Can Uber Ever Deliver? Part Seven: Uber’s “Narrative” and The Vox and Stratechery Critiques of Naked Capitalism’s Uber Series – Defending Uber Requires Ignoring Industry Economics

Yves here. Get a cup of coffee. This post walks through some of the recent efforts to defend Uber against the evidence Hubert Horan presented in earlier posts in his series. One basic issue the loyalist fail to deal with is that the long history of transportation fleet management has shown that there is a tradeoff, in terms of capacity management (how big a fleet to have) between profitability and customer convenience (how much capacity to offer to allow customers more availability/more rapid response). Thus Uber’s massive subsidies are the reason customers may find that it offers more rapid “fills” of their orders for service than traditional cabs. Remove the subsidies, as Uber eventually must, and the fact that it is inherently a high cost producer, it will offer an inferior cost/speed of response tradeoff to other providers.

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

Uber’s narrative for its growth and expected industry dominance is devoid of any economic evidence

Uber has managed to get its own story about its eventual dominance and its unprecedented $69 billion valuation widely accepted despite a lack of supporting evidence. Uber depicts itself as similar to a handful of other blockbuster Silicon Valley startups:  an incredibly powerful business model based on cutting edge technological innovation that would work in any city in any country. Like those other well-known startups, losses will soon give way to robust profits and the enormous power of this business model will inevitably lead to global industry dominance, and could possibly even lead to Uber significantly displacing private car ownership.

Unfortunately, nothing in the Uber narrative is based on objective evidence or actual industry economics. Neither Uber nor anyone else has provided any verifiable evidence that Uber’s business model can even achieve sustainable profits.   Similarly, there is no proof  of massive efficiency advantages that would be necessary to achieve inevitable industry dominance in the near term or major reductions in private car ownership in the longer term.

In fact, the spectacular failure of Uber China directly refutes the claim that Uber has a clear path to global dominance. Urban car services have none of the powerful scale economies that allowed other digitally-based tech companies to rapidly “grow into profitability.” No one has demonstrated that any of Uber’s claimed innovations have a material impact on efficiency or profitability. Uber users may like their fares and service levels, but no one can explain where Uber will suddenly find billions in efficiencies and scale economies that would be required to make its business self-supporting.

Uber has already imposed major unilateral cuts in the driver compensation levels it used to attract the drivers it needed to support its rapid growth; no one can explain why Uber wouldn’t similarly reduce passenger benefits as it approaches industry dominance. There is absolutely no evidence showing how a profitable Uber could sustainably provide cities with higher quality and lower cost transport service.

The Naked Capitalism series’ finding that Uber’s business model could not earn sustainable returns without exploiting anti-competitive market power was based on a wide range of evidence about the competitive economics of the urban car service industry

This series sought to establish an alternative to Uber’s narrative, using economic evidence to address the question of whether Uber’s growth and anticipated dominance will improve overall economic welfare. It has used traditional, well-accepted, widely used analytic techniques that a consultant or financial analyst would use to understand the market potential and/or competitive threat of a new entrant, or that an economist or an urban transport planner would use to consider whether an alternate taxi competitive/regulatory structure might improve service levels or industry efficiency.

If an Uber-dominated industry is to improve overall economic welfare, it would meet four tests

(1) the ability to earn sustainable profits in competitive markets large enough to provide returns on its investment base

(2) The ability to provide service at significantly lower cost than existing competitors, or the ability to produce much higher quality service at similar costs

(3) The creation of new sources of sustainable competitive advantages through major product redesigns and technology/process innovations that incumbent producers could not readily match

(4) Evidence that the newly dominant company will have strong incentive to pass on a significant share of those efficiency gains to consumers in the form of lower prices and/or increased service.

Since Uber’s investors have been explicitly pursuing total worldwide industry dominance, the evidence of profits, efficiency, competitive advantages and consumer welfare benefits would need to be overwhelming and obvious.

Part one of this series focused on the evidence that Uber was a fundamentally uneconomic enterprise (e.g.2015 operating margins of negative 140% and $2 billion in actual losses) and that all of Uber’s growth to date was due to billions in predatory investor subsidies that competitors could not match.

Part six presented new evidence confirming those findings, including reports that Uber’s 2016 losses were likely to exceed $3 billion, and data showing all margin improvement had been due to unilaterally imposed cuts in driver compensation. It also discussed Uber’s spectacular failure in China, which demonstrated that its business model could not be easily leveraged worldwide.

Part two gave data showing that Uber was the industry’s high cost producer and lacked the scale/network economies other startups have used to “grow into profitability”.

Part three showed how various claims that Uber’s growth had been driven by competitively powerful innovations were readily refuted by evidence of actual industry economics. As a result, there was no basis to expect Uber could ever earn sustainable profits in a competitive market.

Part four discussed how Uber’s investors had always seen quasi-monopoly industry dominance and the elimination of legal/regulatory barriers to the exploitation of anti-competitive market power as the key to earning returns on their $13 billion investment.

None of the findings rested on any single data point, and each of the conclusions was complemented and reinforced by evidence from the separate analytical approaches (financial results, cost structure, competitive advantage, industry dynamics). To encourage a discussion that could help improve the analysis part five of the series responded to many of the readers who had posed comments, questions and criticisms about precious posts. The finding that Uber would reduce economic welfare was based on the combination of its lack of efficiency advantage (so that its growth reflected an allocation of resources to less efficient uses) and the risk that a dominant Uber could exercise anti-competitive market power.

One objective of the Naked Capitalism series was to begin the process of refocusing the public discussion about Uber around economic evidence

As discussed in part three using the example of Amazon, the media coverage and public discussion of Uber has been markedly different from past startups.

Every major startup has had a PR story it wanted to tell to investors, consumers and competitors, but media coverage of past startups treated their reasonableness and accuracy as an open question. Amazon wanted to emphasize the power of its potential competitive advantages, but reporters sought input from independent experts in relevant fields (ecommerce, warehousing, distribution, traditional retailing) so that readers could better understand whether the claims were valid. Even as the power of Amazon’s many efficiency advantages became widely understood, the question of whether Amazon could ever achieve sustainable profits remained widely debated.

Press reports on Uber, by contrast, show no effort to investigate whether claims about competitive efficiencies and technological innovations make any sense. Independent sources with actual knowledge of the economics of taxis or urban transport are never quoted.

Similarly, leaked information showing Uber’s multi-billion dollar operating P&L losses first became available in mid-2015, but the overwhelming majority of media coverage completely ignored the question of whether the company will ever be profitable.

Journalists depict Uber’s unstoppable march to industry dominance as established truth, although the basis for their certainty about Uber’s overwhelming is never explained. Competitors like Lyft (with over $2 billion in funding) are treated as minor inconveniences, and every company that had served the industry prior to 2010 is treated as completely irrelevant. Even those who have been highly critical of specific Uber practices (false advertising, driver exploitation, journalist harassment, refusal to obey insurance and safety laws) typically assume that Uber’s story is true. Worse, they take the view that the costs and/or business model changes needed to fix these problems are not significant, and that Uber would retain its yet-to-be-demonstrated efficiency advantages.

