An examination of Uber’s economics | Hacker News Reader

An examination of Uber’s economics

americanaffairsjournal.org

Regarding the lack of "innovation" concept this article is hocking... pretty sure before Uber/Lyft I couldn't click a button and know how much my ride to a place would cost then, book it and pay for it.

(I still remember cabs in NYC where the driver "knew a shortcut" that ended up adding $10/$15 to a ride... I've never seen uber/Lyft pull that move)

At first, for many years actually, neither Uber nor Lyft offered an upfront quote. The other feature, to press a button on your phone and book a cab to your location instantly, existed in a taxi hailing app that I used in Los Angeles around 2010, which I think was called "MyTaxi". I'll admit it wasn't as reliable as getting an Uber or Lyft now is, but it was still 2010.

Funny enough, before the upfront fares on Uber/Lyft, I did see drivers try to pull that "shortcut" move! In either case you just have to be firm and have them stick to your route.

Uber and Lyft opened up some supply and juiced everything by subsidizing rides with cheap VC money. You can call that innovation if you'd like to.

It's covered in the article. When they say "lack of innovation" it's alluding to the fact that nothing Uber does is necessarily exclusive to Uber. Uber is entering into an massive existing market with a low entry barrier and high competition that often already out performs Uber in terms of cost and efficiency.

You could say the same about Facebook when there were a hundred clones available after it was made. Everyone was building social networks back then.

Being able to repeat the technology part is a tiny percentage of the business. Which demonstrates a lack of understanding of tech businesses, or business in general.

Network effects in social media are high and protect Facebook from competition.

Barriers to entry in the taxi industry are lower.

"Uber incurs huge start-up costs with each new city and country it enters."

In other words - people won't use the next Uber unless it has drivers available every time you open the app, but drivers won't be available unless they know there will be riders paying them fares. To fill in the gap, rideshare apps have to pay drivers when they enter a market, even if there are no riders yet.

This is also covered in the article - it costs uber huge sums of money to enter a market because they offer driver incentives that are uneconomical, they have a huge advertiser budget and they use below market rates to achieve growth. It also costs them a lot because they don't move into a market to be in that market, they move into a market to dominate it.

That dynamic isn't true for its competitors. Any current driver for Uber can go "fuck this" get an off-the-shelf taxi company app and start working for themselves. Since Uber is paying minimum wage and still making a loss, there's a strong incentive to do this the second Uber raises prices in an area. At which point Uber has to go back to its incentives to regain its dominant position in the market. The result is they can't sustainably raise prices or lower costs without destroying the growth that justifies their tech-like valuation.

I think the writer understands business in general. His main point is that Uber may have innovated in small ways but they failed to innovate in a way that solves the major problems of making a profit in the transport business

Beyond that, if you're travelling you can do the same but in a place where previously you couldn't even speak the same language as your driver and you would almost certainly get scammed in what you paid.

Uber is a better product than what existed before, perhaps it's fair to say it didn't solve any big problem but rather lots of small problems.

It’s worth noting that this isn’t really a technical innovation. Taxicab pricing and metering is heavily regulated. Before, it often would’ve been illegal for a cab company to use a smart phone app (or anything other than the required meter) to calculate the fare. Also, there are regulations around how taxi cabs accept riders. In many places a taxi can can only accept a street jail.

Uber got many of these regulations loosened for cab companies, because they entered the markets and widely ignored them to start with. It’s more regulatory innovation than technical innovation

To me the biggest "innovation" of Uber is how they were able to strong-arm municipalities into allowing regular people to use their cars effectively as taxis without having to deal with any special regulation or taxes. Whether this is good or bad is up for debate.

The other aspect -- being able to hail a car from an app and know (within reasonable bounds) how much the ride will cost in advance -- is not much of an innovation technically, but considering that the cab companies could have something similar and failed to do so, the innovation is showing that the logistics of it can work

Uber/lyft's big innovation is shared rides.

For ex: "223 million of first billion Lyft rides were shared through Lyft Line"

http://www.businessofapps.com/data/lyft-statistics/

But when we look at the market as a whole, Via, a new company, took this trend and improved it(more people per ride).

So maybe UBER has no moat.

The major innovation is being able to book shared rides through a smartphone app.

Ambiguously legal gypsy bus services have been around for ages.

But shared, on-demand rides offer a much shorter trip time than a gypsy bus, by matching people going on the same route.

