and on / off access (return to1950’s NYC Checker Cabs). With limited number of Medallion Owners this was possible along with traditional administered pricing structure. With gypsy cab ownership (in Uber Model) it is not possible nor is it safe as their margins are squeezed for maintenance and capital costs. So the public is worse off again.
I don’ trust DeBlasio (in general) – this seems like someone is directing traffic to a conclusion which can be better managed another way.
Recent trends in the “Banana Republic” of Florida, shuts down airport bus transit, and substitutes Uber instead, proclaiming that “free enterprise” is obviously better.
How is this not a direct subsidy?
The “Banana Republicans” just want to swindle drivers and investors both to wallow in their favorite, deranged theology.
“…Uber’s strategy for earning returns on its $13 billion investment was always based on eliminating both competition, and any regulatory/legal obstacles to the exploitation of anti-competitive market power.”
That’s the biz plan in a nutshell; operate at a loss until competitors are eliminated and then there is no obstacle to raising the price to consumers. (Not a new or “innovative” strategy).
Somehow I seem to vaguely recall that this predatory strategy was once considered “illegal”…
I’m much more negative than prior commenters about Uber’s actual plan to make money. I think the investors and owners are fully aware that even if they manage to drive all other car service companies out of business and achieve full regulatory capture, they still won’t be able to extract enough monopoly rents to become profitable. The same reasons car service companies haven’t consolidated in multiple cities or regions in the past are still going to work against them here. If Uber attains full global industry dominance and raises prices 300%, Microsoft and Boeing could partner to make NotUberPugetSound and absolutely shred Uber in the Seattle market. And the same is probably true about all high-value taxi regions. There’s simply no way for a global taxi monopoly to make enough money to warrant this level of valuation.
No, I think it’s a different plan – I think they’re aiming for a direct and humongous government bailout.
I was thinking a government enforced monopoly. I don’t see any other way, and I still don’t think that will work, because of the problem of customers being forced into direct contact with exploited workers and their inevitably non-luxurious vehicles, once the pay scales aren’t subsidized.
One aspect of Uber I haven’t seen addressed anywhere is Uber’s high-profile radio ad campaign to find drivers. It’s not advertising to increase sales or customers — it’s advertising to find workers. These Uber ads for drivers are all over the national market, and at least in the San Francisco regional radio market: sports, political talk shows, news, Coast2Coast.
I first noticed this last spring. It occurred to me that this was unprecedented. I think this unusual spending on national and local advertising to find workers is a sign of a broken business model.
Has anyone else noticed this phenomenon? Is there any precedent? What do you think this means?
Yes, started hearing ads for the “side-hustle” about six months ago. I am a doorman at a major hotel in my city, and I watched Uber’s market share grow at the expense of the cabs in my cab line. I’ve noticed a rapid turnover in drivers. I will sound judgmental here, but I sense the quality of driver is going south–by that I mean drivers not familiar with the city, not good with language skills, and, perhaps not very sophisticated, especially in economic matters. I have to presume that when Uber sends the 1099s flying in January that many drivers find themselves facing an unexpected tax bill, which probably causes some to reconsider this venture, and hence, the need to recruit even more drivers. I have to think that eventually Uber will run out of people willing to work for pennies on the hour.
There’s an Uber commercial that features a teacher (yes, if you want to teach be prepared to drive a cab in your spare time) using Uber as a “side gig.” At first it’s just another obnoxious ad, but then I thought about it and I made the same realization you did: Uber isn’t looking for customers, it’s looking for employees. That is a terrible sign if a company needs to conduct a national ad campaign to recruit workers. Anecdotally (mostly), it seems that once people realize that they don’t do nearly as well as they thought working for Uber, they quit. Yes, this means your business has a fundamental flaw if you’re dependent on a steady stream of ignorant workers to make your business go.
Sort of reminiscent of a pyramid scheme, but with only one level. Since the company basically relies on subsidies to drivers and/or drivers with a poor grasp of their costs or unrealistic expectations of their potential income, finding fresh meat for the machine is a constant challenge. I read here that Uber had huge turnover in drivers, presumably because the drivers can’t afford to work for Uber for very long. The business model seems to rely on exploiting drivers as well as investors.
. . . as well as investors.