Later in this series, we will discuss in detail how Uber was able to dominate media coverage and effectively block any serious scrutiny of its business model. In simple terms, pro-Uber media coverage falls into two major categories. The first category includes advocacy directly financed by Uber’s huge PR machine and/or provided by active Uber supporters with the help of Uber PR. Unlike any previous Silicon Valley funded startup, PR was a major strategic and spending priority for Uber since day one. So far, Uber has been able to overwhelm independent or dissenting views. These efforts included paying academics to publish major pro-Uber claims that do not hold up to even cursory scrutiny (including the Steven Levitt papers discussed in part six). Yet the press reports them as if they were independent, highly rigorous research. The active Uber supporters usually have political/ideological affinities with the company (i.e. favoring the elimination of any form of regulation including barriers to monopolization and the ability to exploit anti-competitive market power) and write pro-Uber papers to advance those objectives.

The second category is technology industry journalists and analysts. As in many other parts of the media, their ability to provide readers with critical insights may be compromised by things like their dependence on access to the senior executives of the prominent companies they cover. In its early startup days Amazon felt it had a powerful competitive story to tell and welcomed the business press.

By contrast, Uber went to great extremes to show it would ruthlessly attack any outsiders that dared question their official story.[1] At a more basic level, Uber’s narrative was designed to tap into the technology writers’ predisposition that “tech” is a powerful force for good in society and a major driver of “progress” and economic growth. There are obviously many examples of where technology companies have increased overall economic welfare, but many more cases where they haven’t; you need to look at the economic facts in each situation.

But by wrapping itself in the mantles of “technological innovator” and “industry disrupter,” and emphasizing the contrast between Yellow Cab companies based out of garages in unsavory locations and a glamourous startup funded by the Silicon Valley’s best and brightest, Uber convinced most technology journalists that they didn’t need to talk to anyone familiar with those garages, or to investigate the sources and power of Uber’s claimed innovations and disruption.

Thus the biggest challenge here is not assembling and explaining the economic evidence, but to refocus the public discussion. There are technology journalists and analysts who aren’t on the Uber payroll and don’t see Uber as part of a broader ideological crusade. Can they respond to the type of economic analysis presented in the Naked Capitalism or has Uber’s narrative become too deeply ingrained?

Unfortunately, most of the technology and the mainstream business media have been valorizing Uber for seven years. Even when confronted with hard evidence of $3 billion annual operating losses, they may be reluctant to suggest that they might have gotten the story badly wrong.

Criticism of the Naked Capitalism analysis could be an entirely constructive response as long as the criticism was based on economic evidence, for example finding more detailed Uber P&L data, new evidence about Uber’s cost competitiveness, scale economies, or the efficiency impacts of specific business model features.

The two articles considered below illustrate the difficulty in truly shifting public discussion away from Uber’s narrative and towards constructive debate based on economic evidence. They represent “best-case” examples of reporters who have been covering tech industry issues for years.

While neither author had previously published anything remotely critical of Uber, both are free of direct Uber influence and are not focused on an external political/ideological agenda.

The first was by Timothy Lee in Vox[2]. Over the years, Lee has also covered the technology industry for Forbes and the Washington Post. The second was by Ben Thompson in his tech industry newsletter Stratechery,[3] which has been published since 2013. Both reports started by recognizing that the recent reporting about Uber’s continuing massive losses and the Naked Capitalism series represented major challenge to conventional wisdom about Uber. Both told their readers why they disagree with the major findings of the Naked Capitalism series, but provided links so their readers could examine the detailed arguments for themselves. But none of those disagreements were backed by any verifiable economic evidence that would materially affect any of the findings they disagreed with.

Thompson’s counter-arguments: the P&L evidence is incontrovertibly false, it is impossible to draw any conclusions about Uber’s cost competitiveness, and Uber can easily exploit scale economies to grow into profitability

Thompson’s most emphatic assertion pertains to the issue (that I discussed in both part one and six) of whether the leaked 2002-06 Uber Global P&L data fully incorporates all the operating revenue and expenses from Uber China.

First, Part 1 insisted that the financial figures excluded Uber China, which was incontrovertibly false. (Thompson’s emphasis)That’s a pretty big problem considering the scale of Uber’s losses in China! Not only did that error make the all of the numbers (very) wrong, it also raised serious questions about the analysis as a whole, particularly given the fact it remains uncorrected.

This assertion grossly misrepresents what I wrote. Uber has refused to explain what is included or not included in the leaked numbers (or any other aspect of its financial results). I did not claim that the exclusion of China was a proven fact, but laid out multiple data points supporting my interpretation of the financial results. For example, the quarterly EBITAR contributions, as reported by Bloomberg[4]

2016 Reported Uber Global EBITAR contribution Uber Global shareholding in Uber China
2nd Q ($ 800) million Entire quarter
3rd Q ($ 800) million Half of quarter
4th Q ($ 800) million None (sold in August)


Uber has never published hard data about the losses of the separately organized Uber China operation, but multiple sources have reported claims that the losses were much worse than Uber experienced elsewhere, perhaps on the order of $1 billion. My assumption was that if the P&L results of an associated company with a different ownership structure making humongous losses had been fully incorporated in the parent’s operating P&L, those results would show sudden, dramatic improvements when the subsidiary was sold, probably on the order of a couple hundred million dollars per quarter in this case. You not only don’t see that in the 2016 numbers, but you don’t see any of the 2014-16 margin volatility you would have expected to see as Uber China rapidly grew. And incorporating the P&L results for Uber China would have been a major violation of GAAP accounting rules. Uber not only had no incentive to violate GAAP rules, but would have had ample reason to keep the huge losses and awful margins separate. Would this constitute “proof” in a court of law? Of course not, but it is a fair attempt to back up an argument using data and logic.

Does Thompson back up his alternate view with data or logic? Nope. He ignores my evidence, presents no data of his own, and then makes the totally indefensible claim that his alternate view is an incontrovertibly proven fact. Why does he think his view is incontrovertibly true and mine is incontrovertibly false? Because of a single tweet from the Bloomberg reporter, suggesting that the Uber numbers might include China. A claim that the reporter didn’t think was reliable enough to ever include in any of his Bloomberg articles.

No one has disputed the bottom-line operating P&L loss numbers (e.g. $3 billion in 2016). If Thompson believes that China losses are included, and distort attempts to evaluate whether Uber’s business model is working well elsewhere, what alternate number should we use? He doesn’t say.

The worst case guess would only reduce the 2016 losses to $2.5 billion (Uber China was sold in the middle of 2016). Thompson doesn’t explain why this would significantly change any of the other findings about Uber’s competitiveness.

How Uber did its accounting here is a simple factual question, and at some point we’ll have a clear answer. It would be one thing if Thompson said that his strong hunch was that I was wrong and the numbers did include Uber China but neither of us yet had “proof”. But Thompson is willfully ignoring the available evidence, insisting that his gut feel constitutes absolute truth, and telling his readers the contradictory evidence on this one point I’ve presented raises “serious questions” about the legitimacy of the entire Naked Capitalism series.

Thompson’s second line of attack is to claim that it is impossible to draw any meaningful conclusions about Uber’s competitive economics from aggregate P&L data.

