An Alternative Look at Uber’s Potential Market Size
abovethecrowd.com
abovethecrowd.com
Today we can rely on Uber's mutual rating system. We used to do the same on eBay, but eventually a "business decision" was made and eBay switched to quasi-unilateral ratings (sellers cannot negatively rate buyers anymore).
Today when an Uber driver picks us up, it is likely that they are reasonably in touch with modern society, probably at least a little bit educated, etc. Craigslist used to be like that too. Now it's a spam bazaar full of non-owners selling by owner, hookers pretending to be girlfriends, and so on.
These sorts of changes are inevitable if Uber grows to the sort of revenues being discussed here. Trust hasn't scaled before, and Uber probably can't innovate that away.
Real life still has trust that scales, called the credit system.
The last 3 Uber rides I've had from my office in Brooklyn the driver didn't know how to get on the Manhattan Bridge. With yellow cabs or early-Uber drivers you never see them futzing with a GPS unit, but this is now a regular experience.
Uber recently lowered UberX prices in NYC to be lower than yellow cabs. Funnily enough, given the lack of experience of their drivers and the amount of time I waste circling, or having them type things into a GPS unit, it seems more like a price correction to me than a real price drop.
Scalability. It's hard.
I don't use Ebay, Craiglist or Uber so perhaps I just don't understand how these things work, but my first thought is simply to create tiers and let customers self-select?
Isn't that what UberX / Taxi / Black / SUV / Lux already are?
Just shift the balance of expectation/price for each tier or perhaps create a new one to handle growth without creating the mismatched bazaar of Craigslist.
In a world where $10 buys you 10k followers on Twitter (and it does), using a rating system to build trust does create a lot of questions.
Gurley is obviously a buyer of Uber while Damodaran is not. The lower TAM or penetration numbers could even be written off as conservatism, after all humans are generally more optimistic about future prospects.
Gurley makes a good point on the elasticity of Uber but frankly if I am in a suburb (as most of my close friends and family), you do not use Uber as much given you own a car you paid $30K+ for. In areas like NYC where Uber is used more, there could be higher demand but then you meet a limit- the number of cars on the road... too many causes congestion and people opt for mass transit. I do agree with the napkin sketch but I think there are multiple forces working against Uber away from large metropolitan areas (which is stated as a growth opportunity) including 1) car ownership; 2) infrequent trips -- you generally do a bunch of errands in one shot due to distance; 3) physical space-- how many ubers can there honestly be in a 20-40 mile radius in a lower volume area? Why not go to a nearby city, instead?
Uber is a great service and I use it a lot but I find it hard to see as a car alternative. It is an alternative to existing cabs and mass transit in most areas. It will be interesting to see how it grows and like previously stated, what kind of margins it's drivers are earning... at a certain point you can only drive so much in price drops till they leave for the alternative.
"Appendix" I even spoke to a yellow cab driver in NYC the other day and he stated that he is rounding up support from the commissioner for help on two things: 1) Green cabs (limited to where they can physically pick up but often times break rules) and 2) Uber.
To your point and the article's point, perhaps Uber can displace the older and smaller transportation infrastructures but you still face the issue of physical space. I can move more people per hour, per mile of track on a train than by car. Roads can only be built so wide and long in a given area -- NYC for example. I have been stuck in Uber plenty of times racking a $100+ charge cause of gridlock -- nothing can be done but add roads but we can't pave water. Other modes like trains can go above, on and below ground and coexist with other systems and you can run them more often and with more cars.
After thinking more about the point of auto ownership, I think the $9k/annum cost of having a car is pretty steep. My dad who is religious about logging mileage and tracking his car's health from engine to windshield wipers likely would agree too. Car makers can and are reducing the cost curve and price points of their offerings. Furthermore, I am sure they're focused on the on-going safety and integrity of their product given the Toyota and GM recalls. If this is $9k, that for sure will be coming down.
If it's truly that cumbersome to maintain a car, what about Uber's cars? Are drivers going to be spending large sums to maintain their vehicles (that likely see more wear and tear given they are cabs)? Who eats those costs... Uber? If not, do they need to pay higher wages or concede some ground to these livery companies to help maintain their fleet?