The investors are exploiting regulatory arbitrage and drivers, in the hope that when this turd gets floated in an IPO, an insatiable desire by the public to get a bite, will cause their initial investment, the equivalent of almost three Nimitz class aircraft carriers, to swell to the equivalent of fifteen Nimitz class aircraft carriers, all the while losing $2 billion a year since startup, which is the equivalent of sinking two Nimitz class aircraft carriers and scrapping the propellers on a third one.
The business model is grand scale deception.
Uber has been in my town for 20 months, and they’ve been running the ads looking for drivers on various local radio stations for about 4-6 months.
Yes, you can make some short-term cash working for Uber, but it seems like most folks aren’t looking to make Uber their permanent, full-time gig, and that’s a problem for Uber.
Kind of hard to run a service when no one wants to work for you…(but paying their drivers better isn’t something Uber is interested in doing.)
“Given the short notice this does nothing to increase total taxi supply”
This seems contradictory. You repeatedly argue that the times that demand increases and that Uber is likely to engage in surge pricing are extremely well-known and cannot be changed by people needing transit. Fair enough, but if it’s that predictable, then surely drivers can change their behavior over the long run and thus increase supply. Do you really think that it’s impossible that drivers could say, “Hey, this time is a time that is likely to have surge pricing, so I’m going to be ready to drive?” The inelastic nature of the demand that you postulate helps nullify the short notice problem. And surely one effect of the “using your own car” aspect of Uber (and Uber taking a percentage for trips instead of a fixed daily cost common in regular taxi services) is that drivers are at least *somewhat* able to alter their behavior on shorter notice than in the taxi industry. In the non-owner operator taxi model (which is common in many cities) it is impossible for drivers to work anything less than a full day, due to the fixed costs paid to the cab company to use the vehicle for the day. This may be not enough, but you seem to be overselling your point claiming that it doesn’t increase supply at all.
That makes sense. I drove a cab and the most unpleasant aspect was sitting around doing nothing mid-mornings and mid-afternoons – sometimes for hours while the clock was running on the cab I had leased for a 8 or 12 hour shift.
Driving for Uber for a couple of hours in the morning and early evening after I retire strikes me as something that could be attractive. My car sits in the garage and I likely in front of the tube otherwise. The only cost would be gas and some additional maintenance.
There’s pretty strong evidence, though, that surge pricing doesn’t work in that there are frequent huge and irregular spikes. If surge pricing worked the way they claim, the spikes should be minor and highly predictable because the higher pricing would encourage more drivers, which would make the prices stabilize to a great degree. The idea that surge pricing does encourage enough drivers to satisfy demand demonstrates either a fundamental dishonesty on Uber’s part or a fundamental misunderstanding on their part of their market and how variable pricing works. Variable pricing acts as an incentive to use a service at specific times. You don’t decide you need a ride based on the pricing. You need a ride when you need a ride. Their surge pricing then only functions to either charge more or to drive their customers to other services.
I’m an Uber driver (one of the dreaded part-timers, but after testing Uber for a few months I decided I’d keep my regular job, earn some $$ on the side with Uber, and keep looking for another job).
You can argue that surge pricing is an attempt to get more drivers on the road during times of high consumer demand, but my experience has been that if I am at home, look at my Uber Driver app and see surge pricing, I’m more likely than not to stay home and keep doing what ever it is I’m doing at that time.
There have been a few times when I’ve seen high demand, gone out to an area where I expected I had a reasonable chance of getting called (i.e., a parking lot almost equally between our college campus and downtown, or parked about 2 blocks away from a bar at closing time), yet I didn’t get called for 20-30 mins., and sometimes from a completely opposite direction than the one I expected to get a call from.
3.4 surge or 5.6 surge times $0.00 revenue still equals zero, in addition to the gas I’ve burned driving to an expected pick-up spot, plus the value of my time spent sitting in my car waiting for the call that never comes…(and yes, my time still has some value, even if I’m not riding the time clock at the office)
So, yeah, there are drivers who start to figure this out, and don’t feel guilty for not driving 40+ hours/week.
Uber’s business model is broken. It’s based on deceit and violation of local laws. You can jump all you want disagreeing with it but these are facts. Let me open an app bank, deceive depositors and circumvent FINRA/FDIC/etc banking laws. Same with Uber. It’s still afloat only because very powerful people have invested billions in it and are looking for a way out (through an IPO, of course).
Ha! Uber is the Robin Hood of taxi service. (Takes from the Rich and gives to the Poor; Uber driver.)