Part 1 analyzed Uber’s profit and losses at the company level. While that is certainly an important data point — as should be obvious, in the long run all companies need to be profitable — it’s not particularly helpful when it comes to a company investing heavily in growth, particularly if they are investing in pursuit of an opportunity governed by not just network effects but also scale effects. What is required is an evaluation of unit costs: how much does Uber earn or lose on an individual ride? And, per the previous point, how did that number differ by city, level of market maturation, etc.?…. The issue with analyzing Uber is that we — including the author of these blog posts — simply don’t know what the company’s unit economics are; that the author attempted to make pronouncements about the company’s financial viability anyways was, in my estimation, an error just as significant as falsely claiming that the numbers did not include Uber China.

This objection is simply silly. Would it be nice to base an Uber analysis on detailed, carefully audited tables of unit cost data broken down by city, product and time of day? Well yes, but neither Uber or any other privately owned startup in history has ever provided that kind of data. Analysts routinely evaluate the growth potential of new products and companies where there’s less information available than there is here.

Thompson is also ignoring Uber’s actual strategy and narrative. Uber did not get $13 billion in funding in the hope that its business model might be able to make money in some kinds of markets under some kinds of conditions. Uber raised $13 billion because it told investors that it had an invincibly powerful business model based on cutting edge technology that would work in any city in any country, and would rapidly drive its inevitable march to global industry dominance. Thus the Uber Global P&L data I focus on are entirely appropriate. That Uber Global’s losses have been substantially greater than any venture capital funded startup in history—on both an absolute and margin basis–provides a powerful first clue that their business model might be terribly flawed.

Note that when Thompson doesn’t like my analysis showing Uber’s costs are uncompetitive, he insists that nobody should be allowed to draw conclusions unless supported by extremely detailed internal data that will never be made available, but when Thompson doesn’t like that my finding that Uber’s business model is fundamentally uneconomic is backed by both hard P&L data and industry cost analysis, he dismisses everything on the basis of a single tweet.

The third and most important area of disagreement is that although Thompson accepts my data analysis of the traditional industry cost structure he rejects my use of that same data to support the argument that Uber lacks the scale/network economies that would be needed to quickly achieve sustainable operating profits. My finding that Uber has no significant scale/network economies is central to my argument that Uber has been engaging in predatory competition in pursuit of monopoly. Unless one can demonstrate the growth economics that will quickly convert $3 billion annual losses to sustainable profits, Uber’s behavior cannot be interpreted any other way.

Powerful scale economies only exist when the cost structure has a huge fixed cost component, so that growth rapidly drives down unit costs. I provided the example of Amazon, which did have significant fixed costs (its entire IT marketing infrastructure, warehousing/distribution) and thus could expand to new geographic and product markets at very low marginal costs. I demonstrated that fixed costs were a tiny piece of urban car services total costs (85% are the totally variable costs of drivers, vehicles and fuel) and only a small portion of the 15% corporate costs are truly fixed. Uber cannot expand into new markets at very low cost since it faces unique driver recruitment, political lobbying and competitive marketing challenges in each city. I also pointed out that in the hundred years prior to Uber there had been absolutely no evidence of a tendency towards market concentration (either within or across cities) that would naturally occur if significant scale economies existed in this industry

Does Thompson’s criticism based on any evidence showing flaws in my analysis or showing where Uber had suddenly discovered significant scale economies? Not really. His criticism is entirely based on an argument that demonstrates that Thompson doesn’t understand the difference between short-term tactical marketing issues and the question of longer-term strategic/financial viability. He correctly points out that marketing managers in a company with powerful growth economics (like Amazon) would rationally price below total cost in order to accelerate those growth economics. But he completely ignores the question of whether Uber actually has Amazon-like growth economics, and if so, where do they come from and how strong are they?

Thompson concludes with several other assertions that ignore the evidence I’d provided about those questions and are not backed by any supporting counter-evidence whatsoever. In each case he’s doing nothing more than repeating portions of Uber’s narrative.

He insists Uber achieved important efficiencies from the “leverage to rework decades-old regulations that artificially limited taxi service to the benefit of incumbents.” Zero explanation beyond this single sentence. The economics of taxi regulations are somewhat involved and there’s never been a serious analysis showing large, clear-cut impacts in a single direction. “[T]here is far more demand for Uber than there ever was for traditional taxis. It is bizarre — and perhaps telling — that Horan flatly denies this market expansion in Part 3.” Like the claim of massive efficiencies from deregulation, Thompson imagines that Uber operates totally independently of the basic economic constraints every other company faces. Other companies cannot permanently expand the overall market unless the industry can (or will soon be able to) earn profits on all the added capacity, but Thompson thinks evidence of billions in losses could not possibly have any bearing on his claim the Uber has massively expanded demand. To claim that an industry that currently loses billions every year has permanently increased demand is akin to claiming that volume stimulated by a ruinous price war better is a better reflection of underlying demand than the lower volumes observed under stable, profitable market conditions.

Thompson is also ignoring Uber’s explicit goal of driving traditional operators out of business; it is trying to displace existing capacity, not to add to the capacity traditional operators already provide.

Likewise, you cannot say that Uber’s evasion of longstanding capacity regulations improved economic welfare without showing how a mature open entry industry can profitably provide more capacity and lower prices. Thompson’s claim that “Uber’s full potential is to replace personal car ownership” is similarly untethered to economic reality. This claim doesn’t just require demonstrating that Uber is massively more efficient than Yellow Cab; it requires showing that Uber can achieve such astounding levels of productive efficiency that it could drive taxi prices down to a tiny fraction of what they are today.

Lee’s counterarguments: Uber is much more efficient, Uber’s scale economies will drive profits, and Uber’s real strategy is driverless cars

In parts two and three of the Naked Capitalism series I lay out the reasons why Uber has higher costs than traditional operators, why nothing in its business model constitutes a powerful competitive advantage, and why it lacks the scale or network economies that digitally based companies could use to grow into profitability. Although Lee reasonably summarizes other parts of my argument, he simply ignores the evidence I presented on these points, asserts that Uber does have powerful competitive advantages and scale/network economies, but presents no actual economic evidence showing why he might be right and I might be wrong.

Lee correctly notes that I did not think that Uber’s investors were too stupid to understand industry costs, but (as discussed in detail in part four) that I thought those investors thought they could convert urban transport into a “winner-take-all” game and earn returns from exploiting monopoly power. But he rejects my “Uber returns require industry dominance” argument. “The other possibility — one that seems more likely to me — is that Uber really has figured out ways to make the taxicab market more efficient… that Uber’s model is superior to conventional taxicabs.” I had addressed those issues in detail in parts two and three; what points does Lee see that I might have missed? “The most obvious one is that smartphone hailing is inherently more customer-friendly than having to call an old-fashioned taxi dispatcher.” I had explicitly noted in part three that a lot of people seem to like Uber’s app, but there was no evidence that whatever marginal advantages it might have had any material impact on overall cost efficiency (dispatching accounts for roughly 7% of the cost of a traditional taxi operation) or driver revenue utilization. “The Uber app gives customers a realistic estimate of how long it will take for a car to pick them up. And once a customer hails a cab, it allows him to track a car’s progress.”

The software in Uber’s app can be readily copied (my local cab company in Phoenix has an app with the same functionality) so this can’t be a source of powerful, sustainable advantage. More importantly, there are dozens of other industries with ordering apps even more sophisticated and customer friendly than Uber’s, but none of them have any impact on market competition, and none helped create $68 billion in corporate value.