Just something for us to all noodle about-- nothing like good discussion
Why use uber if subway gets job done then? I presumably choose a line and route by my destination. Uber totally competes with rail as in subway, light rail, even shorter trips on commuter rail. Agree it does not compete with amtrak.
http://aswathdamodaran.blogspot.com/2013/09/valuation-of-wee...
OP's article nails it: precise financial analysis is meaningless if you base your projections on way-off assumptions.
One challenge I would make to this article's assumptions is that the world is like San Francisco. In many places there are already cheap private hire options available[0]. I'm not sure how to calculate for the existing cost and availability of such options. If it makes sense for the drivers they may become Uber drivers but there may be less decrease in car ownership and changes in customer behaviour.
[0] Minicabs, rickshaws etc.
(We also have rickshaws; mostly as a tourist novelty, though)
Doesn't mean they can't do well here too, but certainly a different proposition to one where they only competes against normal taxis.
Google brings self-driving cars to market. Instead of owning a car, a fleet of autonomous vehicles drive around and pick up any passenger who requests it. No drivers are necessary, the app is built into the Android OS, and all the logistics are handled by Google Maps.
Workable telepresence solutions are developed, relying on combinations of e-mail, web applications, GitHub, videoconference, and some yet-to-be-invented virtual presence system (holodecks? Oculus Rift?). Instead of requiring that you be in a physical office, all knowledge workers can telecommute from wherever they live, and their "office" exists only in virtual reality. Seeking cheaper real estate, larger houses, and yards, workers leave cities in droves. Socializing happens in virtual worlds, and all those trips that Ubers are currently necessary for never happen.
The taxi union lobbies hard and gets Uber and similar ride-sharing services declared illegal in all major cities.
And that's discounting the truly black-swan events like "World War 3 breaks out, and we're all wiped out by nuclear winter."
It really drives home how the market value of a company is set by the last person to buy a share of that company, no matter how crazy or irrational his beliefs are. I could momentarily drop the market cap of Google to $6.75M by selling a share at $0.01, but presumably the market would correct itself in a millisecond. In thinly-traded private stocks, this market correction mechanism is not always available, and so valuations can be way off the mark until all the assumptions built into those valuations have become public and been judged as likely or not likely by the market.
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http://old.ycombinator.com/munger.html
One of the advantages of a fellow like Buffett, whom I've worked with all these years, is that he automatically thinks in terms of decision trees and the elementary math of permutations and combinations....
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Here is a probability model vs DCF based model. Goldman uses a probability based model which can be used to evaluate changing shifts in technology such as Tesla's Autonomous technology
This article is refuting the market for the product; I don't think anyone believes the market for electric vehicles is significantly larger than the current automotive market.
Can this/should this be done in other markets? If someone built an equity crowdfunding platform that ignores SEC rules (and the JOBS act) but investors like it/use it, would it succeed? In the cases of Aereo and Silkroad, they didn't succeed in fighting the laws.
The rules and regulations exist ostensibly to "protect" consumers, but we see that when consumers don't agree with them, huge companies get created.
right?
However, regulations that still predominantly serve the public interest, such as those set out by the EPA, FDA and SEC (though not perfect) are much less open.
Is Uber disruptive? Probably in some places.
Why? Because some free market-liberal cooked up a way to cap the number of available taxis. Ubers skirts these restrictions by loudly proclaiming not to be taxis in various creative ways, thereby lowering their price structure.
How could this be done in other markets? Definitions matter. Could you raise funding by callling it something else? Very unlikely (it's hard to deny why people send you money). Could you sell useless medicine by calling it something else? Very likely (see "homeopathy", "natural medicine").
For Uber, I still haven't heard a decent articulation of the need for such rules as is seen in the taxi business.
I realize positions need to be based off something, but it always seems strange to me to see analysis like the one being challenged here for a young (albeit large) innovative tech company. Think of Google in 2003, Amazon in 99' or MSFT in 89'.
None of your medium-long term assumptions can stand on very solid ground. What the market is, it's size, it's structure and the company's potential role in it.