An Uber or Lyft driver + passenger killed by a wrong way driver early this morning.
fair bet that as an independent contractor, the driver didn’t have enough life insurance to cover his future lifetime’s worth of earnings. He leaves behind a wife and two kids.
http://chicago.cbslocal.com/2016/12/02/3-killed-in-wrong-way-crash-on-reagan-tollway/
Thats sad…interesting that the article doesn’t name the company and misspelled ridesharing by sticking a hyphen in so won’t show up in searches on google (rides-haring). Like you said, who’s gonna pay this one? If it was a yellow cab, it’d be yellow cab who paid, right? Anyone know?
In Australia, an Uber driver killed his passenger’s husband when dropping her home.
http://www.abc.net.au/news/2016-12-03/uber-runs-over-husband-in-toowoomba-driveway-queensland-police/8089642
I have two copy suggestions for part 3: “has not done nothing” should be “has done nothing” and “cars without cars” should be “cars without drivers”.
In the tech world, there’s a position called the DevOps meaning these people do some development mainly related to operations. In a startup most developers are really DevOps i.e. they develop as well as maintain servers, handle problems, etc.
Pretty soon, Uber developers will be the first DevDrivers (not to be confused with device drivers), meaning they’ll code during the day and driver for Uber at night after work.
This strikes me as relevant to the discussion, although it’s essentially sociological rather than economic. Worth considering in light of the recruiting efforts to find drivers mentioned above in the comments, too. They don’t enjoy nasty strangers in their personal vehicles. Huh.
http://theweek.com/articles/664406/uber-driver-hates
That is what cabbies deal with day in and day out.
Uber, at it’s core is a taxi service, while fatuously calling itself “ride sharing”. Misleading on so many levels.
Here’s a surprising one: Please don’t call an Uber for a drunk person. “I appreciate that you’re trying to do the right thing,” says Steve, “but I’m not a babysitter. A rider who passes out in my car creates a very uncomfortable scenario for me and is nothing but a liability.”
Every passenger can be a liability, even the ones that don’t slip off their shoes and put their disgusting feet on the dash and they have no duty to care that Uber drivers are using their personal car. Its a taxi, after all.
No doubt the article’s author’s booger ended up on the armrest or wiped on the back of the front seat.
I thought that was interesting. The articles here indicate that Uber was targeting professional drivers. But the drivers interviewed for this piece reflect a different perspective. Whether it’s because they’re next generation Uber drivers — the ones being recruited on the radio now for “side gigs” — wasn’t clear to me. But I would assume even someone who previously drove a medallion cab would have a different reaction if it’s their personal vehicle. The emotional aspect of this seems relevant to just how long Uber can survive churning through drivers.
http://www.taxi-library.org/gord28.htm
TAXICAB DRIVER SAFETY
Thank you for this informative series. I wrote an article recently about Uber, making a similar argument, and taking the case further. It’s at US News and World Report. http://www.usnews.com/opinion/articles/2016-06-24/austin-disrupting-uber-is-good-news-for-workers
The key question I’m addressing is whether establishing dominant market share in an individual geographic area creates a strong enough entry barrier to allow Uber to raise their prices (and cut worker pay) enough to make money, yet still prevent other competitors from entering with better delivery economics (even though they may not have superior customer acquisition economics.)
This is a central question. A monopolist can survive even if not the most economically efficient operator, if they can raise entry costs high enough. Customers want to be on the platform with the most dense driver base, and drivers want to be on the platform with the most dense customer base, all other things being equal. This can be a powerful barrier, in some cases.
The situation that developed earlier in Austin this year implies that old assumptions about entry barriers no longer prevail in a world of social media. It that’s the case then Uber’s investment in achieving market dominance has no lasting value. I’d be interested in your thoughts.
http://www.usnews.com/opinion/articles/2016-06-24/austin-disrupting-uber-is-good-news-for-workers
There used to be a joke: ” Sure, I lose money on each transaction, but I make it up on volume”. And I have always looked at Uber with this joke in mind, thinking “Am I missing something?”. Based on this series, I clearly am not. But this experiment in utilizing the sharing economy with an internet app to leverage an industry that barely makes a profit, and still has to resort to “regulatory arbitrage”, essentially becoming a scofflaw, and a 59% subsidy for every ride, seems the equivalent to China dumping steel and televisions into the US to drive out competition; that is, both sides lose. The taxi business is essentially private business operating under public utility-type rules, rules that are not only there to regulate competition, but also to protect competition. Uber’s operation defies these rules and the regulatory agencies are not protecting those parties who are playing by the rules, and those parties are going bankrupt and jobs are being lost to “marketshare” and the disruption. This is bad and sad on so many levels, especially the part about how money is allowed to run roughshod over the law and regulators, ruining the lives of decent and law-abiding companies and their workers, and wind up with a monopoly that they will further seek protection from competition by the same type of regulations that they stepped all over to get there. And raise prices. What ever happened to regulators who were suspect of trusts and monopolies? Alex W’s suggestion of a government bailout is even more disturbing.
