Yves here. We were glad to see Hubert Horan’s series on Uber get so much reader commentary, including from some Uber drivers. Hubert provides his response to questions and observations below.
By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants
Today’s post is my opportunity to thank the Naked Capitalism readers who not only took the time to wade through four detailed posts about the economics of Uber, but took the extra effort to offer thoughtful questions and comments.
Best comment of them all:
<Charles Myers>—Thank You, I sent money
Yves and Lambert have created a space where these types of financial/political issues can be explored and debated. It doesn’t exist without their tireless effort, but it also doesn’t exist without money. I’ve been a financial supporter for years, and one of the reasons for contributing these articles was that it was a way to thank them for everything they’ve done over the years. I hope everyone who appreciates what Yves and Lambert have created will respond as Charles did.
Nonsensical but frequently repeated claims about the “sharing economy”
<Rusti> Most cars are parked something like 98% of the time, representing a huge lost opportunity cost.
<Matt> suggesting demand for car use is also not there for 98% of the time
It would take a book to document all of reasons why “sharing economy” claims were always ludicrous. The most important is whatever limited opportunity might exist for utilizing idle consumer goods, it is not something that could ever be scaled into a global business serving mass market demand. In order to efficient serve mass market demand, real world transportation companies require vehicles that can be intensively utilized 7 days a week. The car in your driveway cannot do that. It might be able to handle a couple taxi rides on Saturday night, but Uber (or any other taxi operator) needs a huge fleet of dedicated vehicles and drivers to serve the other 98% of demand.
Airbnb always had slightly greater opportunity to use truly spare private capacity, because there always was a portion of housing stock in big cities that sat empty for significant periods. But if Airbnb limited itself to this spare capacity, its growth would have ended years ago. To justify big corporate valuations, it had to expand into selling apartments and houses that were totally dedicated to hotel-like occupancy, while trying to maintain the fiction that its entire multi-billion dollar business was based on isolated individuals subletting their apartment when they were out of town. Total nonsense but the gap between Uber’s “it’s just folks making a few bucks driving their otherwise idle car a few hours a week when they happen to feel like it” and reality is even greater.
The amazing thing isn’t that average people don’t immediately see through the “Uber is powerfully efficient because their cars have zero marginal cost, just like when neighbors share gardening tools” BS, but that major mainstream media continually push these false claims in the face of overwhelming contrary evidence.
To cite just one example, Om Malik, the main technology writer for the New York Times is either totally economically illiterate, or simply sees his job as lending credibility to false Uber claims. In 2014, he was aggressively pushing the “Uber will soon be cheaper than private car ownership” despite totally ignorance of Uber’s actual costs, or its costs relative to private car ownership” and predicted there would soon be many other companies exploiting the power of the “sharing economy” to create wonderful new consumer benefits in food delivery and other businesses.
By 2016, there was zero evidence that Uber had, or would at any point in the future become a credible alternative to car ownership, and absolutely none of the startups that had hoped to become the “Uber of” other industries had actually created a viable business. Did he suddenly realize that maybe Uber’s actually costs were much higher than he’d realized? Did he acknowledge that maybe the “sharing economy” was just a PR concoction? No, he doubled down, attacking the failed startups for failing to meet the standard of “Uber, the hypersuccessful granddaddy of on-demand apps” without explaining how a company losing $2 billion a year qualified as “hypersuccessful”.
How many Uber drivers just drive a few hours a week?
I especially appreciate the input from folks with actual taxi driving experience including Ono, Lynn, Synoia, Tim, Watt4Bob any anyone else whose names I missed here.
Throughout my career I have been on the corporate/consulting strategic planning side of things, but I learned long ago that strategic analysis that was inconsistent with the realities faced by front line staff was pretty worthless.
<Lynn> On special event weekends in my town, when Uber is in surge pricing, it’s worth some of my spare time to drive. During non-surge time frames, not so much…
This suggests, I think accurately, that any taxi capacity owned by private individuals can’t operate profitably at traditional taxi fares; they either need higher (surged) fares, or the reduced costs that centralized fleet ownership and driver control could achieve. The question is how much of Uber’s capacity in a typical big city is actually provided by people who just drive a few hours a week.