Assumption: "the primary market Uber is targeting is the global taxi and car-service market ($100 billion)" - is this correct in 5-10 years? Could Uber target other markets? Deliveries
Assumption: Uber are taking over market share. Can other forms of transport, public or private be replaced by Uber? Where do new technologies (like self riving cars) affect things?
My own speculations gravitate towards efficiencies from having all that data valuable at once.
The 5 seater is a general purpose vehicle for 1-5 people and used for highway driving and for short trips along congested streets. Could Uber's smart system offer regular Sedans for 25 mile highway journeys and golf cart like cars for 1 person inner city journeys?
Could hub and spoke systems exist where several cars take single passengers to a van/shuttle for longer (more expensive) journeys.
Everything is low probability big payoff. Even the the straightforward mission:'take over the existing taxi-limo' is still a high risk-reward proposition. Basically, I think this rebuttal is better than the original analysis. I think neither ow them can give you a number.
You mention Google, Amazon, and MSFT in the same breath, but one of those is not like the other. Google in 2003 and MSFT in 1989 were targeting markets that were small, but young and uncertain. However, Amazon's target market was mature and well established, but huge.
Assigning a big valuation to Google in 2003 or MSFT in 1989 would mean having the confidence that lots of people in the future would be doing something that they didn't do at the time. However, assigning a big valuation to Amazon in 1999 meant having the confidence that Amazon's technology would allow them to dominate an existing, large market. After all, people aren't buying more books and toilet paper in 2014 than they did in 1999: they're just doing more of it through online sources instead of brick & mortar ones.
The problem with Uber is that the most obvious target market, taxis & cabs, isn't big enough to justify its valuation even if they totally take over the market with better technology. They're targeting a mature market that's about $100 billion, versus Amazon, which is targeting a mature market that's in the trillions of dollars.
To make the case for a high valuation for Uber, you have to redefine the market. Either by saying that the real target is logistics more broadly ("Uber for X") or by saying that the real market is auto transportation generally. In the latter situation, Uber isn't going to create a higher demand for getting from point A to point B. Instead, they have to take market share away from personal automobiles. In a country with almost as many cars as people, and urban and suburban areas that are designed around personal autos, that's a really uphill battle. E.g. running errands in a suburb isn't like in a city where you just go into town, buy everything you need, and take a cab back home. It's a multi-hop tour through strip mall after strip mall. Personal autos are well-suited for that: Uber totally is not.
So once self-driving cars are up and running, nobody will drive their cars by themselves anymore, because self-driving cars are 5 times safer than humans driving them and for that reason, insurances will charge 5 times more if you want to drive your car yourself. Where do you order get these self-driving Google cars? You order them through Uber and then you have Uber attacking the $10T ground transportation market.(http://techcrunch.com/2013/08/25/uberauto/)
And what is your basis to conclude that if something works in San Francisco, it works elsewhere? Is the competition there so fierce that anything that succeeds that everywhere else can be considered an easy market?
Extraordninary claims should require extraordninary evidence. The given reasons are that customers feel safer, that expansion has been "rapid" even outside San Francisco (!), and that customers "feel safer". Also no cash.
Somehow I'm not convinced.
The only vaguely reasonable point is the GPS visibility of cabs. Which is great, but not really a billion dollar product. (What I thought to be Uber's great feature, upfront fixed fees, is not even mentioned.)
No, if you want to argue that Ubers valuation is somehow rooted in reality, you'd have to make a much more compelling argument. I expect it to be one where they take a big bite out of the larger logistics market, perhaps look to expand the delivered groceries market together with Amazon or something.
Uber doesn't need to make a dime in logistics in order to achieve $1 trillion in gross sales.
The article argues that this is true in the global taxi market as well. The reasons given are the ones I've tried to summarize.
I might have missed a few though. The article is very long and makes a lot of frivolous claims. Very few are substantiated enough to be questionable, but those that are, are. The only exception I could find is the one about the real time positioning.
Once drivers find out that you don't make the 90k salaries touted by Uber [1] (note: conveniently excluded cost of gas, insurance, tolls, parking, maintenance and repairs, and required more than 40 hour workweeks) driver supply may not match consumer demand. Slashing the prices wasn't exactly beneficial for current drivers either [2]
[1] https://medium.com/@felixsalmon/how-well-uberx-pays-part-2-c...