1. The article addresses this: "Although Uber may have been an early adopter of smart-phone-app-based cab hailing, this service has been easily replicated by other companies, including traditional cab operators, and Uber has no significant advantage here. More importantly, there is no evidence that any of it creates meaningful efficiency gains, or that similar technologies led to major competitive upheavals in any other industry."

2. You can use Apple Maps (or Yandex Maps or any competing app) to get an indication of the best route and its length today. So, I'd say the problem of "shortcuts" is solved by the smartphone, not only/primarily by Uber.

I think the question is whether the amount of innovation Uber has spurred was in line with how much money it has taken to get there. From the article:

"Uber not only lacks powerful competitive advantages, but it is actually less efficient than the competitors it has been driving out of business."

For reference, Intel, which arguably represented foundational innovation, raised $6.8 Million ($42M in 2019 dollars) in their IPO alone.

> pretty sure before Uber/Lyft I couldn't click a button and know how much my ride to a place would cost then, book it and pay for it.

I did that with my local traditional taxi co in 2008. Couldn’t pay in the app until a few years later though. Uber weren’t the first taxi company in my town with app booking+quotes. They probably weren’t even in the first 5.

Uber's app sucks at routing, so people frequently accuse drivers of malfeasance. https://www.npr.org/2014/09/18/349560787/drivers-passengers-...

Some drivers ARE taking longer routes; you don't pay for it, but Uber does. https://thepointsguy.com/news/why-your-uber-driver-is-purpos...

That has nothing to do with Uber/Lyft, and everything to do with mobile phones. I have an app called "mytaxi" on my phone that does all of that with taxis.

I also remember several of my friends telling me about their idea of exactly that app shortly after the iPhone was introduced, so it's not like everyone got that idea from Uber/Lyft.

The "innovation" Uber/Lyft added was undercutting taxis by replacing employees and a fleet of cars with "self employed" drivers bringing their own cars and subsidising the whole shebang with huge amounts of investor dollars. Oh, and flouting laws and regulations.

Then again, things like "vomit fraud" didn't exist before Uber.

Yes, but that's not an innovation worth billions of dollars, like real high tech innovation that takes billions of dollars to get off the ground (e.g. the semiconductor industry back in the days). Instead it's pretty much straightforward functionality that could be implemented by any small team of programmers.

> that's not an innovation worth billions of dollars

Small ideas at scale can easily be worth billions. Marginally-improved ball bearings, for instance. Or the idea of a supermarket.

Until they can sell their service profitably, whether it is truly “worth” billions is questionable.

That's the problem with today's economy. Investors are not using their dollars to support true innovation, but instead they try to grab markets.

I’ve felt that way about Twitter since the beginning. The core idea is like 1000 lines of RoR. Yet year after year, nothing displaces Twitter. Network effects are real and powerful.

Network effects are crucial to social networks like Twitter. But why should that apply to Uber? The network effect on Twitter etc. comes from the fact that each additional user increases value for existing users. But Uber is a two-sided market, and while each additional driver benefits existing riders they are also additional competition for existing drivers.

The article makes that point, too:

> [Uber etc.] also have none of the Facebook-type network effects (following what is known as “Metcalfe’s Law”), by which each new user makes the network more valuable to all other users, which makes it nearly impossible for smaller competitors to survive.

However, I think that's wrong. If I'm in a city with two "ride sharing" companies, but one has twice as many cars on the road, I'd expect to wait longer for a taxi from the company with fewer cars, right (or, if I check both, most of the time the one with more cars will show a shorter waiting time). Thus, as a customer I'd be inclined to choose the one with more cars.

But shouldn't most drivers be working for both companies?

I mean it was recently decided that uber drivers are contractors (not employees), so they should be free to do that.

Yep, but all else being equal you would also choose the one with fewer other customers. So in terms of the first-order effects, each additional user (as in, rider not driver) actually makes things worse for existing users! There's the secondary effect that each additional user encourages more drivers to sign up, but while this might compensate for the first-order effect it's not going to overcompensate.

For another perspective, you can look at things empirically. Has Uber used network effect to dominate the market and force out competitors? No; Lyft, traditional taxis, and foreign ride-sharing companies are still around. To the extent that Uber is winning, it's because it has a better product (for a definition of better that includes burning VC money to lower prices).

