Will Uber Ever Stop the Bleeding?
bloomberg.com
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Absent cost-cutting, that implies a 9 to 12 month runway. Even if SoftBank injects $1bn, that could only add a few months. A larger-than-expected fine in the Waymo case [3] could literally bankrupt them.
It's time for Uber to reduce the number of markets they run losses in and cut costs at headquarters. Their old growth model was predicated on an assumption of unlimited fundraising capability. The scandals seem to have hurt that.
[1] https://venturebeat.com/2017/08/23/uber-is-still-burning-cas...
[2] https://www.bloomberg.com/news/articles/2017-11-29/uber-s-th...
[3] https://mobile.nytimes.com/2017/11/29/business/waymo-uber-tr...
They recently announced a plan to purchase 24,000 Volvo XC90s for self-driving, to be delivered from 2019 to 2021, at a cost of about $1b. That would qualify as productive spending, capital invested for the purpose of greater production. But that's going to be too late, and if I were running Volvo I would not count on those sales...
I am reminded of John Maynard Keynes' words. "The market can remain irrational longer than you can remain solvent."
It speaks of the financing coming home to roost before its labors have borne fruit. Uber may be financing productive spending. But if it runs out of money before the spending makes a return, it was for naught.
Uber played two games. One, buying expected long-term profits with short-term loss-making spending. Two, overwhelming the competition with scale. There is an adage admonishing attempts to make up unit losses with volume. Uber sustained losing money at volume by promising investors its long-term gains. As long as Uber could raise financing, the long-term gains were safe.
This dynamic mirrors the asset-liability mismatch that creates banks' run risk. Uber is reliant on short-term fundraising to finance its long-term competitive position. Those short-term backers are now becoming nervous. Just like a bank facing a run, the only choice is to cut, cut, cut.
I've believed for years that Uber was effectively a self-driving car company which rolled the dice on building an international userbase ahead of time, hoping to be first to market when the tech finally reached market.
I can't even say if it's purposeful, but it's certainly true that recapturing half of their driver payments (the other half going to capital and maintenance costs) would drastically change their financial situation. But at this point, it doesn't look like they'll ever get to take a shot at that position; it'll go to Lyft, Fasten, or some other second-mover which spent less money and ran fewer risks.
The revenue and operating loss and such do not really give a good idea whether or not the company will survive in the long term. What are they spending the money on? Billions in net revenue for an app with offices all around the globe, fine. But how can you amount such losses with that plus marketing expense?
- Number of unique customers
- Rides/Cust
- CLV
- average customer lifetime
- CAC?
These would be the interesting numbers if you want to assess the company.
Disclaimer: I work in the BI space, but have no formal finance education, so I might miss a thing or two in this assessment.
You're not going to get a company sharing many of these specific metrics because they're competitive secrets.
I'm more bearish than Softbank is. But there's a serious difference between a down-round that's still makes Uber a uniquely valuable unicorn and the kind of down rounds that a more typical start-up might get.
The best thing you can say about this is that "it could be worse", but down rounds are ugly no matter the amount. Because:
- it indicates a downward trajectory. Start-ups in growth typically IPO at a higher valuation than their most recent round, because they're moving up. But the reverse is also true, so if present trends continue the IPO valuation may be even less. Sure, Softbank may have factored that in, but more ugly news has surfaced since then, like the destruction of evidence.
- Down rounds scare away talent, both new hires (who will be much more reluctant to accept equity) and existing employees (who are going to get fucked over when existing investors demand more equity as compensation for the lower value)
Down round are really bad for existing employees, unless more equity is given to make them whole. But that's not the perspective that matters here.
That's not an encouraging sign. Large institutional Japanese investors have often been suckers.
Everyone knows that they are bleeding money, but it is by design to get as much marketshare as possible/get as many people using/ addicted to their services. EDIT* They are a software based business ,of course they can and are highly likely to turn a profit if they raise prices *
The better question that many journalists seem to shy away from asking is: What are the effects of subsidizing goods/services on the end user? Will end users be more likely to pay for the goods/services if they increase/charge market rate for them?
Is it okay to make end users addicted to your services?
It will be a very interesting next 10 years for business models of businesses like Uber.