<Tim> Uber can do something taxi/car companies can’t do which is give drivers the ability to work part-time at driver chosen hours. I drove a cab for a while and enjoyed it but you had no option to lease your cab for less than an 8-12 hour shift. Given this and that the number of cabs was fixed, the “market” had no ability to adjust supply or pricing to meet peak demand periods – usually rush hours or during conventions etc. The incremental/variable cost for a driver to use their own car is less than a fleet owner’s cost.
<Reslez>No. As TFA stated several times, the cost to an individual is higher than for a traditional taxi company which has the advantage of a standardized vehicle fleet.
This is key to understanding the “sharing economy” issues. If you drive your personal car for Uber just a couple hours a week, Tim is correct and the true cost per hour is less than the cost of a fleet owner’s vehicle for those same couple hours. But if you look at the total vehicle hours Uber needs to operate to serve total market demand, only a tiny fraction could be operated by truly spare private vehicles; the overwhelming majority require intensively utilized vehicles and drivers. If you operate your private car in Uber service a large number of hours a week, then Reslez is correct, your cost per hour is much higher than what a minimally competent fleet owner could achieve. Isolated individuals can’t possibly achieve vehicle ownership, financing and maintenance costs as low as Yellow Cab.
Do Uber drivers understand the economics of working for Uber?
<Oho>Anecdotally, it definitely does sound like for many Uber drivers: gross revenue minus Uber’s commissions = net income. ….i’ve long given up shaking my head and trying to show the math.
<Watt4Bob> One of the things Uber relies on is drivers not understanding their own economics.
Thanks to Oho and Watt4Bob for taking the trouble to lay out some of the cost details drivers face. Oho’s explanation was based on a Honda Accord which is a good starting point for the economics a Uber driver is facing. My table of the traditional taxi cost structure in part two of the series was based on a Toyota Prius, which is typical of what a large fleet operator would ideally acquire.
<Kevin>I remember what it was like in 2011 or 2012, when everyone was still saying “we don’t even know what it is yet. Is it a taxi? It’s in a grey area. Are they 1099 or W2?…. I think a lot of entrepreneurship revolves around exploiting early days, unknown zones, and this is part of what they mean by “freedom”. The freedom to tell stories that aren’t bothered by facts, because the facts take time.
<oho> ‘What is the driver buying?’ –the equivalent of a payday loan—-as if one is an Uber-Lyft driver w/the wrong cost structure, she’ll quickly go ‘upside-down’ on her car loan, especially given the post-2010 trend of 60 to 84-month car loans
<Oho>As the NakedCap uber driver emeritus, my hunch is that Uber’s cash hemorrhaging is driven by the ginormous driver subsidies that Uber spends to attract/retrain drivers. —as the base rate that passengers pay is 100% unsustainable given the cost structure of the majority of drivers, so Uber throws out supplemental cash as a bribe, er incentive. Strategy being that Uber hangs in long enough to drive out its main competitors in US/globally.
As everyone understands the Uber business model extends the “independent contractor” model that traditional cabs have used for decades so that Uber drivers have to purchase, finance and maintain the vehicles they carry Uber passengers in.
Anyone with classic economics/MBA training would assume that while there might be some confusion and uncertainty at first, Uber drivers would quickly figure out that it would make no sense to work for Uber unless their gross take home pay (fares minus direct daily costs like gas minus Uber’s 30% cut) would need to much higher than take home pay with a traditional taxi company in order to cover all the vehicle ownership, financing and maintenance costs. It would actually need to be higher than that, in order to cover the risk that Uber could terminate them at will, leaving them stuck with all the vehicle costs. Again, people trained to think that markets work perfectly might understand that drivers might underestimate these costs at first, but word would quickly get out that you need a significant premium at Uber just to reach a breakeven versus driving elsewhere.
