The true cost of an Uber ride is higher than it seems
motherboard.vice.com
motherboard.vice.com
Imagine Uber issues a financial report saying they lose $3B in a year on $2B in revenues (total spending $5B). We also know they opened over 100 new markets that year, and in new markets spend an average of over $100 each to recruit new drivers.
So what’s the truth? That passengers are only paying 40% if Uber’s ride costs? Or that Uber front loaded billions in new market development costs internationally, while more mature markets like the US are already close to profitability?
Naked Capitalism would have you believe the first scenario, without enough detail in Uber financial reports to give any idea which scenario is true.
Some of us despise Uber so much, that unfounded speculation by NC tells them what they want to hear, so they turn off all critical thinking about it.
Not only does this article ignore rapidly improving Uber financials since the NC takedown, but that booking a ride costs Uber pennies. Their share of the ride revenues is dollars. How is that not going to be super profitable once new market development costs ramp down?
Yes, booking the ride costs pennies, but actually providing the ride costs them dollars. The question is how many dollars do they need to charge customers and pay drivers to maintain them both, and whether that calculation leaves Uber (or any other of these services) any profit. This is where the 'low barrier to entry' argument comes into play; it is so easy to enter this market combined with the fact that both drivers and customers can (and already do) swap to the service with the best financial benefit to themselves. It remains to be seen what the steady state of this equation is.
Ultimately drivers will make what the market will bear. If they don’t make enough, driver count will fall, Uber will raise rates to compensate, until equilibrium is reached. And the business will go on, every ride costing Uber a few cents to dispatch, and then still skimming a couple bucks from the amount paid the driver.
Because Uber has no business "barrier to entry" for the ride booking: Other people can write smartphone apps that talk to the cloud or whatever also. If the money involved in the app is dollars from pennies, then others will be highly motivated to write the app.
So, the taxi business can return to small, local operators who also use a smartphone app.
Then the dollars Uber is getting stay with the driver and/or their local company.
Uh, mostly the taxi business is a local business. To me, for a centralized company to hope to make big bucks, or even any bucks at all, in the taxi business is wack-o.
For self-driving taxis, okay, for Level 3 automation, but that doesn't help much. What might help would be Level 5 automation, but IMHO that would require essentially full, real AI, and no one knows how to do that. Thus, to me, the idea that the taxi business will be affected by self-driving cars is just nonsense hype -- the media likes to have hype to get clicks.
Uber is on hundreds of millions of phones. It’s incredibly expensive to get your apps on phones nowadays. And saying other people can write apps that talk to the cloud is a massive oversimplification, building a system that tracks tend of thousands of simultaneous transactions while giving real-time updates to drivers and riders, with 99.xx% uptime, and web/android/ios front ends, is a massively expensive effort.
Lastly even if you spend hundreds of millions getting your apps on phones and building real-time infrastructure, no one is going to use your service until you acquire a massive amount of drivers in their market.
Uber’s brand, which includes that massive bases of installed apps and active drivers, is a huge competitive advantage. It’s the reason 6x more riders choose Uber over Lyft every day, despite Lyft having app installs, drivers, real time software, and despite Uber itself spending the last year or so shutting on their own brand with their tawdry behavior.
Even if you target Uber in a single market or small set of markets to reduce your investment costs for acquiring app installs and drivers, but now your infrastructure costs can’t be amortized over as large a base, making you a high cost competitor.
I don't get it: The taxi business is older than cars! Before cars we had essentially taxis pulled by horses. In parts of Asia, there were taxis pulled by people, on foot or bicycle.
The times I used a taxi, I just called a phone number.
Now with smartphones, people can call such a phone number while walking down a street. Answering the phone can be a person and/or computer.
For the branding, etc., if you are right about the difficulty of having a computer answer the call from a smartphone, then have some company write a generic app that all taxis in the world can use.
The difficulty of getting an app installed? Depends on the app!
I'm still having a super tough time seeing any money in a central taxi business, computers or not, smartphones or not, etc. E.g., people have done serious, well funded, polished research on just how to do dial-a-ride for 40+ years.
The Taxi business has always been about two things, dispatch and monopoly rights. The drivers made a pittance while the profits accrued to dispatchers and medallion owners.
Ride sharing has (mostly) broken the monopoly, so the profits are going to accrue to the most successful dispatchers. I agree with you that it seems existing Yellow Cab/Green Cab/etc dispatchers could invest to build a similar dispatch system and jump in quickly to compete with the hundreds of thousands of existing cars/drivers they have.