Contrast this with Facebook: the only major similar product in recent history is Google+, which died pretty quickly. All other successful social networks differentiate themselves in some way, because they have to.

Network effect for Uber is having the app installed. It is more comparable to a central market for a single, homogenous good.

Drivers don't really compete with each other. Maybe in some extreme future case, but its hard to imagine driver/rider ratio going out of control. So far more drivers just means lower ETAs which means more riders.

Twitter is a free product that has global network effects and they deliver a digital good which has near zero marginal costs.

Uber, on the other hand, delivers physical services to consumers that cost money and they do not have economies of scale or other innovations (e.g. self-driving vehicles) which would help them lower price.

> they do not have economies of scale or other innovations (e.g. self-driving vehicles)

Not yet. They're on it, having invested about $1B so far. https://www.bloomberg.com/news/articles/2019-04-11/uber-has-...

Not on Uber scale. You should watch some Uber presentations from developer conferences before writing comments like yours.

lots of "uber scale" is self-induced over-engineering. I'm pretty sure for any enterprise piece of software that exists there is a parallel uber solution that does the same thing.

Given that their basic product is a smartphone app that connects car drivers and customers the size of the entire operation is quite ridiculous.

You should keep in mind that innovation exists in the context of the cost that is associated with it. Building giant software systems alone isn't enough.

Scale is all about numbers. Solutions that work for small scale don't always translate to large scale. Plenty of information about Uber scale is publicly available on the blog and YouTube.

Uber's application can be almost perfectly sharded because the problem they are solving is mostly local. This simplifies the problem significantly.

Even with sharding the scale is significant. The QPS is massive because everything is real-time. Optimized matching and routing decisions based on many factors are instantly made on a large scale even locally.

What to do if data center in one region goes down? Should Uber not support users in that region because of sharding? Most probably that's not acceptable solution.

> Instead it's pretty much straightforward functionality that could be implemented by any small team of programmers.

This is some pretty extreme gatekeeping on innovation. You don’t have to invent brand new technology to innovate. Applying existing technology to solve a problem is innovative. Coming up with any new way of doing something is innovative, regardless of how small of an engineering team you need to implement it.

Uber definitely changed the user experience of calling a car service for the better. Everybody has an app now and lots have predefined pricing. It’s the stuff they did after that (the so-called “sharing economy”) that went off the rails.

I’m bearish on Uber and I read the entire article, but it’s full of a lot of bald assertions with no supporting evidence and the only real point it makes, and it makes repeatedly is that Uber is only “successful” because they offer below cost rides subsidized by investors who were pushing growth at all costs because they wanted to flip their shares to dumber money in the future.

I don’t feel like he needed that many words to say that.

I thought the Uber goal was also to drive the competition out of business via any means necessary and then raise price.

That is their ultimate goal. There's no indication that they'll be able acheive it. Their main "innovation" if you can call it that is removing regulations that were previous barriers to entry. If Uber removes all barriers to entry, somehow eliminates competition, how does it not come back once they raise prices past a point that makes it profitable to compete?

The other goal they have is to be the first to engineer autonomous cars and replace all their drivers, roughly halving their operating costs. As the article points out, that is several years away, and would require Uber to expend huge capital costs to acquire and operate said cars. They are currently a company that doesn't do anything close to that.

Honest question: how isn't this dumping? I thought that anti-dumping measures were a thing. Couldn't it be argued that nine years of losses mean fares are being sold below cost to push out competition, and therefore this is not ok? In particular in the context of Uber being a US-based company operating in lots of other countries (as in, being international trade, etc).

I always wondered that too. And Uber itself makes no bones about how its ultimate strategy is blatantly anti-competitive. It's weird; it seems to go to a degree well past Microsoft's bundling Internet Explorer a bit too tightly with Windows in 1998, for example, which I understood to be the basis of their getting sued by the Justice Department.

Edit: Ah, well, I guess sibling comments have answered the question, more or less. Thanks!

Dumping usually means selling below unit cost, which they're not doing. What they're doing is failing to cover their fixed costs in the same year they incur them. That's completely normal, especially for new businesses. Whether they ever will be profitable is a different question entirely.

>Dumping usually means selling below unit cost, which they're not doing.

only if you fall for their clever structural arrangement, the article addressed this. Regular tech startups lose money because of high fixed costs but recuperate through falling marginal cost once they scale.