[2] http://uberdriverdiaries.com/uber-slahes-prices-new-york-cit...
That figure includes folks in rural areas where Uber is basically non-existent.
I don't think you're going to get $50k annually with Uber right now unless, at the very least, you're in a major metropolitan area.
That said, I still can't deny that $50k (if that number is realistic and already includes expenditures like gas) is a good amount for what amounts to borderline unskilled labor.
It has been said that London cab drivers even have an enlarged hippocampus due to the large spatial knowledge. I don't know how true this is, but I've heard the examination is a brutal one to pass.
And Uber works even better in the suburbs than in cities.
Edit: I commented before reading the whole article which totally nails it. Uber might be the first to $1 trillion in revenue.
And my friends in NYC or Chicago don't use Uber because they can just hail a cab. Five minutes is "high liquidity?" If it takes me five minutes to hail a cab here in downtown Philly, I'm having a bad day!
Did you read the post's suggestions that Uber (and ZipCar, RelayRides, etc) enable getting rid of secondary or even primary cars (in fact, it's already happening)?
Again, your post is highly myopic to the unusual situation of San Francisco. Its a place that's dense enough for people to mostly forgo cars but without sufficiently good transit to allow them to forgo a car entirely. In the vast majority of the country, you'd have to reduce Uber's costs by an order of magnitude to compete with personal autos. And you're not doing that without self-driving cars.
You could get there with self-driving cars, but I don't see Uber uniquely positioned to capture that market. The companies developing the technology, like Google, will make all the money in that space.
And you don't have to engage in the biggest time-waster of all time: driving.
Your example about forgoing a second car totally misses the mark. Families have multiple cars in the suburbs for one of three reasons: 1) householders need them to commute; 2) stay at home spouses need them for school drop-offs and errands; and 3) teenagers need them to go to school, friends' houses, and after school activities.
Uber is not a practical replacement for any of these core functions. The average commute in Metro Atlanta is 17.5 miles and 30 minutes, or $30 each way on Uber X. A stay at home spouse will generally make shorter trips, but more of them. Two trips per weekday to pick up/drop off kids at school, and potentially several more for errands and after-school activities. Moreover, most of these will be multi-hop: drop the kids at school then drive to the pharmacy to pick up a prescription, then drive to the Costco to get groceries, then drive to Giant to get stuff you don't need to buy in bulk, etc. Teenagers with cars will take several trips per day as well, to/from school and to after-school activities.
There's a reason that the U.S. has almost as many personal autos as people old enough to drive them. In most of the U.S. you can't even leave the house without driving, and unless you only leave the house once every other day to go to a place within 10 miles (which is nothing in terms of suburban distances), you'll spend vastly more on Uber than on a personal auto.
You're right, no one said it will replace a lot of commuting (although I know of a number of people who do commute via Uber). I know lots of families that have 3 cars and only 2 drivers with the third car serving for certain functions. I can easily see Uber nipping into that situation.
Not really.
You just seem to be taking half a dozen suggestions by a 'Series A investor and board member at Uber', some of which are anecdotal, 4 out of 6 of which hinge on the San Francisco or NYC and treating them as universally applicable facts while trying to boil a whole range of human preference down to simple math.
It's all pretty myopic, just as the parent suggests.
You might have a look at Uber's open job list. This service is going to (continue to) work in a huge number of locales. https://www.uber.com/jobs/list
As more and more young people are moving into the cities again, especially cities in the sunbelt that lack the public transit and availability of cabs of NY/Chicago, there's huge opportunity for uber. When you consider all the people now moving back into downtowns and wanting to live the urban walkable lifestyle, but in cities with subpar transit, the opportunity is massive.
I think you're just plain overestimating the demographic trends actually in play. Yes, there is some growth in urban areas, but we're talking very marginal ones here: http://www.city-journal.org/2011/eon0406jkwc.html. There's no demographic trend of a major shift to the cities that will create a "massive" opportunity for a company like Uber.
That's plausible, but is there any good data on what Uber drivers make, or how much margin these price cuts leave Uber with?