Plus Uber is in the middle of a court case right now, so I'm sure both Uber and its lawyers have very good reasons to worry about laws.
That's clearly false. Uber is currently in a court case and was just reprimanded by the judge for appearing to intentionally destroy business records.
Dropbox has competitors and for years operated at a loss thanks to investment from YC and other VC firms. So did Twitter, Airbnb and countless other.
If that was illegal, there would be no-one for VCs to invest and you wouldn't be here reading Hacker News, because this website would not exist.
I disagree with your claim that there would be no one for VCs to invest in if the law were enforced more broadly/frequently. The important part is that the law isn't applicable to all unprofitable businesses. Only those that are unprofitable because they are pricing below cost.
[1]: https://www.ftc.gov/tips-advice/competition-guidance/guide-a...
The aren't as software-based as many people make them out to be. They need driverless cars to become what their current valuation and growth expectations require.
Don't get me wrong, I'm long Uber and think they'll survive either way, but if others dominate them in driverless and drive prices down before Uber is ready with their own fleet, they will be forced to conduct a massive down-sizing.
Abet, these areas still have a long way to go such as their self driving car division does.
I'm not saying that they cannot compete but initially it's not going to be easy, like flipping a switch as so many make it out to be.
There is no human driven taxi business in the world where robo taxis exist.
By my calculations robo taxis are 2x-4x cheaper than human driven taxis.
If Uber doesn't do robo taxis then it dies the moment someone else does.
Care to share these calculations?
Also whoever wrote that piece has never taken a class in accounting. There's something known as useful life of an asset.( You can write off a lot of expenses and do other clever accounting tricks that I'll never post on a public forum)
They also bought one of the safest vehicles.
Wait until they ( insurance companies) start charging higher rates of insurance for having a less safe vehicle AKA not newer model.
They also bought the same vehicle so they can actually use scale for buying parts and services to maintain it.
They also just bought a mapping fleet because wherever it goes it will take images similar to Google Street View. Uber could build its own map service.
All of this reduces costs on the back end.
In terms of operating costs, they can buy fuel at scale and possibly hedge which makes it incredibly cheap, talking about 20-40% cheaper than anyone else.
There also was nothing mentioned about prices increasing. The fact of the matter is that prices will increase. If that's the case they can easily make that money back over 5 years.
These are some thing that was not mentioned in the calculations you referenced.
What does that even mean? Has Uber made a single physical product? To the best of my knowledge they do not. Yes they may have to balance wages of drivers which is arguably not easy, nor is it easy to balance human labor(capital) costs in any industry.
They are a marketplace for retail transportation.
I agree that driverless cars could sink their ship if they're beaten to the market first. Self-driving cars are about many years away contingent on the legal system being the way it is today. That could change.The biggest problem to self-driving cars is insurance/liability ,the areas that they are going to be used, people's ability to change/adapt to them.
What people don't understand is that the most population dense places, where uber and other ride handling services are predomimatly used, happens to have many pedestrians and the shittiest infrastructure.
I think even talking about self driving cars is a gigantic waste of time , borderline buzzwordiness of 'machine learning' and 'artificial intelligence'. At least those buzz words are being used today. We are nowhere near a level 5 standards.
The hair stylists and massage therapists don’t make “a single physical product”, but no one is arguing that they’re the next Microsoft. I’m still at a loss as to where you’re going with this “they’re software, of course they’ll make a profit” when they’re arguably not a software company, and it doesn’t matter because plenty of software companies have gone under.
Your fixed costs per unit go down as you scale, but you still need to recover them, and recover your per unit variable costs to break even.
For Uber, they gamble they will the only ones to have scale by the time self-driving cars drive per unit costs down, and thus can keep competition out on price and still make a healthy profit.
Problem with that is that they won’t be the only one reaching that globally. That means that, for example, Chinese competition may still be able to enter Uber’s home market. That’s relatively easy if/when self-driving cars become available.
It will also be interesting to see what governments will do with public transport if self-driving cars become available. They could, for example, start operating a much denser and more flexible network of (smaller) buses. That might take away part of the market Uber aims for.