Uber has no change in marginal cost because every additional driver costs exactly the same, and in fact they incur inefficiencies because every driver has to look after their own car, so there is no scale.

They absolutely do sell below unit costs, just with one level of indirection between drivers and company because at the end of the day they have to subsidize rides if they want to compete with other business.

Their long-term plan has been to replace human drivers with autonomous vehicles, which actually would reduce marginal costs. Whether that ever actually happens we don't know yet, but the fact that they've been pouring money into it with no returns as yet is a major source of their losses.

> They absolutely do sell below unit costs, just with one level of indirection between drivers and company because at the end of the day they have to subsidize rides if they want to compete with other business.

They don't pay the drivers more than the riders pay them. That's the unit cost. What the drivers do as independent actors is something else, but I doubt the drivers are losing money on purpose.

How many startups have that been true for? Let’s take YC funded startups, which ones have become profitable? Even Dropbox - the only YC company to IPO - is not profitable.

I am not sure what you're talking about, Uber has the same lawful prices as normal taxis in Prague. Uber also does not drive anybody, it's Czech guys with their own companies that use Uber, Bolt and other platforms or their own marketing to gain customers and (happily) pay a small fee (way smaller than what traditional taxi company charges) for that service. While Uber has created great competition on the market, the traditional services do anything they can to limit entry to the market and ideally limit the total number of taxi drivers to a very small number.

Is every VC backed company running at a loss “dumping”?

Usually you only get in trouble for dumping in the context of exported goods.

This is a really great article digging into the economics of Uber. The unsustainable economics of the industry were a lot more obvious to obvious in markets where Uber had well funded local competitors and ultimate failed like China. When Uber and Didi were competing everyone was using car service to get around. A 45 minute ride could cost 1 us dollar. You had people in jobs making 600 USD a month riding to work in 100k usd Teslas when previously they would take the bus or subway for 15 cents. Everyone was taking advantage of subsidies. When Uber left China, DiDi prices went up a lot of most people stopped using it exclusively and regularly. Taxis in many cities are both faster to hail and cost less money.

The issue I take with the article is that the authors appear to believe in some god-given right to car-based public transit. For example, people what work night shifts at low paying shouldn’t have to pay the surges prices a rich person trying to leave a club would pay. They also believe that adults shouldn’t be able to get themselves into money losing business deals (which is what sounds like is happening for both drivers and Uber equity holders). They also believe that people should not use money raised voluntarily in the market to subsidize services.

It is not clear to me that those beliefs are self evidently true.

As an example: Regulation that subsidies late night taxis for low wage night shift workers economically distorts just like uber drivers that are receiving food stamps. Why is the former okay but the later is not? Both are subsidies to employers who can have a job filled by paying a lower wage than the market would otherwise bear.

> They also believe that adults shouldn’t be able to get themselves into money losing business deal

When one person gets into a bad deal it is a bad decision. When tens or hundreds of thousands get into the same bad deal with the same company then it's systemic and creates a systemic risk.

> Regulation that subsidies late night taxis for low wage night shift workers economically distorts just like uber drivers that are receiving food stamps. Why is the former okay but the later is not?

It is not the same that the government subsidizes a night service to improve people's lives and the economy that a company like Uber bases its business model in not paying enough its employees and letting the taxpayers get the bill.

Uber is gaining a competitive advantage (over taxis and other forms of public transportation) at the cost of taxpayers. Late night taxis will probably cease to circulate if it were not for a subsidy. And then someone at the government thinks that to be able to take a taxi at night to go home is something desirable.

How is Uber gaining an advantage by taxpayer subsidies any different than any other venture backed company that is subsidizing money losing companies? Some of those VC funds are also coming from public pensions.

They are truly innovative in the sense that they finally exposed the fact that much of tech startup funding is just a ponzi scheme by pushing it all the way to the IPO with no plan to ever make money. That's a new thing, usually only microcap companies were able to pull off that scam in the past.

Get out between series A/B if you want maximum return, the only losers in these phony companies that never make money are the last round of investors who get left holding the bag.

And if you're an employee looking at stock options in a startup just say no. Stop surrendering real money for fictional money. Get a higher base salary instead. Employees with equity plans are always at the bottom of the list to get paid out.