My articles argue that the assumption of an efficient driver labor market based on good quality information about pay is wrong because there was a fundamental “information asymmetry” between a multi-billion dollar company and hundreds of thousands of isolated drivers, and Uber worked aggressively to exploit this imbalance by providing blatantly false information (drivers making $90,000) and deliberately misleading information (implying higher gross earnings directly translated into higher real take home pay).
What hasn’t been clear to me is whether good information would finally cut through the initial barrage of deliberate misinformation, and the inherent difficulty of dealing with issues like depreciation costs, and how depreciation and maintenance costs increase if you drive your personal car 65 hours a week instead of 10. Oho’s comments strongly suggest the problem is even worse than I’d imagined.
To simplify just a bit, the Uber strategy was to (1) jumpstart rapid growth with driver pay premiums that would get lots of drivers to switch from traditional operators; these premiums were real but not as large as they seemed because drivers hadn’t figured out how to properly deduct vehicle costs to determine true take home pay, and by willful falsehoods (our drivers make $90,000) (2) gradually cut back driver pay once Uber was clearly a large established play by eliminating incentive programs and increasing the percentage of fares Uber retained; but drivers can’t do anything about pay cuts because they’ve locked themselves into car payments (3) At some point—and according to the study quoted in the second article in the series, it may have already happened—true Uber take home pay (after vehicle costs) is no better or slightly worse than what Yellow Cab paid before (4) Uber achieves industry dominance, drivers have no alternatives, and take home pay falls to (or even below) minimum wage level.
Do taxi drivers focus on peak demand in order to maximize earnings?
<Temporarily Sane> I was taking a cab last week on a rainy and windy weeknight and the cabbie remarked that he was going to end his shift early because the fares were far and in between. So it appears that cab drivers are not universally forced to drive for a full shift regardless of demand.
Speaking about the questions of whether academics understand real world taxi driving, there is a curious subliterature in the economic journals as to whether taxi drivers actually fit the neoclassic model whereby market participants rigorously focus on revenue/profit maximization. If they did, there would be clear evidence of drivers busting their butt on busy/rainy days and avoiding slow periods. Studies clearly demonstrated that this wasn’t true, and it was very common to see “daily income targeting” where drivers had a good idea of the gross earnings they’d need to cover the lease costs of the cab, gas, and justify the work they’d put in. On peak demand days, many drivers wouldn’t work the maximum 12 hours, but would quit early because they’d hit their daily target.
These articles got very angry rebuttals from doctrinaire free-market types who didn’t want their beloved “markets work perfectly in every and all situations” assumptions challenged but the rebuttals I’ve read were pretty weak. In simple terms, all the neoclassical models of the labor market assumed every hour of “labor” was exactly the same as every other hour of labor, thus higher peak demand should induce more labor. In reality, an hour of low paying, exhausting labor is different, and workers make the rational choice to blow off a few more dollars when it involves a lot more exhaustion, but the neoclassical models couldn’t deal with variables like exhaustion or nasty working conditions.
Here are some references in case anyone is interested. Camerer is the key author, Richard Thaler later became known as a leader in trying to incorporate behavioral issues into mainstream economics (and had a cameo in the movie version of The Big Short)
Camerer, C. (1997). Taxi Drivers And Beauty Contests. Engineering and science, 60(1), 10-19, Camerer, C., Babcock, L., Loewenstein, G., & Thaler, R. (1997). Labor supply of New York City cabdrivers: One day at a time. The Quarterly Journal of Economics, 407-441, Crawford, V. P., & Meng, J. (2011). New York City Cab Drivers’ Labor Supply Revisited: Reference-Dependent Preferences With Rational Expectations Targets For Hours And Income. The American Economic Review, 101(5), 1912-1932
Does surge pricing increase taxi supply?
