Kudos to Naked Capitalism’s Yves Smith for giving transportation industry expert Hubert Horan a platform to highlight the following analysis of the scant figures Uber has shared (reluctantly) with the public thus far – none of which had a requirement to be audited in accordance with GAAP or SEC reporting standards. Our emphasis:
As shown in Exhibit 2, for the year ending September 2015, Uber had GAAP losses of $2 billion on revenue of $1.4 billion, a negative 143% profit margin. Thus Uber’s current operations depend on $2 billion in subsidies, funded out of the $13 billion in cash its investors have provided.
Uber passengers were paying only 41% of the actual cost of their trips; Uber was using these massive subsidies to undercut the fares and provide more capacity than the competitors who had to cover 100% of their costs out of passenger fares.
This is critical because it suggests we’re dealing with a charity case in disguise.
But there’s more to it than that. Silicon Valley elites justify the subsidies in the name of monopolistic growth expectations and the building of “eco-systems”*. They believe if monopoly status is achieved, profitability will follow naturally from that point.
Yet, as FT Alphaville has long maintained, there is no reason to assume Uber’s obliteration of local competition across the planet will create a sustainable business in the long term. Costs are costs, even if you’re a monopoly. As long as people have cheaper alternatives (public transport, legs), they will defect if the break-even price is higher than their inconvenience tolerance threshold.
The fact Silicon Valley thinks otherwise is sadly symptomatic of the emperor’s new clothes groupthink dominating the sector. Though it does explain the sector’s obsession with popularising the idea that public transport can be done away with. (Less investment in public transport will lead to fewer competitively priced alternatives, empowering the Uber monopoly in the long run).
As Horan notes:
There is no evidence that Uber’s rapid growth is driving the rapid margin improvements achieved by other prominent tech startups as they “grew into profitability.”
Assuming that the unusual spike in EBITAR margin in the first half of 2014 (157%) was due to one-time events or accounting anomalies, Uber has been steadily producing EBITAR margins worse than negative 100% since 2012, and the absolute magnitude of losses has been increasing.
With the economics of the core business model looking that bad, small surprise Uber is currently preoccupied with pivoting its way to viability. If prices ever reflected the true cost of service provision, customer growth would stall and marketshare would no doubt be lost to more economically organised local alternatives.
Users will be familiar with the key pivots in hand. The first came in the shape of subtly turning its private taxi service into an economised carpool experience and hoping customers wouldn’t notice Uber’s slow and steady transformation into a bus service. Indeed, since this is Uber, customers’ preferences are instead subtly massaged and managed with discount incentives and other behaviour moderating mechanisms (like crappy app navigation which makes it impossible to opt out of a pooled journey).
The pooled option generates a much better margin for Uber. But drivers, safe to say, hate it. Many complain customers don’t always realise they’ve ordered a pooled trip and are shocked and annoyed when the app forces them to divert to pick up another customer at the expense of their convenience and journey time. The margin improvement, meanwhile, is mostly absorbed by Uber. Another pivot is the deployment of an “optimised pickup point” function, where passengers are incentivised (with discounts) to gather at hub points which improve route efficiency — essentially, the reinvention of the taxi rank and/or the bus stop.
Then there are the more dramatic pivots such as the deployment of delivery services like UberEats (the economics of which are equally questionable) and ultimately the release of self-driving vehicles, the economics of which we’re not sold on either.
But there are other more sinister issues at hand, like the blurring of political processes with business viability.
For example, when we met Bradley Tusk, CEO of Tusk Ventures, who lobbies on behalf of Uber in Washington at the Web summit in Lisbon earlier in November, he argued fervently that the backlash amongst drivers was being prompted by the fact that Uber was disrupting taxi cartels which had overpriced services for so long. Consumers wanted cheaper taxi journeys and the law which protected these cartels had to move with the times to respond to consumer demands.
As he noted to us:
There are, sure, the black cab drivers in London and taxi drivers who feel disaffected because they are losing out, but they can always become Uber drivers by the way, but at least in the US what frequently happens is the taxi cartel tries to shut Uber down because they don’t want innovation because Uber is ultimately such a more democratic system, it will take people where they want to go no matter who they are.
I think we’ve used democracy much in the way Trump has to ultlimately make our point. So we’ve run campaigns where 1000s of customers will plead or email the regulators to the government to say no leave me alone so the position of Travis is that Uber is very much a position of economic freedom.”
But what the above really illustrates is that nobody at Uber seems to understand the difference between a political process and a market process.
What they want is for the law to bow to “consumer demand” for cheaper taxi services by granting Uber the right to ignore collective regulations on worker rights and conditions. But all this equates to is an economic transfer from the working class over to urban metropolitan elites, which benefits one particular corporation over others. This is plainly crazy. The only innovation in hand is that the old “You rang m’Lord” system has been transformed into a “you hailed me on your app m’Lord” one instead.
If the population’s top political priority really was a cheap private car service rather than a new public transport infrastructure, political parties would be putting this issue at the top of their political manifestos. The fact they don’t suggests society as a whole would never endorse policy which campaigned for cheap taxi services to be funded with lower worker living standards.
It’s hardly surprising that consumers will endorse political calls for cheaper taxi services if a pre-drafted email to that effect lands in their inbox without a fair explanation of who funds those cheap services really. They’d call for cheaper medical services, education, housing, utilities, basically everything as well. The question is not whether they want cheaper taxi services, it’s whether they would prioritise this need over all their other social and political needs as a whole. Hence why getting customers to dispatch thousands of pre-drafted emails to politicians isn’t indicative of the power of democracy. It’s indicative of an Uber-organised DDoS attack upon the state.
It’s fair to suggest the economics will prove themselves eventually. There’s even good anecdotal evidence to suggest they’re already doing so.
We recently spoke to one of Uber’s earliest London drivers, who declined to be named. He told us that to survive he had to forge a driver syndicate which collectively owns the underlying car capital. With more drivers than cars to hand, the cars can be fully utilised 24 hours a day improving the return on capital invested. To economise further, the drivers take turns with shifts, step-in for each other if and when they need leave and recruit temporary staff if and when they find themselves under staffed. They also mutualise the costs and the insurance. Yet, even then, he said “it’s really hard to make the economics work” and that “when Uber increased its margin from 20 per cent to 28 per cent it knocked our profitability in half”.
What this amounts to, of course, is the re-constitution of the very economies of scale which Uber inadvertently demolished when it went about its atomising driver process. But if a quasi professional corporate structure like this can’t make ends meet within the Uber network, what hope does any single driver have? Uber is surviving on plain old worker naivety.
*Eco-system is a Silicon Valley euphemism for a cross-subsidised system.