Uber's billion-dollar losses expose the fragile state of the on-demand economy

> Uber is an example of what happens when central banks attempt to 'stimulate' the economy through misguided central planning. By forcing down interest rates and essentially moving spending from the future into the present, they're stimulating investment in general. But what they forget (or more likely, choose to ignore) is that investments can be just bad investments.

How do you explain things like the .com boom when interest rates were "normal"? Uber has raised a lot of money, but it's a drop in the bucket in the world of global finance (and a very small drop at that!).

Wow, that's a roundabout justification. You don't need low interest rates for people to make stupid investments.

Uber could just as easily be an example of what happens when the weather is nice and we grow a surplus of food and food prices fall and therefore people spend their remaining capital on bad investments like Uber.

> I did it once as a prototype years ago but it was unfortunately in the pre-smartphone era and you had to find ride matches using your regular computer.

How was the driver side solved? SMS?

In the end Amazon.com managed to survive and prosper with a very similar strategy.

I generally agree that flooding the market might lead to stupid investments. Two points:

> That forces institutional investors to pour their money into risky investments like venture capital firms.

Are there statistics about this? Is this really the case? What is the percentage of VC compared to the rest? I only have a vague feeling that VC is tiny compared to private equitiy and even tinier compared to Wallstreet.

> their money ends up subsidising a 10 minute taxi ride and being lost forever

That actually seems like a good thing. People with capital subsidising basic services for the general population. Wealth generally has the tendency to move in the other direction.

> their money ends up subsidising a 10 minute taxi ride and being lost forever.

What? Uber is just a black hole? What about the driver? Who received most of that money for their services? That driver can now use that money to invest in the way they wish.

Where does that money ultimately go ?

Into the pockets of drivers (although a portion of that comes from the pockets of existing taxi firms in opportunity cost and financing repayment).

So as a stimulant for the economy it is working. It is even trickle down economics in action !

It should also make incumbent taxi oligopolies up their game, so the customers ultimately win.

There will be losers. But that is the nature of the game.

I have a half-baked theory that much of the 20th century's prosperity came from spillover gains from "malinvestment". Things which are socially useful, but it turns out not to be possible to capture their value in the market. The big example is railways - all the original investors lost their money.

What if there are no profitable "normal" capital investments left in the west, other than asset price bubbling?

Well there is a barrier to entry, user preference.

The same force that keeps people searching with Google instead of Bing keeps people hailing rides with Uber instead of Lyft.

Good post I agree with your sentiment.

Adding to this, food delivery startups are another great example of this. I call them "VC subsidized lunches." Me and my friends installed half a dozen apps, each of which have given anywhere from $25 - $500 (!) in promotions, i.e. free lunches.

The irony was having actual lunch with investors in which they didn't pick up the tab...

You clearly have a viewpoint you're entrenched in - and you're pigeon holing this into that.

Uber is a bad investment to you - but a good investment to others. If in the end they successfully become one of the first firms to have a self-driving fleet, then they'll likely be able to make a tremendous return on their investment.

And maybe they won't, maybe they'll fold before then. But saying that this was all the fault of Fed policy is nonsense.

I don't disagree with your main argument, but I'd say there's at least some barrier to entry. The market definitely has some network effects. More drivers in the network makes it faster to get a ride and therefore more attractive to riders. Vice versa more riders makes it more attractive to drivers to be on Uber's network.

As you point out, drivers and riders can install multiple apps (and they often do, e.g. Lyft), but for a competitor to enter they'll likely need to jumpstart their network. Something which they'll likely have to do by subsidizing both drivers and riders. This means that whoever decides to take on Uber would probably need quite a big war chest themselves.

Interest rates just explain why there's money looking for a better return. But why invest in Uber as opposed to other start-ups? And why invest in start-ups at all as opposed to property or existing companies that are available at lower P/E values?

The answer seems to be that many people feel Uber is a decent investment compared to alternatives. If Uber ended up owning some share of self-driving transportation that choice might look prescient or at least not so hard to understand. Something analogous has happened at Amazon, where an unrelated business--AWS--now seems to be driving profitability

>Uber is a bad investment. There is no barrier to entry in ride sharing.

Uber's size is only a benefit for drawing in tourists from other cities, each market is a separate battleground and you only need to beat Uber in your local market. And what prevents some city from setting up its own government sanctioned/required ride sharing market & app.

> There is no barrier to entry in ride sharing. Drivers can install multiple hailing apps.

Uber and Lyft have erected barriers by structuring their pay system so that drivers are much better compensated if they do a large number of rides for them. This effectively erects a barrier to entry, because newcomers cannot get drivers as easily.

Even if Uber winds up a bust, the money they've paid drivers is really money which was used to buy real things in the economy. Since most countries have been unable to pass actual (or enough) fiscal policy, the only tool left to fight off a sluggish economy is monetary policy. I for one don't mind if the investor class bleeds some money because they can't afford (meaning the returns are too low) to invest in "safe" asset classes.