But in reality it’s a lot harder than that. They have to be willing to compete on price and service while throwing away their existing business and angering their existing medallion owning stakeholders. It almost never happens that an existing business torches itself to change everything to compete using a new business model.
> Dial a ride? That’s something to research 40 years ago. The new world is app driven, no one need answer a phone call.
Look, you've got it in spite of some of what you write: The "dispatching" part is 40 years old. So, that's nothing new. When I looked at dispatching as an optimization problem, it looked so ill-defined that any optimization looked not worth the bother. Or, just assign the next call to the closest taxi or some such.
I have a quite good background in optimization and a year or so communicated with a guy who claimed to be high in Uber and working on optimization. I sent him some outlines of some approaches, some questions to clarify the real problem, etc. and never got back anything at all meaningful. My guess was that he knew next to nothing about optimization and had made no real progress on optimization at all. I doubt that Uber's dispatching optimization amounts to much.
For answering the phone, for a solo business, let the driver answer his own phone. Or let his wife or kids at home do it. Or have 10 taxi guys form a little informal group and rotate the phone answering one day at a time among themselves or their wives.
For a simple server to answer the phone, that can't be very hard to do. Then for the app, the smartphone just uses a standard Web browser, no mobile app required.
> The new world is app driven, no one need answer a phone call.
Don't need an app; on the client side, a Web browser, including on a smartphone, is enough.
Besides, having a human answer the phone stands to be a big, huge advantage. Nearly any taxi customer would much rather talk to the nice voice of the wife or daughter of the taxi driver than some computer. Out where I am, when I called for a taxi, that's what I got, a wife or daughter.
Where I live, 70 miles north of Wall Street, the taxi business is just mom and pop operators. There's no way for Uber to make any money here; nothing like Uber is an advantage to anyone or needed or wanted.
You have talked about medallions, monopolies, sweet-heart deals with governments, etc., but out where I am my impression is that the situation is fairly simple, that anyone who wants to be a taxi service need only say so or nearly so. On my computer I have lists of phone numbers of local taxi services. That's all I need. I don't have or need a smartphone (a friend gave me a cell phone, but I've never bothered to learn to use it; I just don't need it), but if I did and was out someplace and needed to call a taxi, then I'd have the phone numbers of the local taxi services on my smartphone. When my startup is farther along, I'll do more driving, get a smartphone, carry it in my car just in case, and to use it will just make a phone call to a local taxi service.
Here's one: Just set up a Web site with names, addresses, phone numbers, and user rankings of taxi services, for the world. In the US, include GPS coordinates, Zip code, and area code. Link to maps at Google. Start in a medium sized US city where there are lots of small, local taxi services and expand from there. Client side? Sure, just a Web browser. A smartphone user could just paste in his GPS coordinates, and the Web server would give back the 10 closest taxi services. Giving back the 10 closest is common at Web sites now.
At least in all but two dozen or so of the largest US cities, anyone who uses a local taxi service has a good shot at being a well-known, favorite customer of a local taxi service, that is, with "the human touch", and get good service -- a good situation for both the taxi and the customer. It would be harder but not impossible for a big company to do some such.
Sure, if I suddenly had to travel to some medium sized city in Europe for the first time, maybe I'd be glad to use the brand name of Uber. But so far I've never been in Europe even once! Maybe when my startup is doing well!
You may prefer calling a taxi using a phone. Some people still prefer traveling by ship, yet airlines continue to carry more people over water every year. No one thinks ships are making comebacks. More people use apps every year, and they prefer them.
And maybe Uber guy never called back on route optimizations because they solved that problem on their own, or their problem is different from a taxi optimization.
> has massive advantages
I don't see their advantages as being massive or even significant. The best possible dispatching is not very good and not very difficult to do.
All around the world, for nearly all customer trips, the locals can offer in nearly all respects better service at lower prices. The prices can be lower if only due to the lack of Uber overhead.
For something like a taxi service, an app is not the way to go. The UI/UX of a good Web page with a Web brower is plenty good and much easier 'system managament' for both the client and the server.
All of the scenarios that I see where Uber can grind out competitors is by continually operating at a loss? I would imagine that eventually investors would tire of such a position.
Then comes co-branded credit cards.
The endgame is to replicate the airline industry - 4-5 companies controlling everything.