“And Uber’s pickup times have gotten even shorter as the company’s fleet has grown.” Here Lee is simply ignoring all of the data clearly showing that the prices and service quality Uber customers like is due to massive multi-billion dollar subsidies, not superior efficiency. Customers like the Uber app because it shows them multiple empty cabs nearby who can quickly pick them up. My Phoenix taxi app often shows no cars nearby or long wait times before pickup. That’s not because Uber’s software represents an efficiency breakthrough, it is because my fare in Phoenix needs to cover the entire cost of the cars and drivers on the street, while Uber subsidies make it possible to offer greater (but unsustainable) capacity.[5]

Lee then claims that Uber somehow achieves much higher driver revenue productivity than traditional operators.

As Uber gets more customers, it reduces the average distance a driver must drive to reach a customer — and hence the amount of time they waste driving without getting paid….And this suggests one hole in Horan’s argument: If Uber can use driver time more efficiently, that really could lead to a sustainable cost advantage…. In economics jargon, this is known as a network effect. It’s the reason that eBay has a stranglehold over the collectibles market and Craigslist dominates online classified ads.[6]

Needless to say Lee has no actual evidence of this huge productivity advantage, but he is at least trying to come up with a hypothesis that has some logical relationship to competitive efficiency.

The first problem here is that driver revenue productivity is fundamentally driven by major demand differences by time-of-day and geographic location, not the problem of driving twenty blocks to find a new customer when there was another customer only ten blocks away. A dispatcher at a traditional taxi company has the same information on the location of people who want cabs as Uber’s app, and as noted, traditional operators could adapt software with the same functionality as Uber’s if the additional automation would have a big impact on productivity.

But drivers who have just dropped off a passenger at the airport at 6:30 am (or anywhere at 8 am on a Sunday morning), or in a distant low density residential neighborhood, are likely to have a long wait before their next fare and there is absolutely nothing in Uber’s business model that solves this problem.

The second problem is that the customer perception of shorter waits for Uber cars actually means Uber has a driver productivity disadvantage. I wait longer for my Phoenix cabs than Uber customers because fewer of them are sitting around empty.

And the third problem is that this is neither a scale or network economy, and any appearance of “efficiency” is an artifact of the unsustainable excess capacity Uber has been subsidizing. There is absolutely nothing in the business model of Uber that produces Ebay/Craigslist type network economies.

As noted earlier, if urban car services had powerful growth economics here you would have seen strong tendencies towards market competition in cities dominated by dispatch cab services long before Uber. Lee is arguing that the dispatch company with the most cabs would gain a huge cost advantage due much better driver productivity; not a 1-2% type improvement, but as much as a 30% advantage. If so we would have lots of historical evidence of bigger companies capturing most of the traffic from smaller companies with higher costs and longer customer wait times. This never happened; taxi companies large and small needed to ensure a close balance between their driver/vehicle capacity and their revenue base. If the biggest company added capacity wait times would fall but profits would fall faster because the efficiencies Lee thinks are powerful don’t actually exist.

As with Thompson, Lee thinks that Uber can rapidly eliminate multi-billion dollar losses because he imagines they have the exact same scale economies as Amazon.

“Amazon’s unprofitability during the 1990s was an illusion created by Amazon’s aggressive investment in growth. Amazon was spending a lot of money on things like warehouses and new software that were going to take a few years to pay off….thanks to economies of scale in software and warehousing, Amazon’s costs per book kept going down as the company grew…[Uber is] just pursuing an even more ambitious version of Amazon’s strategy — that Uber’s core business is sound, but Uber is investing heavily in things like expanding to India and developing self-driving cars.”

Needless to say Lee provides absolutely no economic evidence here, and does not explain why my analysis showing that urban car service costs are overwhelmingly variable might be wrong, he just baldly asserts that if this worked for Amazon, it must fully explain what Uber is doing.

Amazon’s worst losses were $1.4 billion in its fifth year of operations, but shrank rapidly thereafter, while Uber losses have been steadily growing and will be over $3 billion in its seventh year. If Uber had huge scale economies, its profit margin would have been rapidly improving; in fact Uber had no margin improvement whatsoever between 2012 and 2015, and its 2016 improvement was totally driven by unilaterally imposed driver pay cuts, not growth economies.

As with Thompson, Lee does not seem to have a clear idea of what scale economies are, or how they work, makes no effort to explain how his imagined future scale economies could quickly achieve over $3 billion in savings, and does not seem to care that his argument is totally inconsistent with all of the available data.

Perhaps, Lee argues, none of this matters because the big payoff for Uber investors will come from driverless cars.

“The real prize in the ride-hailing wars, then, isn’t the conventional ride-hailing market itself. Rather, it’s the opportunity to become the customer’s gateway to the emerging self-driving car market. There are good reasons to think that most self-driving cars will be hailed on demand rather than owned by individual drivers. If that’s true, having the most popular ride-hailing app will be a huge strategic advantage in the self-driving car market.”

That’s Lee’s entire driverless car argument, and Thompson had made a similarly unelaborated and unsubstantiated assertion. There’s no explanation of how (or when) he thinks driverless technology and markets will develop, no explanation of what “winning” this yet-to-be-created market will actually involve, and no evidence as to why Uber is better positioned to earn billions in profits than the other major companies investing here.

Uber had raised $10 billion of its $13 billion cash base before it made driverless cars a strategic priority, so there is no basis for claiming its investors saw this as “the real prize.” Rationally, companies should not expand into riskier, more capital-intense markets until a strongly profitable position in its core market has been completely secured. At this point the main reason Uber and its supporters seem to be emphasizing them is to distract attention from Uber’s inability to make money in its core business.

Tech press coverage of Uber: ignore economics, keep repeating the Uber narrative

The focus here has been on the Thompson and Lee articles, in the interest of seeing whether they had raised any issues that the Naked Capitalism series had missed, or whether they had presented new economic evidence that could constructively contribute to the public discussion about Uber’s business model and its potential impact on economic welfare. They had not, but I want to reemphasize that Lee and Thompson remain “best case” examples of tech press coverage of Uber. There are scores of articles in the tech and mainstream media much, much worse than these, but these “best-case” examples help illustrate the power of Uber’s narrative.

Unlike many other reporters, they are free of direct Uber influence, make serious effort (as they have done here) to consider different viewpoints and I have always found their work to be worth reading. But neither is yet able to present analysis or engage in debate centered on economic evidence.

Their willingness to acknowledge that hard evidence about P&L results and industry economics contradicts the narrative is limited and grudging. Thompson is sure there’s evidence out there showing that Uber is actually profitable in most markets and that its costs aren’t actually higher than traditional competitors, even though he can’t produce any of it. Lee is sure there’s something in Uber’s business model that is powerfully efficient, but he can’t point to anything that would actually create major cost advantages or help explain $68 billion in corporate value. Both insist that since they consider Uber to be a “tech” company it must magically possess Amazon caliber scale economies and/or Ebay type network economies, but see no need to demonstrate that these magical economies actually exist.

A key issue here is that “tech” has morphed from one element of a larger business toolkit into a quasi-ideological/religious “movement” based on inherent virtues that the “non-tech” world lacks. As the broader Silicon Valley world has convinced itself that it is the avatar of progress and economic growth, and that “industry disruption” is virtuous regardless of actual impacts, most of the journalists and industry analysts embedded in that world have devolved from critical, objective thinkers to advocates and cheerleadiers for “our side.”