I think the author here, although very insightful no doubt, is missing a crucial element of uber’s business model – the data that it owns about its customers. According to Evgeny Morozov, data is the new gold, hence the big valuations and years of subsidies from investors.
Uber has been operating for six years. It is losing over $2 billion a year.
Moreover, Uber is getting more and more competition for data tracking all the time: trackers in stores that talk to your smartphones, the Internet of Things, more snoopy telematics in cars (and efforts to allow insurers to track that). The amount of data on individuals being gathered is exploding and Uber’s relative importance is shrinking.
If it was going to have a material impact in terms of monetization, you’d expect to see it already. It hasn’t. Please tell me how it possibly could in the future. With all due respect, all you have is a handwave.
For decades, I used to joke that the government wouldn’t be happy until it put a bug up everyone’s ass.
Boy, was I wrong. People willingly put the bug there themselves, and for what? So someone can sell you crap you don’t need at a discount, or charge you based on where you go and how fast you get there.
We need a “blind eye” movement. All this data is being accumulated and exploited for one purpose. Money and power.
I dont think I just have a handwave. Here’s an article that gives an example of how important data is to Uber and similar companies – https://www.theguardian.com/commentisfree/2015/feb/01/cities-need-to-fight-uber-trasnsport-choice-evgeny-morozov “At the moment, Uber is so effective because it controls all the key data points: our phones tell it all it needs to know about planning a trip. If, however, control over data were to pass to cities, Uber – a company with few assets – would hardly be worth the $40bn that it’s valued at today. Surely, an algorithm to match supply and demand cannot be that expensive?”
If you’d like to listen to evgeny morozov this is a good one – https://www.youtube.com/watch?v=vN__7mFNoqA
This IS a handwave. The guy is saying “Uber is worth $40 billion, ergo it must be due to something” and he latches onto the app.
As Hubert explained ad nauseum, Uber is a high cost producer. Magic data won’t solve that. It’s like saying installing FitBit will cure you of cancer. Lordie.
Dana-Farber and Fitbit partner to test if weight loss can prevent breast cancer recurrence
As an Uber driver, it became very apparent very quickly to me that my job is to generate data for Uber.
Where do trips start, and where do they end? What times of the day or night, and on what weekdays?
What routes are best for trips from a to b (which routes take less time, or seem to generate more satisfied customers)?
Uber wants driverless cars, because it can avoid the cost of driver compensation, and all the annoying things drivers do (like go offline to eat, sleep, or go to the bathroom). Uber will use the data the current drivers are producing to figure out where to put its car corrals, when to schedule maintenance, and possibly even switch cars around between cities if it knows that demand will take a significant dip in one city (like when all the college students leave a town in May, and come back in late August).
So yes, there is value in Uber’s data, but is it worth the outrageous amount the VCs currently say Uber is worth?
There is only two factors that the Uber biz model has a disruptive power: parking and car rental. On issues such as traffic congestion and cost of public tranport, Uber is the “same old same old”. And on issue of economic welfare, such as cost and GDP, I would argue Uber is zero-sum game. Indeed, if thru Uber, 10 people can get the all the mobility goodness they need from just 1 car, their by lowering their transportation cost by 1/10, then there will naturally (at some point in time) decrease in the demand for physical automibles by 1/10th. Unless one can make a credible argument that people a just not traveling/moving about as much as they need, the cost saving thru Uber will have to be sourced from GDP itself.
On the other hand, the one area Uber can innovate is MASS transport, i.e. the bus. The current public bus system is a “dumb” system that moves along a predictable path irrespective of real-time demand. An Uber-like system could greatly enhance efficiencies of bus. Not only allow for bus routes that evolve based on real-time demand, but also help move/direct passenger to the optimal location to maximize average vehicular speed (i.e. walking to best street corner based on current traffic patterns to avoid traffic and unnecessary detours). But the efficiency is gained by maximizing the number of people on the bus, not by monopolistic pricing power.