Ride services are completely different from airlines, if only because the capital outlay is incomparable. You could run a ride sharing business and get two hundred drivers driving around New York by December for 250k. That won't even pay for a single flight crew for a year, much less a plane to put them in.
I assume the mix varies by locale.
I don't use taxis etc. a lot when I travel but if I did a single goto brand would be useful. Locally, if Bob's app was the best local taxi service, I don't really care if someone else operates in 500 cities worldwide. (Just like I don't care that the car service I use to get me to the airport covers only a slice of even my local area.)
The Internet and software makes solving the problem of distribution trivial which provides an existential threat to any traditional business which does not absolutely require physical proximity of producer and consumer, but Uber isn't acting in that space. They do not seem to be preparing themselves for a future where they are only one among many (even if the biggest)... would they be likely to be able (or willing) to survive with a smaller piece of the pie?
I've always thought Ubers big problem was that they built it so much like a traditional company when their only actual value was running some servers and knocking down regulatory hurdles which doomed them to be replaced by a much lighter-weight organization taking only a standard 10% 'finders fee' for hooking up a provider and consumer (a standard older than our money)... but now I'm not sure if they'll make it to the point where they get to see that even.
Ehhh I don't buy the thesis. The author is suggesting all Uber rides run at a loss, but Uber makes a killing on some rides. Not every ride is subsidized, I've paid $60 for a 20 minute ride through LA during surge pricing, and I'm certain both Uber and the drive made a profit off me. I've seen stories of $300+ Uber rides too. There's no way Uber and drivers don't make money off these.
I know many rides are subsidized and Uber loses some money on them, but implying Uber's business model is a failure based off average cost is a fallacy.
Uber booked well over 100M US rides. I think 400M, but I can't find a reliable source ATM. You do the math. Uber rides don't cost an average of $2 in the US. Uber isn't paying 50% of our bill in the US.
"Uber Losses Not explained by Uber China and No One Can Explain How Profitability Can Be Achieved"
The losses covered in that article don't include anything from China.
[1] https://www.nakedcapitalism.com/2016/11/can-uber-ever-delive...
Which is flat out not going to happen without reducing the number of riders thus pushing up prices even more. Which is why it's not a 50 Billion dollar company long term.
This is perfectly common for companies starting up business in new markets. The trick is to turn emerging markets into mature ones.
If indeed Uber is losing money on their local operations plus non-growth overhead, then it's bad. But we don't have those numbers.
I have no problem saying they could eventually break even by adding ~2$ a ride in the US. But, that's only enough to be a multi million dollar company to be a multi billion dollar company they need to raise the price 5+$ in the US and the rest of the world without losing ridership.
Now, increasing prices reduces demand... So, to be a 50 billion dollar company they would need to keep a huge ridership while charging ~twice as much on average. Or charge ~5+$ more per ride while becoming a monopoly.
QED: They have zero paths to maintain their current valuation let alone growth to offset the risk of failure.
Since when has dumping become "charity in disguise" ?
It’s not clear that this market is winner take all. Rides are very cheap for consumers on Uber or Lyft. The experience is MUCH better than cabs in every city except maybe NYC. Drunk drivers are reduced.
So far it looks like the loser is going to be VCs. What’s wrong with that?
The sharing/on-demand economy is incredibly cruel to the 1099s doing the heavy lifting
> Predatory pricing (also undercutting) is a risky and dubious pricing strategy where a product or service is set at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors.
> ...
> Nowadays predatory pricing is considered anti-competitive in many jurisdictions and is illegal under competition laws. However, it can be difficult to prove that prices dropped because of deliberate predatory pricing rather than legitimate price competition. In any case, competitors may be driven out of the market before the case is ever heard.
Wouldn't that constitute very clear violation of the Sherman Antitrust Act and be considered profound anticompetitive behavior? I'm fuzzy on specifics, but I thought offering your product at a loss to drive away or outlast competitors was one of the big giant no-nos alongside price-fixing. Is the person doing the analysis just interpreting the numbers in that way because they're not showing a profit? Or, in other words, would the FTC be likely to interpret the situation in the same way?
Source: I was a summer law clerk for the antitrust department of the CA DOJ.
In a few circumstances an Uber passenger may consider only cabs and Uber when deciding how to be transported. In many many other cases, Uber passengers are considering any of the other transportation methods above.
I personally often decide between an Uber or taking the bus. I don't own a car.