Uber’s narrative was designed to evoke these emotive/tribal loyalties, by portraying itself as the heroic defender of progress, innovation and disruption, engaged in mortal battle with the “evil taxi cartel” and the corrupt government regulators fighting to prevent the entrepreneurs who were using advanced technology to provide the world with better taxi service at lower prices. Despite hard evidence ($3 billion losses in year seven, massive failure of Uber China, no efficiency or scale driven margin improvements) many find it difficult to abandon the framing they bought into years ago.

Tom Slee (I would highly recommend his book “What’s Yours is Mine: Against The Sharing Economy”) has been following Thompson’s arguments and the overall Uber discussion over the years. When Brad DeLong posted links to the Naked Capitalism series, to Izabella Kaminska’s Financial Times article and to Thompson’s Stratechery piece at his website,[7] Slee posted the following comment, which captures the ongoing refusal to reconsider the Uber narrative in light of growing economic evidence nicely:

It sounds like Ben Thompson is falling for the Uber bait and switch. Stages of which:

– Uber has a nice business as a status product (Uber Black Car ~ 2010)
– Uber Black may not be profitable, but Uber will displace taxis and be hugely profitable because of technology-driven efficiencies (UberX: 2014-2015)
– UberX may not be profitable, but UberPool will lead to new efficiencies in mass transit (2015-2016)
– UberX may not be profitable, but Uber is a logistics company and will rewrite the rules of delivery (UberEats, various speculative stories, 2013-2015)
– UberPool may not be profitable, but when Uber displaces car ownership the scale of the market will make it profitable (2016)
– Uber with drivers may not be profitable, but driverless cars will make Uber profitable (2014-)
– Driverless cars may not be profitable, but Uber is looking into flying vehicles (2016)

The Uber makes losses while maintaining credibility for bringing “the future” in some form or other.


[1] Uber executive Emil Michaels “suggested that the company should consider hiring a team of opposition researchers to dig up dirt on its critics in the media — and specifically to spread details of the personal life of a female journalist who has criticized the company.” Smith, Ben, Uber Executive Suggests Digging Up Dirt On Journalists, Buzzfeed, 17 Nov 2014. Lacy, Sarah, The moment I learned just how far Uber will go to silence journalists and attack women, Pando Daily, 17 Nov 2014.

[2] Lee, Timothy, Why Uber lost $2.2 billion in 9 months, Vox, 9 Jan 2017

[3] Thompson, Ben, Uber Losses (but China Gains?), Uber and unit Economics, Reconsidering Uber, Stratechery, 20 Dec 2016. Stratechery is a subscription-only tech industry publication, similar to Pando (which has published numerous articles strongly critical of Uber) and The Information (which has said nothing critical of Uber but was the primary source of the Uber financial data presented in part one.

[4] Newcomer, Eric, Uber’s Loss Exceeds $800 Million in Third Quarter on $1.7 Billion in Net Revenue, Bloomberg, 19 Dec 2016. 2nd and 3rd quarter results were actuals; the 4th quarter number was Uber’s mid-December expectation of what the actual results would be.

[5] There is published evidence that Uber can easily manipulate customer displays to show many more cabs than are actually available. Hwang, Tim & Elish, Madeleine, Uber’s Algorithms and The Mirage of the Marketplace, SLATE, 27 Jul 2015, Rosenblat, Alex, Uber’s Phantom Cabs, VICE, 27 Jul 2015. The larger issue is that Uber’s app was never designed as a passive conduit between independent drivers and customers; it was always designed so that Uber (particularly if it achieves industry dominance) could totally control all of the supply, demand and pricing information taxicab markets require in order to function.

[6] Although he did not claim that Ebay/Craigslist type network efficiencies existed, Thompson has laid out similar arguments about superior Uber driver productivity in the past (Thompson, Ben, Why Uber Fights, Stratechery, 24 Nov 2014) and repeated the general claim in the article discussed above.

[7] DeLong, Bradford, There is a serious debate about “Uber, floor wax or desert topping?”–excuse me: “Uber: grift or technological and organizational breakthrough?, Grasping Reality Blog, 20 December 2106. Kaminska, Izabella, The Taxi Unicorn’s New Clothes, Financial Times, 1 Dec 2016.

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  1. Ben Thompson

    One additional note: the fundamental error Hubert made is in conflating the part of my Update about the importance of unit economics with a full-fledged defense of Uber. In fact, as I made clear in an email to him, that discussion was independent of a response to Hubert’s article and thus, much of his takedown was moot.

    In the end, I actually concluded that Hubert’s argument should be taken seriously, which is why I’m so disappointed in this mis-characterization.

    1. Ben Thompson

      Sorry, one more:

      While neither author had previously published anything remotely critical of Uber, both are free of direct Uber influence and are not focused on an external political/ideological agenda.

      This is simply a flat-out lie. I have written multiple critical pieces about Uber. It’s perhaps the most telling line in this article when it comes to my frustrations.

  2. yan

    About the display of uber cars: At least in Sao Paulo, it is a mirage. Every time you look it up there are a minimum of 6 cars in a 2 block radius (in a city that has, actually, quiet low density in most areas for the population). If you order one, the car is always farther away.

    About Uber Pool (also Sao Paulo): I have taken 5 in my life, granted, but only once did I find an extra passenger.

    More circumstancial: the last uber driver I took was complaining that he has to take the Uber Pool rides even if most of the time he does not pick up extra passengers because if not he is idle quiet a lot. As you say, only during peak traffic times does he say he is able to pick up more than one. And the fare is normally 50% smaller than Uber X. Also Sao Paulo, where a 3.5 USD ride (10 BRL) can take up to minutes depending on traffic conditions.
    People do thoroughly use the service althouhg I have started seeing some upset customers (they no longer offer water, for example, as bottled water can mean up to 25%, 2.5 BRL, of an average 10 BRL ride).
    Upper class people do use Uber Black quiet a lot because of supposed status. But even in Sao Paulo there is so much upper class you can capture.

        1. Code Name D

          This is somehing one could positvly test by running down the Uber cab locations shown on the app.

  3. voteforno6

    I guess that it could be considered a compliment to this series, in that (1) these commentators felt the need to defend Uber, and (2) that their defenses were so weak.

  4. Larry

    Fantastic article. I was struck by the recent Bloomberg piece that demonstrated how difficult it was for people to make a living being an Uber driver:

    And as noted by an Economics Prof. at Brown, driving for Uber does not give you flexibility because you cannot refuse rides without losing status points that keep you in the system. So say it’s 4:30 pm and you only intend to work until 5pm, you pick up a fare but the rider needs to travel an hour outside your local area. That puts the driver in a real tough spot and throws cold water on the flexibility of driving for Uber. Not only that, but the analysis found that driving for Uber was no better and really likely worse than minimum wage earnings in Rhode Island.

    1. RUKidding

      I read that Bloomberg article, too, and linked it here yesterday. It’s really a sobering picture of what it takes to be an Uber driver full time.

      I know quite a few people – friends, neighbors, work colleagues – who drive for Uber and/or Lyft part-time. As the Econ Prof points out, Uber/Lyft aren’t all that flexible. A number of my Uber-driving acquaintances have complained of the exact situation of being nearly at the end of their shift and heading home, when a fare comes in wanting to go far afield. If they refuse the fare, they risk losing status.

