Uber is ostensibly valued at over $60 billion. To really be ‘worth’ that they have to grow rapidly, and arguably beyond on demand ridership into a ‘transportation logistics company’ moving goods and not just people. And they have to actually make money.
While there are certainly network effects — the more consumers use Uber, and the more drivers offering rides on their platform, the more valuable they are. The first person with a fax machine had a useless piece of equipment. There was no one to send them anything, and they couldn’t send a document to anyone else. The fax machine became more valuable the more people that had them. But even there, when’s the last time you sent a fax? I believe I’ve sent two in the past year.
There are few barriers to entry (although each time Uber works with a local jurisdiction to regulate the industry, more barriers go up). That’s why investors keep putting money into Lyft. It isn’t a winner take all for all times market. Eventually Uber has to earn profits.
And it turns out that one reason they’ve needed to raise so much capital is because they lost about $1 billion during the first 6 months of 2015. They’re spending big money to expand into new markets. For all of the complaints by drivers – especially in California, arguing they ought to be reimbursed for miles as employee business expenses, for instance — giving drivers an average of 80% of each fare isn’t enough to cover their costs. They’re investing in technology. They invest in bringing drivers onto the network. They invest in attracting new customers. And they build infrastructure in new cities and countries around the world. And that’s expensive.
Uber is indeed a tough master to work for, except for anyone else that most drivers would work for. Apparently it’s tough to attract cooks in Britain because of how much Uber is increasing opportunities in the UK.
Oli Khan, the owner of the the popular U.K. Spice Rouge restaurant (and past winner of England’s National Curry Chef of the Year prize) says it’s harder than ever to attract talented cooks to work in his kitchen because of Uber. In a fascinating FT.com look at the British curry trade in crisis, Khan tells reporter Malcolm Moore:
“A lot of people in London have joined Uber . . . including chefs, tandoori chefs, waiters, managers — even the owners of restaurants….We do not have the profits we used to and now a lot of people value the freedom of that life…In a cab company you just go there and drive the car.”
In many ways, Uber is like the First CityWide Bank of Change.
A lot of people don’t realize that change is a two-way street. You can come in with sixteen quarters, eight dimes, and four nickels – we can give you a five-dollar bill. Or we can give you five singles. Or two singles, eight quarters, and ten dimes. You’d be amazed at the variety of the options you have.
…All the time, our customers ask us, “How do you make money doing this?” The answer is simple: Volume.
In other words, Uber loses money on each trip but they make it up in volume. (In fact, the marginal trip isn’t done at a loss, it’s just that revenue net of payments to drivers isn’t enough to cover Uber’s overall costs.)
That can only last so long. Can Uber grow enough that critical mass actually entails lower costs and they don’t have to raise prices? Or when Uber starts trying to make money what does that look like? Are the riders still as loyal, or does that mean there’s room for competition?
After losing that billion dollars they had over $4 billion cash on hand and they’ve since raised more. They believe they might earn $14 billion over the next four years. And they project earning $8 billion in 2019. Of course every business is profitable in Excel.