I'll tell you exactly how it will end.

Uber will be one of the first companies to a $1T valuation. (First two will be Facebook and Apple).

Here's why. Uber isn't about ride-sharing, at all. Uber is about rewriting your idea of needing a car. The market they're going after is literally automotive industry.

So right now, they're burning money hand over fist, but they don't /need/ to be doing that. It's a strategic choice, to drown their competitors (see Amazon, that's exactly what they do by tapping good sources of financing in the past). Uber will continue to do so until it is not viable to compete with them.

The only companies that will be able to compete is one with infrastructre and rivers of gold. Google. Google owns all the data of Ubers (maps), and they've got everyone on their own maps, they've got hundreds of millions of users that are tied into a google profile in some capacity (gmail/youtube/etc...) and a lot with linked credit cards. This makes for the biggest threat to Uber. Google can afford to lose, and Uber not buying Lyft is going to be the only potential down fall of the company. If Google buys them (which I don't think they will) then that is the headshot on Uber unfortunately.

Back to my point, basically Uber is going to burn and burn while capital is cheap, and force other players out. Makes sense. They can stop subsidizing their rides for users once they've bullied out the others, and there we end up with decently priced normal rides (Which is still ridiculously better in price and experience than a taxi). But by the time this happens (3 years-ish) Autonomous vehicles will be making their ways into cities at much more capacity. This will reduce their costs significantly, and all these price points they have which they have to pay for, will pay for itself by autonomous tech (instead of just forking out their own money to make our rides $5, the lack of labor because of the autonomous vehicles will force the COGS down essentially).

People will have a huge uproar at Uber for creating and then cutting hundreds of thousands of jobs (the drivers) - But their service and value add of an autonomous driving network will wash away everyones humanity side because it's just "too good". Leaving them in the tallest tower in the city with a penthouse office and a cat sitting on Travis' lap while he looks out the window down onto his autonomous city laughing in an evil tone.

$1T company, without fail.

RE Groupon: Groupon as compared to in the article is a different situation. Groupon had minimal barriers to entry and is only a sales machine. People, people, people, and more people were needed in order to bring in the next deal, the next bargain, etc... Uber is absolutely incomparable as they have an innovation in technology, financial defensibility, and humungous footprint of recurring revenue. Groupon had none of those so I feel the article writer putting that out there doesn't seem like a just example. The only thing they have in common is that they're losing money.

> There is no barrier to entry in ride sharing. Drivers can install multiple hailing apps.

Some ride sharing companies offer bonuses to drivers based on number of rides now. For example, 50 rides in a week $250 bonus at the end of that week. Using multiple apps interferes with a driver's ability to get the bonus. Many drivers use multiple apps anyways, maybe don't drive enough to get the bonus anyways, etc... but the dominant companies do have tools at their disposal to help mitigate the risk of newcomers quickly taking over a market.

I disagree with your main argument. Uber is buying growth, and it is buying growth that yields network effects. I live in the Bay Area and yes uber prices have been ridiculously low and they stayed the same for long. However one thing changed; now I see other riders sitting next to me while I pay the same price I always paid for UberX. Demand enables pooling. Network effect in pooling is obvious.

You are also dismissing the fact that traditional cab companies are going out of business. My main counter argument against"there isn't innovation on uber anymore" would be simply pointing out what is happening to traditional players. I don't think they are coming back with the new rules of the market, any they were forced to leave this early because uber "bought" growth.

> what they forget (or more likely, choose to ignore) is that investments can be just bad investments

Do you have evidence that someone forgot or ignored this issue? Quotes from a particular central banker, for example? I don't think this part informs the conversation.

The question you raise, while maybe novel to some of us on HN, has been long discussed and examined in economics. There are indicators of over-investment and under-investment, and trade-offs to different central bank financial tools.

Finally, because a central bank tool increases investment, that doesn't mean the level of investment becomes too high; it could have been too low before. It's like watering a plant; it might help or depending on its prior condition the same action might over-water or under-water it. One sign there is under-investment, as I understand it, is that extremely low/negative interest rates are not stimulating inflation. This suggests plenty of under-utilized capacity.

> There is no barrier to entry in ride sharing. Drivers can install multiple hailing apps. Riders can too.

This is not true. There are big network effects when you consider products like UberPOOL. A new app would burn through a lot of cash to subsidize rates below the rates Uber can offer profitably through pooling.

I agree. Transportation companies just don't tend to be profitable. Airlines are super competitive and minimally profitable. The airlines folks have a saying- they can only be as profitable as their dumbest competitor- and these are people that actually own or lease their planes and have airports and routes granted to them. Even monopolies like taxi cab companies weren't that profitable if you consider the costs of the medallions. Its just hard to make money in transport- drivers make peanuts, car companies have razor thin margins, oil is too volatile, customers are too cost-conscious. Very different than enterprise software or pharma.