      Uber’s not all it’s cracked up to be from the driver’s standpoint. The rest of the post points out the issues for the company.

    2. Arizona Slim

      I’ve been around Uber drivers and their direct supervisors. And, in a word, the relationship is filled with condescension.

      I saw quite a few drivers having difficulty using the app — I think it was designed that way — and the supervisory response was not helpful. It was if the company had decided that those driver-beings were not cool enough to figure out the app, so the heck with ’em.

      The drivers responded by bailing on Uber. I suspect that the company has turnover that rivals McDonalds.

      1. WorldBLee

        I too have heard from several Uber drivers that a) they hate the app and the fact it doesn’t work properly and b) when they complain about it they get no response and/or no improvements.

    3. Charles Myers

      The problem with saying a driver has flexible hours is this. Just because you want to work Tuesday 9 to 5 doesn’t mean the phone is going to ring.

      Unless you are an idiot you are going to work when its busy. So the hours are not flexible at all.

      1. jrs

        from the article:
        “Lyft, unlike Uber, restricts how many hours drivers can work in a row: After 14 hours, the app makes the driver take a six-hour break.”

        why would you even WANT a ride from someone who may not have taken a break in 14 hours of driving? Not only would I not want to be driven by them, I don’t like that I’m even sharing the roads with what have to be these half asleep drivers.

    1. CaptainPoptart

      I was thinking exactly the same thing. I actually went through Enron’s HQ on a consulting gig just before they crashed and burned. We saw their “trading floor” which was just a bunch of computer workstations with bogus data. Reminds me of Uber’s technology spiel – don’t pay attention to the man behind the curtain.

        1. CaptainPoptart

          The floor was only running when they had customers or visitors to bring through and impress. The rest of the time, the “traders” were just lounging around killing time. It was patently obvious that no real economic activity was going on when the floor was not being hyped. We just happened to come through at a dead time.

  5. Scott

    Great article. It reminded me of a conservation I had with a friend a few weeks ago. Namely that Uber’s boosters’ comparisons to Amazon miss a very important point – namely that prior to Amazon, a number of retailers, such as Walmart and Boarders, had used technology to lower costs and create economies of sales. These companies had very strong inventory management systems and POS, which they used to keep shelves stocked and reduce in-store inventory, among other things. This allowed them to lower prices, which increased sales volumes. With the increased volumes, they negotiated better deals with suppliers. A company which could further lower costs would be able to do the same. Amazon used the internet as a sales channel, eliminating the need to physical stores and the associated costs and avoided sales taxes. Amazon could use technology to disrupt the retail industry mainly because technology already had disrupted it.

    1. jsn

      All of this happens in the context of the Carter Administration having turned anti-trust enforcement on its head, following the sweet tunes hummed in the ear by Milton Friedman and Alan Greenspan.

      They argued as long as industry consolidation produced lower prices it was “good for consumers”, ignoring the original point of anti-trust which was to simultaneously prevent economic/power concentrations and fuel job creation (competitors mean duplicate, competitive efforts complete with admin and C-suite jobs). Not only do multiple small competitors sustain innovation (and prevent monopsony power while raising wages by bidding for portable skills/knowledge), the prevention of market power concentrations allows consumer demand signals to identify and channel investment into popular innovations rather than the crappified “innovations” our tech monopolists/monopsonists keep crapping on us.

      J D Rockefeller didn’t really get rich until his voting shares in Standard Oil were converted to non-voting stock in all the successor firms it was broken into: he had resisted tooth and nail because he liked the power, but once Standard was dismantled, the values soared. Woolworth was trying to do what Walmart eventually did but anti-trust was used to ensure main streets across the continent weren’t destroyed then, as they would be three generations latter by the Walton family.

      Bezos and the whole Intellectual Property tech crowd are just New Age Robber Barrons.

    2. Harrold

      It seems to me that Jeff Bezos just followed Richard Sears exact play book of 100 years earlier.

      He just updated part of it.

      1. lyman alpha blob

        Ding ding!

        I’ve always been amazed at the talk of how this or that .com was going to revolutionize everything. It’s just a catalog ferchrissakes with the convenience that any person can access multiple catalogs on their computer.

        Amazon did create a self licking ice cream cone of sorts though. No physical catalog means nothing for little Jimmy or Sally to sit on at the dinner table, which means to reach their dinner they need a booster seat, which can now be sold to them by Amazon.

  6. Quanka

    Excellent series and excellent addition. It would be great to see a future post or comments on the “if left unchecked, Uber will eventually drive down service quality for everyone” idea because that is the ultimate crux of this IMO. I think of a possible analogy as Health Care, or Telecommunications. In the U.S. we are stuck with far inferior “products” (hate the term / marketization of everything) as compared to others in the world, and we usually pay more for it, and this is largely due to entrenched political power. They are imperfect analogies but maybe a starting point.

  7. Oguk

    I have really enjoyed this series, it is like a breath of fresh air to read actual economic analysis of a sector and company that I can understand, AND that makes sense!

  8. Watt4Bob

    Uber is a fairytale that appeals to a wide range of ‘marks’, that being the term of art denoting the target of a con.

    It should be abundantly clear to anyone who has read this series with an open mind, and a healthy understanding of the way personal bias clouds our judgement, that Uber is a con, and that it has been a con since inception.

    The history of the tech industry is littered with the wreckage of failed businesses, many of which had much more realistic basis in reality than Uber, and as such had real prospects of becoming legitimate, profitable businesses, but many more were based on selling ‘services’ that the business had no ability to deliver.

    This was made abundantly clear during the Clinton era’s tech boom, and subsequent bubble collapse, when new businesses exploded on the scene, with vast sales organizations promising completely plausible, and obviously advantageous services, that unfortunately, they had no prayer of delivering because the scale of their technical staff didn’t match scale of their sales force.

    In the telecom industry, for example, it was quite common to order new integrated phone and internet services only to wait and wait for an install team that missed every appointed date, and never actually arrived.

    It wasn’t only start-ups that failed to deliver during this period, but even the legacy carriers who already owned the wires connecting their customers to phone and internet services, and technical staff to install and maintain legacy services, and by the way, who understood the technology necessary to deliver the ‘new’ integrated services, did not have the ability to keep up with demand for the attractive new products.

    There was nothing illusory about feasibility of the services that were being promised, the problem was, even those companies well placed to eventually deliver, were at the moment, unable to do so.

    The result of the tech boom based as it was on a combination of explosive growth in sales operations hobbled by lack of technical support resulted in dissatisfied customers, and as we know, the bursting of the tech bubble.

    Add to this farcical story, and magnifying the impact by orders of magnitude, was the financial ‘industry’ that profited immensely from selling investors this flawed fairytale.

    Clever people at the ‘top’ were profiting immensely by selling shares in businesses that the people at the ‘bottom’ (technical staff and accountants) were already aware could not possibly be successful.

    Over the ensuing years, almost all the wonderful services promised during the tech bubble years have become available, but it took many years of effort, and the telecom industry is still a minefield where both the individual and business customer find it hard to choose which services will deliver advantage, and which will deliver disappointment.

    All the history I’ve outlined above, has to do with the actual, ‘real’ promises of the ‘tech revolution’, combined with the effects of the machinations of ‘financial-innovation’ crowd.