<John Thacker>“Given the short notice this does nothing to increase total taxi supply” This seems contradictory. You repeatedly argue that the times that demand increases and that Uber is likely to engage in surge pricing are extremely well-known and cannot be changed by people needing transit. Fair enough, but if it’s that predictable, then surely drivers can change their behavior over the long run and thus increase supply. Do you really think that it’s impossible that drivers could say, “Hey, this time is a time that is likely to have surge pricing, so I’m going to be ready to drive?” The inelastic nature of the demand that you postulate helps nullify the short notice problem. And surely one effect of the “using your own car” aspect of Uber (and Uber taking a percentage for trips instead of a fixed daily cost common in regular taxi services) is that drivers are at least *somewhat* able to alter their behavior on shorter notice than in the taxi industry. In the non-owner operator taxi model (which is common in many cities) it is impossible for drivers to work anything less than a full day, due to the fixed costs paid to the cab company to use the vehicle for the day. This may be not enough, but you seem to be overselling your point claiming that it doesn’t increase supply at all.
As the question suggests, drivers know there will be more revenue out there on Saturday night than there will be on Monday afternoon, but they didn’t need surge pricing software to tell them that. The studies I’ve seen suggest Uber actually isn’t all that predictable about surge pricing as the duration of the surge and the small geographic zones that get surged aren’t plannable by drivers. Surge pricing responds to sudden demand spikes in the last few minutes. If demand suddenly spikes west of Central Park, but not east of Central Park, drivers on the east side can react to the surge and head west. But it isn’t going to get drivers who live on Long Island or New Jersey who weren’t already on the road to suddenly head into the city. So surges can shift existing capacity around a bit, but total capacity doesn’t increase.
In the third article I tried to make a major distinction between Uber surge pricing and airline revenue management. The latter plans both capacity and fares months in advance based on lots of historical data about demand on a given day at a given hour, and it is based on data for the entire market, not just the airline doing the planning. Customers then use the schedule and pricing information that all the airlines publish well in advance and sort themselves out. Both capacity and demand gets allocated efficiently but only because everyone made plans well in advance and had perfect information about all the options. Uber drivers have no idea what prices they can charge on Wednesday or Thursday, aside from their gut feel as to whether prices might surge or not. Uber passengers who head to dinner at 6pm have no idea what Uber will charge them to get home.
You’ve explained that Uber is fundamentally unprofitable. Maybe they’ve driven a lot of traditional operators out of business. But won’t surviving competitors and new entrants eventually kill them?
<Vlade> There’s little cost of switching for users and potentially drivers. The moat Uber is trying to create is that it drives prices down so much that it kills all competition – but that is not a viable long term strategy – because it present it with two choices only – keep losing money (not viable long term – yes, I know Amazon is technically losing money, but it has IIRC positive cashflow, and the loss is mostly due to investments – it could turn itself profitable anytime it wanted w/o impact on end customers), or raise prices (which would invite competition back).
<Oho> network effect. If I launch Humanity Rides LLC tomorrow, any rider using my puny network of drivers is going to likely wait 10-20 minutes for a ride. …Versus the 1 to 8 minutes for Uber. People are a lot more impatient than you think.
<Tim>I am wondering if Uber’s anti-labor knife will ultimately cut both ways. Both customers and drivers can and will easily switch to and among alternatives as they arise.
<Lynn>Uber will have issues retaining drivers, hence the interest in going to driverless passenger pods.
<Damian> – this business whether Lyft or Uber et al – is merely a dispatcher gone digital –the attempt to take rentier profits by Uber will fail. This model will revert to essentially a Cooperative (“COOP”) of Medallion Owners with the economy of scale associated with: insurance / maintenance / acquisition of vehicles / use of vehicles 24 / 7 by multiple drivers and the Dispatcher APP used for $1.50 per ride.
<voteforno6>What I’ve been trying to figure out is, what is the endgame? If Uber does somehow manage to gain market dominance, then presumably they’ll raise fares in order to achieve profitability. Wouldn’t that just encourage smaller operators to jump into the market? I suppose that Uber could then push for regulatory barriers to entry for these smaller operators, but that would certainly fly in the face of how they’ve been running their business up to this point.