"Uber is an example of what happens when central banks attempt to 'stimulate' the economy through misguided central planning."

Substitute the word 'stimulate' with the word 'influence' but this is actually the job of a central bank.

What does "moving spending from the future to the present" actually mean in Uber's case?

For many kinds of spending, the future and the present aren't in competition. Keeping cars and people idle today won't result in more cars and labor available tomorrow.

If Uber weren't around, maybe the people writing software and driving cars could be doing something more useful. But that's competition between two different investments in the present, not between the future and the present.

If anything, low interest rates encourage people to speculate on bets that might pay off later rather than on surer bets that will pay off sooner. So that's the (possibly mythical) future competing with the (actual) present.

> Uber is a bad investment.

So the VC's might lose money. But if the central bank is aiming for a bigger picture, Uber and Lyft have been great improvements on the market/society/efficiency overall. A car picks me up in 1-2 minutes, instead of the 10 minutes a taxi used to take. And it actually comes - taxis in SF have always been unreliable.

And instead of most cabs driving around aimlessly empty half the time burning fossil fuels, now you have the majority of Uber cars carrying at least 1 customer (sometimes 2 or 3 with UberPool/Lyft Line) most of the time.

Agreed on central banks, disagree on "There is no barrier to entry in ride sharing."

There are enormous costs to acquire customers and to enter new cities. The technical ease has nothing to do with the enormous soft costs.

You are completely discounting the positive externalities that arise from "ride-sharing" (a ridiculous term) services such as Uber and Lyft. This is the opposite of misguided central planning in my opinion for a number of reasons.

According to the California DMV, after a record high number 215000 DUI arrests in 2008, the number of DUI arrests has decreased year after year. Uber and a lot of the other ride sharing apps started in about 2009. In 2013, the latest year for which I could find data on, the number of arrests had plummeted to 160000. While this information may not be all that pertinent to VC investors, it certainly has benefits for the general public. Here is a link to the data (pg5):

https://www.dmv.ca.gov/portal/wcm/connect/77b8b0e3-c20b-42b0...

With the options provided by the sudden ubiquity of ride-sharing apps paired with a surge of investment in public transportation has led to some residents of Los Angeles forgoing car ownership. This is a massive shift in consciousness for a city derided for and held up as the model of urban sprawl. I've even started using a combination of biking, ride-sharing, and public transportation for commuting to work/play.

From a more personal standpoint, I can not be happier to see the death of the taxi industry. Taxi drivers would routinely give me one look and pass me by even after calling ahead because of the color of my skin. The taxi industry in Los Angeles is largely dominated by recent Armenian immigrants who most likely are not that familiar with the different cultures here in SoCal. One driver who was a bit more enlightened told me that in their taxi training class they explicitly are told to avoid picking up black passengers if possible. In fact, it got so bad, that police launched a sting and the LA city council passed new laws to target discrimination: http://www.latimes.com/local/california/la-me-lax-taxis-race...

Uber's bust this year is so spectacular because they pulled out in China because they went up against and lost to a consortium that included Alibaba, George Soros, GM, and a number of other interests who were scared shitless that if Uber won, they would dominate not only ride-sharing, but transportation in general...globally. That is Uber's ultimate aim. Yes, they lost a couple billion. But it was worth doing because if they were successful, they'd be the dominant global player. In the end, they lost to a more innovative company in Didi Xiang (I believe they were mixing dating with ridesharing among other features).

The dot-com bust was only a bust if you take a personal, myopic, short-term view. While a lot of people may have lost their shirts, that money didn't vanish into a black hole. The investment in infrastructure is responsible for the Internet as we know it today. It's not perfect, but it's pretty much at the level of a William Gibson novel. Honestly, I am hoping they turn car ownership into an expensive luxury option. I can finally enjoy driving in the California sunshine without any ill-suited and undertrained drivers on the road.

    > Building a real time ridesharing engine is not hard - I did it once

You did about 0.01% of the work.

You should consider the possibility that subsidizing a 10-minute ride could be a good method for a central bank to stimulate the economy.

Because for tax reasons Uber wants to make it very clear they aren't the ones with the vehicles. You're using (sharing?) the driver's vehicle.

> Passengers don't share the ride with other customers.

This is no longer true with Uber Pool and Lyft Line

> Passengers don't share the ride with other customers

I beg to differ. I just took an UberX from Changi Airport to home, a 30 minute ride during which the driver took on and dropped off a total of 3 other passengers.

The cost was about half the taxi rate.

I can't seem to find it, but IIRC Reuters(?) set a new policy to refer to it as ride-hailing and several publications followed along, for basically that reason.