    Boil it down to this, when American business sees a new opportunity to make money, they hire salespeople and start selling it before they know how to actually deliver the goods, and more and more, they go public long before they can show their efforts will be profitable.

    The end result of all this is that the people who own the fairytale, and the people who finance their fairytale by selling shares to investors, make a lot of money off even the most implausible, and often completely fraudulent business models.

    There are plenty of ‘marks’ among the investor class chasing ‘opportunities’ and there are plenty of desperate people at the bottom of the heap, who are vulnerable to the allure of the ultimately empty promises offered by those serving up the gig-economy, of which, Uber is the most egregious example.

    Uber has both defrauded its investors and its drivers, investors with a business plan that has an ever-changing set of goals, and drivers with promises of incomes that cannot be realistically expected to be achieved.

    This whole story resembles nothing so much as the plot of the popular movie The Producers, wherein a clever accountant points out, to a failing Broadway producer, the profit to be made from over-selling shares in a production that is guaranteed to fail.

    Uber is a fraudulent endeavor, guaranteed to fail, but not before it has made its owners and a few people on Wall $treet a lot of money, all the while sowing more misery, at least to those at the bottom who’ve been enlisted to provide the labor, the drivers who’ve been sold the empty promises, and are so busy chasing them.

  9. oho

    a meta-comment—

    If you’re a bicoastal top 15%-er, see get all the benefits of neoliberalism: daily Starbucks fraps (thanks non-fair trade beans), 90 sec. wait for an Uber, have employer health, etc.

    Obviously things are pretty good and you’re confused how HRC lost in November.

    If you’re in the bottom 85%: You’re second job is a night/weekend Uber driver, you’re hobbling towards the Medicare eligibility cut-off, you read headlines how Starbucks is hiring 10,000 refugees, etc.

    You know what? For many, Trump–even with his flaws–sounds pretty good. And they want to blow up the system and start over. The Left used to relate to the majority of bottom 85%. Now? I’d bet no.

    1. RUKidding

      You sum up a lot of my friends and acquaintances exactly. We’re not doing too badly – not as good as things used to be, but really not too bad, either – out here on the left coast. People really don’t see or get what’s happening to, as you call it, the lower 85%, especially in more rural areas of the country.

      That said, the cracks are appearing and getting deeper for at least the lower cohort of the 15%ers. Many well educated friends with good work experience are starting to find it more and more difficult to get another job if they need to do so. And I have quite a few friends who now drive for Uber/Lyft because they’re not making it financially even if they have pretty decent full-time job. Or they have some sort of part-time, second job to make ends meet. A lot of belt-tightening is happening.

      So it may take a while longer but the upper 15% – at least the bottom of that group – are starting to experience worsening work/financial conditions. I’m not happy that’s happening, but I do hope this may serve to awaken them to what’s really happening economically in the USA.

    2. FluffytheObeseCat

      What left? Self-styled ‘social justice warriors’ are not the left, no matter what they tell you, what their affiliations are, or or how much you want them to be. There is no coordinated left in the U.S. today. There was one old guy who remembered what a ‘left’ was, who recent ran for the Democratic nomination for the Presidency. Regular people loved him, so the party elite torpedoed his candidacy.

      If we had a political left, we would not have The Donald as POTUS. Not have his collection of demagogue wannabes in high office, playing at governance and blustering like little Mussolinis whenever they face questions.

  10. Colonel Smithers

    Thank you to Oho and RUKidding.

    I have observed the same in London and Buckinghamshire except that I don’t know any Uber / Lyft drivers.

    I don’t use either service, but have friends who do, mainly women for some reason. Whilst liberal on social issues, they are neo-liberal on economics. They seem to make a point of using Uber (and AirBnB) as a way of socking it to labour / trade unionists and to show that they are up with the novelty du jour.

    When hanging around until their Uber cab arrives, I have also noticed that the drivers are / tend to be immigrants / of immigrant origin. Such people may not (be in a position to) challenge the boss(es).

    The “gig” economy is spreading to the provinces.

    1. Watt4Bob

      They seem to make a point of using Uber (and AirBnB) as a way of socking it to labour / trade unionists and to show that they are up with the novelty du jour.

      That describes exactly what I see, it’s still I got mine, good luck with yours.

      In the Twin Cities, Minneapolis/St. Paul Minnesota, there are aprox.1500 closely regulated regular Taxis, who are now they are forced to compete with 10,000 under-insured, and unregulated Uber/Lyft drivers.

      One of the results is that Taxi owners cannot find drivers willing to work at night.

      Uber/Lyft services have destroyed demand for Taxi service after dark, and so owners are losing the aprox. $50/night they used to get from their night drivers.

      I don’t understand the impulse to hate on Labour, and I don’t get the failure to understand the vicious tactics employed by Uber to drive legacy Taxis out of business.

      Those same tactics will eventually be employed against the PR, Advertising, and Financial Services employees, and by that time, the Uber monopoly will be charging much more than current Taxis do, and those displaced workers kicked out of the top 15% will no longer be able to afford the cost of a ride.

    2. nemo

      “…mainly women for some reason. Whilst liberal on social issues, they are neo-liberal on economics”

      Thank you for pointing out the hypocrisy of the “pink pussyhat” women who preach social justice while supporting economic injustice.

  11. rgf

    The argument is sufficiently convincing to me that I’d like to establish a short position in Uber. How do I do that?

    1. oho

      >a short position in Uber.

      you can’t, private co.

      next best thing is shorting Santander USA—they’re big into subprime lending to full-time Uber drivers with low credit score.

      Santander USA has small float though.

      Or perhaps the public auto dealers or the entire auto sector. “anecdotally” sounds like some?/many? people stretch their budget to get a bigger car, and rationalize that by being a part-time Uber driver the costs of the nicer car will ‘pay’ for itself

        1. Hubert Horan

          This “how does one short Uber” question came up earlier. In Part Five of the series where I responded to reader questions and I comments, I cited a article that explored this question in detail. The author was nowhere near as critical about Uber’s economics as I have been, but sensed there might be serious issues, and considered the “short Uber” question in the broader context that even if Uber could possibly become profitable, all sorts of external things could happen to prevent it. Short answer was that from the beginning, Uber has structured its equity issuance to make any kind of shorting impossible, but read for yourselves:

          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.

  12. shinola

    For some reason, when I read the defenses of Uber’s “bidness” model I’m reminded of an old joke that goes something like: “Yeah, we are losing money on each unit we sell but we’ll make up for it in volume”

    Uber’s road to profitability through self-driving cars? Wouldn’t Uber have to buy or lease the vehicles? As it stands now, I believe drivers own/lease the cars and bear all costs of fuel & maintenance. If the vehicle costs were shifted back to Uber, how would this improve profitability?

    I know, I know – shouldn’t ask impertinent questions because “innovation, disruption” and all that.

    1. NotTimothyGeithner

      The idea if it’s thought out is to drive out the traditional cab companies leaving Uber as the sole operator where they can jack prices. There are obvious problems such as reliability, safety, insurance, drivers being available once people realize Uber only makes sense in narrow windows without access to airport and train pick ups, and then cheapness of an alternative start up operation or adoption by the traditional cab companies. The other issue is are Uber passengers not taking cabs, their own vehicles, or other forms of transit such as a bus.