<Samuel Connor>I speculate that after the traditional fleet operators are driven out, it may be hard to resurrect successors when fares “normalize” since the up-front investment to re-constitute the local taxi fleets may be prohibitive
Taxi markets fall into three main segments that have totally different competitive dynamics.
“Streethail” dominates in Manhattan, similarly dense European/Asian cities, and in the central business/entertainment core of a few other large US cities.
“Taxiranks” are what you see at airports, train stations, convention centers, and other places where you have very large, very concentrated pockets of demand.
In the US, the overwhelmingly dominant model is “Dispatch” where demand and trip patterns are of very low density, so cabs are ordered by phone (or now, by smartphone app) and cabs assigned by a dispatcher (or dispatching software). Individual owner/operators can easily serve airports or the taxiranks at big hotels, but will have little ability to get any business from widely dispersed houses and businesses that occasionally need cabs.
Thus in the vast majority of cities, the taxi industry was organized around a bunch of dispatch companies. The predatory competition funded by Uber’s investors has devastated these dispatch companies.
The commenters above were implicitly asking that if Uber abused its dominant market position, couldn’t new taxi companies sprout back up overnight and reclaim a big chunk of the market.
There’s no problem with new entry at airports and other dense locations, and it is unlikely that Uber would ever completely eliminate competition in these segments. But it is next to impossible for drivers who are limited to these markets to actually make a living—without a broader base of revenue you can’t cover the cost of a full day’s driving and fares will be held down by drivers just trying to earn a few extra bucks. The question is whether new dispatch competition could ever emerge. In a competitive market where Uber isn’t a dominant player, the Uber app has little or no impact on Uber’s ability to operate profitably. But as many people understand, the value of the app seriously kicks in after Uber becomes dominant. Once everyone who uses (or drives) cabs regularly has to have the Uber app on their phone it becomes much much harder for newer, smaller companies to get to the scale where they can provide a strong competitive challenge. As Izabella Kaminska of the Financial Times put it, with dominance the app would provide the basis for controlling “a rent-extraction business of the highest middle-man order.” And of course, Uber’s billionaire owners could just cut prices until the new competitors failed.
Is Uber really a software company? Is it actually any good at software?
<voteforno6>I think that Uber has a better chance at becoming profitable if it focused on developing and licensing its software for real taxi companies.
<jon s>As a software engineer by trade, Uber’s software is not that difficult to replicate.
<dave> What’s to stop clever coders from creating their own Ubers,
<Temporarily Sane>Uber is about as “digital” as Domino’s Pizza, after all they have an app too, right?
<Kevskos> Seems that Uber has a few things going for it. An app that many people have installed, a name they can remember and they can use it everywhere they go. Seems like all they have is a dispatch service. Seems like the profitably way to run the business would be to charge taxi companies a very small fee (somewhat lower than dispatch and cc fees) and operate as a dispatch company instead recreating existing infrastructure.
A few years ago “we are a software company not a transportation company” was a major Uber PR theme, supporting the larger theme that regulations that applied to every other company that took money in exchange for rides in cars. How could local regulators who dealt with Yellow Cab ever figure out how to regulate a software company. Kalanick insisted they were just a passive intermediary ““Are we American Airlines or are we Expedia? It became clear, we are Expedia.” This was palpable nonsense when uttered back in 2013; with hindsight it is clear Uber hasn’t developed any software other than what was necessary to run its transportation operations.
The software behind Uber’s app appears fine, and people like the app, but as correctly noted, Domino’s Pizza has a nice app too, and it didn’t allow Dominos to drive all its competitors out of business and create $69 billion in corporate value. Yes, Uber could have just decided to be an “app” company, and could have sold software to taxi operators all over the world. But that wouldn’t have created a $1 billion business, much less a $69 billion one. In my airline career I’ve run pricing departments and helped design revenue management systems. The systems behind Uber’s ordering app are incredibly simple compared to what airlines and hotels have been using for decades.
<Silas Barta>They take people from point A to B in cars, but not “like traditional car operators always have”. Name me a service operating before 2010 that had smartphone integration, reliable, tip-free service, actual responsiveness to complaints, and which was willing to drive you to far-out places, and which had mutual rating to weed out bad drivers/passengers.