Uber began winding down [their direct to driver leasing
business] this summer after learning that losses were
$9,000 per car on average, steeply above the previous
estimates of around $500 per car
I don't think the definition of "addictive" you seem to be using is the standard one, or it would apply to making any product or service better in any way.
They're vetting people, and having them do labor on their behalf. Regardless of how the law defines an employee, they're effectively hiring a huge amount of labor.
They're completely unlike most software firms who can sell licenses or ads with no human involvement.
They are doing this, primarily, with software.
I agree they are not like traditional software companies, but technically they are giving you the right but not the obligation to obtain business, and in that sense it is like a software as a service company.
Again, I agree that it is not traditional, but as another commenter stated they are more like a Logistic Company like Delta or UPS with a focus on the end consumer versus a business.
Not really, no, or at least no more than ordinary companies like Target, where they also have you apply on a website. They're paying people to do background checks, vehicle confirmation, and so on.
How much of a moat does uber really have? It seems to be only made of money - there is nothing inherent in their product that makes it sticky, only "is this the cheapest ride right now?".
I agree with you that price is king(cheapest) and on stickiness.
Unfortunately, at the moment, they are the dominate service.
Did we not ask the same questions about Amazon and now they proved they knew what they were doing?
Can't Uber continue to operate at a loss for a few years until they can switch drivers for self-driving vehicles and significantly reduce cost instantly?
1) Achieve driverless tech at a safe enough level that they don't carry a huge insurance/legal cost
2) Build out a fleet of cars, maintenance regiment, security team etc.
1 seems to be a huge sticking point for them. And for 2, uber has never had to have large carrying capital costs. They spend on ads, subsidizing rides and legal battles, not purchasing and maintaining vehicles.
Right now they have successfully externalized a lot of costs to their drivers. That will go away. They also still won't have customer lock-in even if they achieve the dream. Others will be hot on their tail and then they'll be back to a race to the bottom where the core competencies are: fleet maintenance, ride optimization and capital costs that far outstrip their current operation.
They have an advantage in ride optimization, not the rest of it.
When driverless tech becomes available, they'll be much better positioned than Uber.
Yes. They never came close to bleeding money at the rate that Uber is, though.
> Can't Uber continue to operate at a loss for a few years until they can switch drivers for self-driving vehicles and significantly reduce cost instantly?
No. They don't have years, at least not without raising more money. And when you start looking like you won't survive, raising more money becomes much harder.
Uber has been "investing" in expanding the customer base, but, this expansion has been a money giveaway. Also, customers can walk whenever they want to.
Uber is being criticized for having massive losses, which is much worse, because it means that they must make significant changes in the near future that will likely be detrimental to their growth and valuation.
Also, growth is more valuable for Amazon because they have a bigger moat.
The difference with Amazon is that they would make a core business profitable and then use the free cash flow to invest in adjacent businesses. Users core business is not profitable yet.
Books->general merchandise->3p marketplace->prime->AWS->???
Where ??? Will probably be one of logistics, Alexa, or Whole Foods/Go/Fresh.
Sure. Uber can survive years/decades through losses if wall street/hedge funds/big boys are determined to carry Uber for years/decades. The big boys were willing to carry amazon because it was continually growing and establishing a monopolistic position. The question is whether the big boys believe Uber can continue to grow and establish a monopoly.
Amazon spent all of its profits over many years improving website infrastructure, logistics, warehousing, shipping, customer support and generally making life easier for its users. Uber did almost none of that, opting to focus on freebies and advertising.
If they raise prices by a dollar everyone will switch to
Lyft or one of the other dozen competitors in an instant.
- I wouldn't even know if Uber raised prices by a dollar.
- I don't price-shop between services.
- Uber is still regarded as "cheap", including vs. taxis.
- Uber's gotten people hooked on on-demand transportation: taxis are dead.
I think there's less price sensitivity than you think. Combine that with the obvious PR move to spin price increases as a way to pay drivers more, and competitors will (have to) follow suit.
If Lyft becomes a better deal, a vanguard of users notice it, they word of mouth it, and the equilibrium shifts somewhat. Not all the way, there are price insensitive users. But there are also price sensitive ones too.
If _and only if_ there is significant lifetime value for customers. If there is little or no lock-in, losing money to acquire a first-time customers may look good to outsiders, but isn't sustainable.