      If Uber can’t win monopoly status, it can’t meet its function before it won’t have drivers or even customers. If you dont ride the bus, why would you want a cab driven by someone who cant drive a cab? Traditional cab companies make their money because the cabs are well cared for by a full time garage and mechanic where the cabs are inspected and small problems don’t become big problems.

      Self driving cars might be a story for investors.

      One issue I haven’t seen is the rapid growth of Uber. One area that isn’t well served is over priced white flight suburbs where there is a population moving into an age where they can lose licenses and live in a population density that won’t support public transit or a traditional cab company. Younger people aren’t demanding hideous McMansions which were often built very cheaply above poor infrastructure. Those people can’t just sell their houses and move into a condo as readily as ten years ago. How do those people travel? They could call cab companies, but those rides are very expensive for obvious reasons. A retiree in the same neighborhood who is still deemed reliable behind the wheel could easily be a part time driver especially if he can do his own car maintenance or really doesn’t care about depreciation of a vehicle. Meeting the neighbors might be fun. This is what I thought Ubercab was originally, hence the name.

    2. JustAnObserver

      Yeah. The cars will have to arrange their own financing and be self-maintaining.

      Now *that’s* what I call real AI!

      A car you can discuss the Super Bowl with & maybe go for a beer together every now and then.

  13. Tim

    The argument that Uber benefits by freeing itself from regulatory burdens really makes no sense. Most taxi and livery regulations benefited the taxi company owners by severely restricting supply through the use of medallions and through regulated fares. What Uber has done is to open the industry to cutthroat price competition and minimize potential margins.

    It’s anecdotal, but it seems to me that the quality of the cars from Uber seem to be going downhill fast which would indicate to me that the squeeze is in play even while Uber is subsidizing prices to the tune of billions of dollars.

    1. JustAnObserver

      “ … It’s anecdotal, but it seems to me that the quality of the cars from Uber seem to be going downhill fast …”

      Interesting observation since its what I recall happening when the so-called minicab (*) industry took off in the U.K. many years ago. For a while they were good quality & – seemingly at least – reasonably well maintained but within a short while the cabs from many minicab offices had significantly degenerated towards the clunker end of the market with the driver quality heading the same way.

      (*) For those unfamiliar with this term these were cabs you could phone up for (well before cell phones, let alone apps) but they were not allowed to ply for hire on the street, that was reserved for the famous black cabs & the Knowledge. They were cheaper but, well, you get what you pay for …

  14. RMO

    “Uber’s full potential is to replace personal car ownership”
    That defense of Uber has got to the most clueless, boneheaded and unintentionally hilarious sentence I’ve seen outside of the writings of the Mustache of Understanding! For starters the entire Uber fleet are personally owned cars! Aside from that let’s think about how Uber would handle morning and evening rush hour in a big city. If they had enough capacity to handle that (even if they managed to fill every car they had access to which is extremely unlikely judging by how well the Uber pool worked out) there would have to be thousands of Uber cars sitting around unused during all the off peak hours.

    I also have trouble buying the notion that Uber is going to become a self-driving car colossus. Assuming that fully autonomous cars do become feasible in the near future (although I think this is more likely to happen than many people here I’m still skeptical) exactly what would Uber be in that field but an unnecessary middleman?

    1. Nakatomi Plaza

      In a city like SF it sort of makes sense to imagine people would abandon personal car ownership. Of course, the obvious solution is to take public transportation or ride a bike, which is what people without cars do. Whenever I’m in SF I’m amazed at how many Uber cars I see; I’m equally amazed that anybody would possibly argue that Uber cuts down on traffic while simultaneously arguing that Uber needs more vehicles to become more efficient.

      1. pretzelattack

        “I’m amazed at how many Uber cars I see; I’m equally amazed that anybody would possibly argue that Uber cuts down on traffic while simultaneously arguing that Uber needs more vehicles to become more efficient.”

        that’s a very telling point.

  15. Harry Shearer

    In London, where I spend some time, the black-cab (traditional taxi) industry boasts at least three free Uber-like apps. Real-time ordering is quick, showing plenty of cabs in my West London area, and pre-ordering is reliable. And, unlike Uber drivers who (reportedly–I’ve never used Uber) depend on GPS or “satnav” to get around London’s spaghetti bowl of streets, black-cab drivers have “the Knowledge”–two or more years of training (literally, driving around town on bicycles) to learn the streets. That’s an easily experienced built-in advantage. I’ve never understood why no US city’s taxi regulators have required a similar training regimen.

  16. Harry Shearer

    In London, where I spend some time, the black-cab (traditional taxi) industry boasts at least three free Uber-like apps. Real-time ordering is quick, showing plenty of cabs in my West London area, and pre-ordering is reliable. And, unlike Uber drivers who (reportedly–I’ve never used Uber) depend on GPS or “satnav” to get around London’s spaghetti bowl of streets, black-cab drivers have “the Knowledge”–two or more years of training (literally, driving around town on bicycles) to learn the streets. That’s an easily experienced built-in advantage. I’ve never understood why no US city’s taxi regulators have required a similar training regimen.

  17. Dk101010

    I have noticed that Uber has started to “throttle” its drivers. Until one can look under the “hood” one can’t confirm, but it does seem that Uber is trying to make sure it spreads the wealth. If a driver hits his limit he doesn’t get any more customers.

  18. mooreniemi

    Really love this series. However, would it hurt to follow through on the driverless cars angle?

    In a previous post in this series you go into the traditional cost breakdown of this sector. Like 60% (IIRC) went to drivers. That then seems like the potential new profit pool for Uber, subtracting out presumably higher vehicle costs and liabilities.

    Even if at the impossible “ideal” case where somehow they manage to grab the entirety of that new pool, would they then be worth their valuation?

    1. Hubert Horan

      Nobody has any idea how a hypothetical “driverless car” industry would be structured or what would be the most critical economics. Would vehicles initially cost a little more than today’s taxis or three times as much? Would there be competing companies with competing standards? Would Uber be making the vehicles or buying them off the shelf? Would Uber own/control the vehicle software, or the systems communicating with roadway IT or the databases about roadways?
      Additionally there’s been a recent report that even an internal Uber report is downplaying the profit potential here. Original item is subscription only but here’s an exerpt:
      Meanwhile, a team at Uber calculated that the switch to self-driving cars, still many years away, won’t save the company as much as is widely thought….Doing without drivers will only increase Uber’s projected long-term net profit margin by as much as 5 percentage points, according to an Uber worker who’s seen internal data projected by that team. That’s in part because of expected municipal regulations on pricing related to autonomous vehicle services, this person said

      1. mooreniemi

        Hubert thanks so much for your reply. This is the item, I take it? Expensive subscription on that site!

        I do wonder what evidence if any could be marshaled to make the argument for what likely savings would be. If you’re not bored to tears of this series by now, I’d love to read your analysis.

        My guess was sort of in the direction suggested by that article: driverless cars will (I hope!) be heavily regulated for safety and that would drive cost up. That said, it could well be driverless cars represent a pyrrhic victory, as many industries have been automated to much lower employment numbers but not higher higher profits. I’m thinking of I’m not an economist though, so perhaps there is some reason driverless vehicles would drive down Uber’s costs without somehow also driving down prices overall. (Monopoly perhaps?)

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