<Art Eclectic> I disagree with the premise that Uber has no meaningful competitive advantage. What Uber has is a ubiquitous app that works in whatever city the service operates in. Until I can say, “Okay, Google. Call me a cab. This location to destination SFO” Uber has an advantage.
As mentioned the app is nice and people seem to like it. But does it make Uber profitable? Does it create a huge efficiency or pricing advantage that competitors couldn’t readily match? The smartphone integration is certainly useful, but did this create a 2% improvement over traditional telephone dispatching, or 25% better efficiency? I’m not sure but I’m guessing that it is closer to 2%.
How much has Uber spent on software, and more importantly how much did it cost to scale all the behind the scenes scheduling and pricing software so they could function in every city in the world? The jury is still out, but I’m guessing the costs to date have been much higher than the cost savings and competitive benefits they’ve generated.
And remember the service improvements many attribute to the app were really due to other hugely subsidized service advantages. The Uber app produced cars sooner, and at lower cost than Yellow Cab could offer because of those subsidies. If smartphone requests for Uber cars led to the same long, unreliable wait times as Yellow Cab, no one would be talking about how wonderful the app was. Nobody would be talking how wonderful it was that you could use the app in different cities.
What about carpooling as a future growth opportunity?
<Alex> What do you think about uber pool service (when you share a car with fellow passengers going approximately in the same direction)? It seems to be beneficial, as less energy is super and pollution generated per passenger. Do you think it could be replicated by traditional companies and could it be a source of competitive advantage for Uber?
Urban transport people have been touting multi-rider options (carpools, jitneys, paratransit, dial-a-ride) for approximately forever. The occasional places you see actual operations require much larger subsidies than regular transit services. No one has the slightest clue how to create a commercial service here, outside of very isolated cases like SuperShuttle.
Problems include (1) people don’t like sharing vehicles (2) people really don’t like it when their trip takes twice a long because of the other people; because of (1) and (2) nobody with access to a car ever uses the service (3) the normal time wasted in single-trip taxi service (taxi takes 20 minutes to arrive instead of the promised 10, passenger isn’t ready when they said they would be) gets hugely magnified here (4) software can’t solve very much of the trip inefficiency problems because it doesn’t have accurate info in advance, and the demand density isn’t big enough to create a lot of opportunities for more efficient trips. (5) in a big dense city, where there’d be enough people going in the same general direction at any given time the efficient solution has already been found. It is called “public transportation”
When traditional taxi regulations were established in big cities in the 1920s and 30s, multi-destination options were banned because the (then privately owned) transit operators didn’t competitors weakening low density routes. When libertarian/anti-public transit advocacy groups fought for taxi deregulation in the 90s, they prominently pointed to these vestigial protections and claimed that regulation had stifled industry “innovation” for example these jitney/paratransit services. These rules were eliminated everywhere; absolutely no innovative services emerged.
Is Uber like Theranos?
<Ibrahim> Do we have another Theranos on our hand?
The similarity is that the much of business media completely swallowed a company narrative about heroic, cutting-edge innovation that would bring huge benefits to consumers, and didn’t bother to look at basic economics to figure out where the huge benefits were coming from. But aside from that, hugely different. Theranos was promising its customers specific product features that it couldn’t deliver; they could blow smoke for a while, but eventually people would figure out the product didn’t work.
Uber hasn’t promised customers anything but a ride from point A to point B, and it has delivered on that, and given the subsidies that have increased cab availability and held down fares, customers are happy. People may discover that the low prices and cleaner cabs and shorter waits aren’t sustainable, and people may discover that a dominant Uber makes their cable TV and phone providers seem like efficient lovable companies, but that’s a totally different set of issues than Theranos raised.
Did Uber make an ill-fated wrong turn a few years ago?