Not really. The driver may or may not be going in the same direction and you are sharing their vehicle. Seems fine to me. Hammer sharing would imply one person out of two could work.

It's because "sharing" sounds really good. Everyone knows that it is kind to share, so lots of companies try to stick the word on to their own business.

I hate the way that any company with a vaguely peer-to-peer business model calls themselves 'sharing', or 'part of the sharing economy'. It's not just Uber. e.g. Zopa (a p2p loans company) describes itself as 'sharing', but it's a business where people lend money to others for a fee. AirBnB claims to be 'sharing', but at it's core, it is little more than a hotel booking system. Taskrabbit gets described as 'part of the sharing economy' but no-one is sharing anything, you are paying for workers to do chores.

Since when has sharing involved making a profit by charging users?

As others have pointed out, both Uber and Lyft do have services where you literally share a car with another customer. These services are used by many people.

In addition, "ride sharing" also refers to the transportation itself as a shared resource, in the same way as a taxi, or even public transportation. With a system of shared transportation, not everyone needs their own vehicle which has significant financial/economic and environmental implications.

tl;dr: Uber/Lyft are shared resources among people who may or may not actually be in the car together at the same time—and the resource they are sharing is transportation ("rides").

It's because the "sharing" economy is catchier than the "capitalists extracting value from the few remaining resources owned by the middle class" economy.

Because "taxi" is very bad branding. As a test, casually ask the young Uber driver in the Prius how he likes being a taxi driver. You might get some visceral reactions. If Uber were thought of as "taxi", things would start to unravel for them.

As I see it, the only acceptable outcome for Uber at this point is gaining a huge lead in the establishment of an autonomous driving fleet.

I don't see any way its current businesses (e.g. app-based taxi service, food delivery, etc.) justify its valuation. The question then is whether reliable fully-autonomous cars are 2 years out, 10 years out, or more; even the experts can't agree. Uber needs it more than Google needs it, more than Tesla, more than anybody.

It hinges on them getting public transportation agreements locked down with cities before Google or Tesla do. Imagine a major city where 80%+ of the vehicles are run by a single company and the rest are paying a toll to be on the road.

Uber doesn't appear to be any more overvalued than stocks and bonds, broadly. It may be a big gamble but so is buying $1 billion of bonds that yield .25%.

> Which is kind of what you have to do when you have billions lying around and investors that expect you to multiply them.

Which is also part of their awful strategy that they didn't have to do.

Do you realize that Uber and Lyft drivers are often making below minimum wage when you account for their costs? The only way they are getting drivers is by offering fat bonuses to both parties for driver referrals. The entire business model is unsustainable and now Uber is hemorrhaging money because all of their drivers figure this out, drive enough to get a bonus and move on.

Kill the competition now, reap the customer surplus later.

It would work out pretty well if they had a monopoly but they won't have. Their only real barrier to entry is to be able to subsidise the hell out of their service with investor money.

As much as people seem to think "driverless cars" are obviously Uber's future, it's a pretty monumental change to their business model.

It seems that their model now is to own essentially nothing; drivers own the cars and are responsible for 100% of the upkeep/maintenance, costs of insuring, etc. If that changes, where does that leave Uber? Are they going to own the cars? If so, that's a tremendous capital investment, which is something they've specifically avoided as much as possible. If they don't, and they just remain a brand name, then it's likely that someone like Ford/GM/Toyota/whomever will eat their lunch if cars are just on-demand and self-driving. Uber offers very little in that world.

I believe part of their positioning is to become beloved by regulators. Become part of the routine of the politically elite in Washington, and you're more likely to have favorable laws passed. Whether they're able to scale this to less-friendly jurisdictions is an open question.

But, they DID pressure regulators into folding.

I remember a time when cities left and right were trying to get Uber shut down. When the question of "will Uber be able to continue to run in NYC" was actually up in the air.

Does this even happen now, anywhere in the US or Europe? Uber won the regulation fight.

if it looks like a duck, if it walks like a duck....

UBER is on its sure way to bankruptcy, the model is not sustainable.

This would be a best-case scenario for them. While personnel costs will stay the same or increase fleet maintenance costs will only decrease over time as driverless tech gets cheaper. If they get to the point where their dominant cost is maintenance of an autonomous driving fleet they will have won the competition for the future of transportation which is today in its infancy.

When ever I read a post like this, I can't help but reflexively think that their interview process must be a pretty good filter. Going through your post history, I see only two years ago, you were asking:

> my app will need account creation, a map, REST requests, and notifications. what's the fastest way to get from 0 to mvp? do I need to build a native app for every platform? can I get away with a web app?

and a year later was Lead Engineer at a couple of startups

Pretty sure you didn't ace anything. The fact that you think you did shows that they made the right choice.

Really? Is anyone expecting a successful product to come out of Google anytime soon?