SoftBank’s Fund was one of the last investors and poured billion in at a $48B valuation. So they won’t make a lot of money percentage wise but at worst they’ll make a small profit. Otherwise they could make over a billion or two profit from their investment. The other last investors got in at higher valuations. So if Uber drops more they’ll lose out. Though even they won’t lose a ton of money percentage wise.

I don’t know, Uber Share and it’s integration with Google Maps has been a money/time saver for me. Although I do agree about Uber’s valuation part. The whole private equity and exit on listing to stock exchanges is a charade. It must be broken and do away with. Or stock market listings are meaningless

Frankly I hate the modern way of doing business. "Operating 25% in the red is fine as long as we're growing 200% a year" and just keep doing that until your company implodes and your investors have moved on to something else.

I think there are two issues operating here. The first issue is that there is absolutely a genuine business case where as long as your COGS is close to 0 then you literally can grow into profitability. That very clearly applies to Slack and other internet companies where you build the application and you're basically incurring only fixed costs.

The second issue is that we have a number of companies that aren't that style of tech company that are wrongly valued like that. Companies like Uber, Tesla WeWork etc. All attempt to mask their traditional business with tech. I think we can make a pretty strong case that what we're seeing there is a bubble that will burst.

Do a image search for “cab company owner.” Hint, you won’t be get a bunch of pictures of guys in Ferraris.

I can't understand why the model of "build an outstanding App, then reduce engineer team to < 100" is not a thing. If they could do this, they'd be profitable. And I think they could do this, if their codebase wasn't a mess.

Heck, I bet 25 excellent googlers could make a run a service like this with 99% uptime (obviously there would need to be a large support staff still).

Jobs! They created millions of jobs over the years, that's something entirely missed here.

Except they arent employees, so not quite. Jobs have healthcare, and retirement prospects. Uber is just stealing equity from your car, so drivers are no better off excepting maybe those with title loan levels of desparation.

> Customers correctly perceived that Uber offered greater availability and reliability than traditional cab companies used to, but failed to recognize that all of these improvements required billions of dollars in unsustainable subsidies. If a new entrant in any other established industry suddenly offered much more service at much lower prices than incumbents ever had, the normal response would be to demand evidence about the productivity breakthroughs making this possible.

This paragraph is baffling to me. Why shouldn’t consumers want lower prices subsidized by billions of dollars of VC money? There are other industries with huge subsidies (American agriculture, for instance) where consumers are also happy to buy the artificially cheap products indefinitely, and the only people complaining are conservative/libertarian think tanks and public health groups.

Investors had reason to question Uber’s efficiency, but it’s tough to argue that they weren’t aware the prices were too low to be profitable, as it was their money subsidizing it!

Hypothetically speaking in a world where vehicles are autonomous (no human supervision)and/or electric would Uber be profitable?

Nobody has any idea since they don't know what an autonomous car will cost.

http://archive.is/NizFV

> Uber not only lacks powerful competitive advantages, but it is actually less efficient than the competitors it has been driving out of business.

Yeah, it ought to be less 'efficient', the Uber business model is far less exploitative than the taxi model.

This article is ... long.

I'm inclined to agree with some of these other comments in the thread, that the innovation of app-ifying taxi services is indeed extremely valuable. I suspect most of us that detract from the success of Uber are really more concerned, among other things, about the political means by which they gained their marketshare. The "ask for forgiveness not permission" philosophy and their willingness to ignore existing regulations is, I think, bad form - and the article rightly calls out that they did kind of hijack a techno-libertarian mindset to moralize what they were doing.

Still, is it easier for me to safely get home after a happy-hour with some friends? Sure. Am I able to more easily and reliably move about major cities - especially ones without major public transit infrastructure - absolutely. My gripe with Uber today is mostly that they appear to treat their employees like crap, if they consider them "employees" at all. I don't too much care how much they are worth, as I'm not an investor and don't plan to be one.

As an aside, this magazine has some ... interesting content. A sampling:

https://americanaffairsjournal.org/2019/05/the-new-shame-of-...

https://americanaffairsjournal.org/2019/05/chinas-city-clust...

https://americanaffairsjournal.org/2019/05/houellebecqs-unfi...

That the appification of taxis was innovative is irrelevant. The article very clearly makes the case that the appification is not a competitive advantage Uber actually has, because all their competitors now have apps as well.

Having an app that people prefer at the present cannot justify Ubers insane valuation. There is nothing Uber is doing with their app that their competitors can't.

Reply on news.ycombinator.com