Uber Has Not Expanded the Market for Urban Car Services…
Not true. Have you used Uber in LA before? It’s amazing and works almost everywhere – even suburbs beyond West LA. Now, have you ever used a taxi in LA before? Most people have never used a taxi in LA.
You should think outside of your NYC bubble and realize that most of the US has an urban fabric closer to LA than it does with Manhattan. Whether its subsidized or not – the fact that people in an auto centric culture now have an alternative to driving themselves and are choosing the alternative is a big deal.
Please stop bullshitting. I’ve gone regularly to LA and only occasionally rent a car.
Yes, you don’t get street hails. But even in the stone ages of the 1980s, you could (gasp) call a taxi service and get a car.
And in case you hadn’t heard, Uber regularly shows ghost cabs in its app to create the impression that it has way more cars on offer than it really does:
http://www.timesunion.com/tuplus-opinion/article/Democrats-need-to-slow-Uber-s-roll-10817807.php
I grew up in LA and went back for the holidays last year and used Uber the entire time – I don’t know anyone who would call cabs in LA growing up there. I used a cab once in my 18 years of living there and it was a nightmare and really expensive. Everyone drives and the people who don’t either can’t afford a car or are not allowed to drive.
To your point – I would occasionally rent a car if I’m visiting LA but now I don’t even have to do that because of Uber and Lyft – it’s the first time that I felt I didn’t need to have a car in LA which is a big deal when before you felt that was the only option. Talking to friends who also grew up there and some who still live there – they all agree and their usage of Uber has gone up dramatically in the past 2 years. At first to get to the airport, but now to go out at night and even to run errands.
So in a market like NYC where you are displacing taxis – comparing to taxi market makes sense. In a market like LA where taxis are rarely used by the populace – this is creating a new market.
I can only speak from my own experience but I went around LA – westside, downtown, and foothills and I always was able to get an Uber within 5-7 min. This was not the case 2 years ago.
Why do you think I am bullshitting?
LA is now the second biggest US market for Uber after NYC – doesn’t that say something?
I have met people who have an excessively Manhattan-centric view of the world, but since I’ve spent the last 20 years in Phoenix, I don’t think there’s any basis for your attack. You might consider whether there’s also a “LA bubble”
My Uber articles very explicitly focus on the question of whether Uber’s long-term economics could produce sustainable profits or justify industry dominance. My articles very explicitly explain that the short-term growth and popularity of Uber is explained by multi-billion dollar subsidies, and that current prices and service levels are unsustainable. I am always appreciative of constructive criticisms and questions–the Uber issues involves a lot of moving pieces, and there’s been very little press discussion of the competitive economics. But have difficulty understanding comments like this, from people who obviously haven’t read anything I’ve written, but demand that my conclusions be rejected because of their personal emotional response to a Uber trip they just took.
I read your entire series and to discount a new market being created is what I am challenging. It is false to say that Uber or any ridesharing company for that matter has NOT expanded urban car services.
Also I’m not basing this on a personal emotional response to one Uber trip I took. Although I don’t have data – if LA is Uber second biggest market after NYC – it suggests that Uber model is working in cities that don’t typically offer taxi services.
It’s a trend among both younger affluent people…
https://www.nytimes.com/2014/11/02/fashion/how-uber-is-changing-night-life-in-los-angeles.html
Among teenagers…
https://www.nytimes.com/2015/04/09/style/for-some-teenagers-16-candles-mean-its-time-to-join-uber.html
And among business travelers who are the least price sensitive…
https://www.certify.com/infograph-sharing-the-road.aspx
In particular with the Certify data you can see where cities that don’t have big taxi industries – Uber’s percentage of the taxi market jumped the most in Atlanta, Dallas, and LA
I’m not attacking you I’m questioning your assumptions – I am someone who is interested in improving urban mobility and I think ridesharing provides an amazing opportunity to reduce our dependence on personal car ownership. If you look at the trends and data (beyond my own personal Uber ride) there is a new market being created which is why I’m guessing investors are jumping. The question is how big and lucrative that new market is – not if it exists or not.
You are choosing to ignore a very basic issue: a business based on $3 billion of annual subsidies to users is NOT a viable business or a real market. It is a freebie.