<Ben Mandell> instead of pursuing a business model that actually would make money, they made an unfortunate decision to put everyone in the taxi profession out of business. In the beginning, Uber was a superior product (in many locations) to a traditional taxi service. Instead of capitalizing on that superior product offering and charging what is actually needed to provide that product and make a profit,
<Art Eclectic>If Uber stayed with their original model and hadn’t gone after global domination, the picture would different. If they stayed with major metropolitan markets and focused on solving a real problem where there was unmet market demand for better transportation options, we might be having a different conversation.
<cnchal>. . .They take people from point A to B in cars, but not “like traditional car operators always have”.
Traditionally, they were called taxis, and the taxi operators were called “cabbies” and in the old days, when a cabbie gave a customer a rough ride, a call to the dispatcher by the customer would land the cabbie at the bottom of the call order list, waiting a loooong time for the next fare, and gasping for money to pay the daily rate. Cab companies even had their own communications infrastructure in the form of 100 foot tall aerials and radios in every car, so not even cell phones, never mind smart phones, but so what? That got the jawb done, which was pick up your fare and take them to where they want to go, the further the better.
Go ahead and believe the whole Uber turd is worth 15 Nimitz class aircraft carriers, after they only invested in three and then sunk a few to gain “market share”. The Fed works in mysterious ways, and before you know it, the finance flim flam artists will have sold it to you.
Have Uber’s investors been fully aligned with what management has been doing?
<Matthew> So the thesis of this series is that Uber’s business model is to: * Raise lots of money through “the bezzle”.* Use this funding to drive out the competition through predatory pricing. * Extract monopoly rents once this is done. I am inclined to agree to agree.
I’ve argued with Lambert about this, and it is really a semantic question. “Bezzle” implies either a Theranos-type situation where the product itself is fundamentally fraudulent, or a situation where the early round investors have been totally snookered by an investment proposal that fundamentally misrepresented where investor returns would come from. This is certainly debatable, but I believe that Uber’s investors and senior managers have had very strongly aligned views of what the long term business objectives were, and where ROI would come from. The long term objective was to create a quasi-monopoly company and to undermine all traditional legal/regulatory obstacles to exploiting anti-competitive market power. Undoubtedly lots of different perceptions among investors about which elements of the business model would be most powerful, and clearly frustration among investors about Kalanick’s slow path towards an IPO, but from any strategic perspective Uber’s managers and investors have been very much on the same page.1 But aside from this semantic quibble about the “bezzle”, I think Matthew summary was spot on.
<Tim> Exactly! It’s devil take the hindmost like most unicorn companies today. The early/smart guys have gotten out or will before the rest of the world figures it out.
<Teddy> is actually just a ruse to con wealthy investors out of their money and only a select group of insiders is expected to make a profit?
<Tongorad>I’m guessing Uber has already delivered, in spades, to a relatively small number of pirates at the top.
<Larry> I agree that for deep pocketed investors, an IPO is a must. Multiply the value of their private shares on the public market thanks to multiple hype machines (Wall Street banks, fawning media, etc) and then dump the shares for fantastic gains.
Given past unicorns, the concerns here are certainly understandable. One of the themes of this series is that Uber has been completely different from previous tech startups. The important differences involve strategy, politics and the sources of investor returns. But the difference in the timing of investor returns are also important to understand, and I think Kalanick deserves credit here, even if the differences aren’t creating any broad economic benefits.
As these comments suggest, many previous startups have been structured to create a fairly quick opportunity for monetizing the corporate value created. Put in money, start a business with a bit of buzz, quickly go public before the difficult bits of building a business hit home, then the company shrinks/collapses/sells out at a discount. Uber has been playing a much longer game. Uber hasn’t gone public, isn’t going to anytime soon, and makes it very difficult for investors to sell stock privately. The monetization target isn’t peak media coverage (2014 for Uber) but when full industry dominance has been secured. None of Uber’s early investors have cashed out with big profits, which has been very frustrating for several of them. But waiting for dominance could produce much bigger returns than any previous unicorn saw.
<LT> You have to go a step further and realize that there are investors that are not investing in the success of Uber, but they are investing in Uber as a vehicle to get rid of certain laws and regulations. The wool was never pulled over their eyes about “profitability”. It’s an investment based on ideology and they would deny that every step of the way.
This series has focused on the economics of Uber in the marketplace. If you wanted to better understand Uber’s origins and many of the tactics it has used, and why it has always been focused on monopoly, and the extreme nature of the “deregulation” it has been pursuing, the political/ideological worldview of its founders and investors becomes very relevant. Also relevant to my point earlier that investors and management have always been strongly aligned about Uber’s basic strategies and objectives. But I’ve seen no evidence that any investors put money into Uber just to pursue political ends. I think “possibility of big financial returns” was the primary motive in every case. But I’m sure the worldview compatibility made it easier to conclude that this management team might actually produce those big financial returns.
If Uber has all these problems couldn’t we short it and make a lot of money?
<Lyman>This reminds me of the story during the runup to the financial crisis where potential investors met with the execs of some company issuing CDOs and asked how they were going to make money. The execs couldn’t offer an explanation in plain English at which point the investors realized the execs had no idea what they were doing and went short instead.
<Just an Observer>Yeah. Trouble is that Uber (& other pointy headed startups) are trying to act like quasi-public companies – selling shares in private placements – while rigidly avoiding publishing any real financial info. To short it you’d have to find one of the private investors willing to lend you their shares *and* find and even more idiotic investor to buy the borrowed shares from you. Not gonna happen so one of the ways Mr. Market can start shouting that Emperor Kalanick is naked is not available … which is, of course, another reason Uber’s IPO will happen sometime after the heat death of the Universe
Excellent question, and there’s a very good article that answers it in detail.
LeVine, Steve, Investors have placed a one-way bet on Uber—which made us want to find a way to short it, Quartz, 5 Aug 2016.
LeVine is dubious about Uber—he doesn’t argue as I do that the entire business model is based on hopelessly uncompetitive economics, but he’s sees that the kind of positive evidence that past successful unicorns could easily produce is missing, and he recognizes that even if Uber has come up with important insights, that doesn’t mean that they will be the ones to successfully exploit them commercially.
I’ve argued that Kalanick’s refusal to pursue an IPO—over the objections of powerful investors who would like to take some of their paper profits—is fully rational because Kalanick understands that the data that would accompany an IPO would burst Uber’s carefully developed PR narratives. Some of the threat would come from the media, who would be looking for headline grabbing news out of the spreadsheets. But as these comments suggest, the bigger threat would be from shorts, who could destroy the illusion that Uber had created $68 bn in corporate value a lot more effectively than any journalist. For a company that portrays itself as a paradigm of objectivist competitive virtues, Uber is terrified of the possibility of actual scrutiny from the capital markets.
Again, the game plan here is to hold out until Uber has a strong enough market dominance, so that many of the risks shorts would be focusing on go away, and the IPO price is inflated by all the monopoly power it can readily exploit.
1 I hate to differ with Hubert, but a venture capitalist specializing in auto-related technology took issue with the idea that any unity of vision among Uber’s investors was necessarily all that well informed. Via e-mail:
We have experienced this in our own research where we have the sense that something is amiss but because of lack of complete information we are a bit off with the facts. First, it is we’ll known that many Silicon Vallyers are libertarians, therefore they a service like Uber would be appealing philosophically, and of course they would advocate for less regulation. Second, VCs are like lemmings, they follow the lead of other VCs whom they perceive to be sophisticated, and often nobody performance any due diligence, I have seen this first hand. They all kinda assume that someone has looked at the deal carefully. Third, smart entrepreneurs always create a sense of urgency when raising money, so with oversubscribed deals VCs have very little time for perform due diligence, some times they only have days to decide, so again diligence is spotty. Forth, VCs know that hot deals are good PR when raising money. Limited partners, particularly the institutional kind, think that a VC must be good if they can get into hot deals, never mind the economics. Finally, VC community is very small and tight, so no one will ever say another bad about anybody, even when they are total crooks.