You are also ignoring that, as Hubert has described, Uber has worse service delivery economics than traditional taxi services. Once these subsidies are removed, and they will be, Uber will raise its prices above where the old taxi services would have provided them, not only to cover costs but also to try to recover their substantial costs.
Demand will dry up. That means it will be unappealing for drivers to work for Uber, so availability of cars will plummet. That means it will become less attractive to users because in addition to the charges being higher on an ongoing basis, response times will go back to what they were in the old days of call-up, radio dispatched car services.
Hubert’s claim thus stands. A phony subsidized market does not change the economics of delivery of car services.
This is no different than pretending that selling gourmet meals that would cost $300 a person for $100 a person (and finding you had a lot of demand at that price) had changed the market for gourmet meals.
On efficiency –
Can Uber produce urban car services more efficiently — at sustainably lower cost — than traditional operators? – Nowhere in Hubert’s article does he ever mention things like POOL or LINE in ways that these ridesharing apps bring efficiencies that taxi companies could not bring – that to me is a big oversight as those services can significantly bringing down costs for passengers while keeping a driver earnings constant. There is a potential path to efficiencies driven by marketplace technology compared to taxi companies.
On technology –
Uber’s App Is Not a Powerful Technological Breakthrough – could taxi companies ever had the ability to create routes that optimized filling a car up to its capacity while balancing a passengers tolerance for time spent in the car? This is not just a simple dispatch system where you could (gasp) call a taxi service and get a car.
On driver comp –
Nowhere do you mention the utility % – if a driver can jump on the system and make $20-25/hr during peak hours because he or she always has a passenger in the car – is that preferable than driving 60-65 hrs a week to make $15-17 where half the time no one is in your car?
Also what is the appealing earning rate for drivers to drive? Who are they competing for drivers? Look at the quick service restaurant industry where employee churn rates are at 150% and they make minimum wage. I doubt most Uber drivers want to make a career out of it (which does seem to be the case for taxi drivers) – so if drivers make more than $10/hr in net earnings – what will they prefer?
So if efficiency goes up through better tech to match supply and demand which brings down costs for customer who obviously want the service (hence the new market thing) increasing overall demand, while maintaining earnings for a driver that is on par or even more than working at McDonald’s with the added bonus you can work on your own hours vs. shifts – is there a future where this is not subsidized?
I would question your claim that you are only interested in “improving urban mobility” and reducing dependence on personal car ownership. Either of those goals involves questions of price economics. You either have to find a way for private sector entities to provide service at sustainably lower cost than anyone can today, or find a way for taxpayers to increase subsidies to public transit. You appear fixated on a fantasy world where questions of cost and price can be ignored.
I wrote a six part series carefully laying out the economic evidence showing that Uber prices and service levels were not sustainable because Uber had much higher costs that Yellow Cab. You ignore all that evidence because in your fantasy world things like costs and profitability do not matter, but the enthusiasm of Venice Beach kids who like to party on Saturday night is all the evidence you need. Further evidence of your willful disregard of factual evidence (1) “Uber model is working in cities that don’t typically offer taxi services” None of these cities exist. There are plenty of smaller cities that have some taxi service but no Uber service; there are absolutely no cities that have Uber but no taxis (2) The Certify data you cited directly refutes your “expanded urban car service” claim—it says all the increased Uber ridership exactly offset declines in taxi ridership.
I directly addressed the false claim about Uber in part three of the series. Uber will have zero impact on car ownership unless it can produce taxi service at costs dramatically (and sustainably) lower than the costs of both transit services and car ownership, and be able to provide the same near-instantaneous service availability of car ownership.
It is impossible for Uber to “better match supply and demand”. Uber is not scheduling drivers and ordering them to particular locations. Drivers show up when they see fit and often are using multiple ride-sharing services.
Hubert discussed this at length. It cannot solve the empty backhaul from airports problem, and other backhauls (people at rush hour leaving urban centers and going to suburbs/exurbs). It cannot use pricing to shift demand as airlines and rail companies do. And like a traditional yellow cab company, it has to have drivers running around in empty cars so as to offer the fast response times that Uber users like. It has no magic crystal ball for knowing when riders will want a ride or where they will be when they want it.
As for your claim regarding drivers, the New York Times has just debunked that:
https://www.nytimes.com/2017/01/12/nyregion/uber-lyft-juno-ride-hailing.html
As Hubert said via e-mail:
Regulators criticize banks over Uber loan [Reuters]
Disruptive!