Uber’s Doubtful Path To Profitability Is Not A Meme

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Pricey Dara:

I’m writing to share my reactions to your Q2 earnings name earlier this month. Regardless of the disturbing information of Uber’s $5.2 billion greenback quarterly loss that clearly rattled many analysts, I admired your preternatural optimism all through the session. 

You set an upbeat tone from the outset, citing the progress Uber made final quarter “towards changing into the platform of selection for the motion of individuals and powering international commerce all around the globe.” To that finish, even your skeptics ought to acknowledge that it’s onerous to consider one other firm that has delivered as a lot compelling shopper worth, constructed as robust a worldwide model, or demonstrated as a lot operational prowess in creating Uber’s scale, attain and breadth in lower than a decade.

As for that breathtakingly massive quarterly loss, you had been proper to remind us that three-fourths of the pink ink got here from a “as soon as in a lifetime” accounting cost that’s really type of complicated to most of us. Furthermore, whereas $5.2 billion might sound like an enormous quantity, it’s not even shut to creating the top-ten record of largest quarterly losses ever. Heck, AIG posted a quarterly lack of $61 billion in 2008, GM got here up $48 billion brief in a nasty quarter the next yr, and GE misplaced practically $23 billion in Q3 of final yr. Final I checked, all these corporations are nonetheless buzzing (or no less than limping) alongside. So you've got each purpose to be proud, optimistic and targeted on the prize — delivering immense income within the unspecified future by realizing Uber’s mission “to ignite alternative by setting the world in movement.”

I do nonetheless must quibble with the way you answered one analyst who requested you to share an enormous image view of Uber’s path to profitability. In case you forgot, here’s what you mentioned (with my emphasis added):

“I feel that there is a meme round, which is can Uber ever be worthwhile? I've actually heard that meme together with others. And I am going to let you know, we have now a enterprise â€¦ that has the potential and if we execute to be a spectacular enterprise long run.” 

By swatting away this query about Uber’s future revenue potential as an inconsequential meme, you didn't take accountability for the basic flaws in your enterprise mannequin which have dogged Uber from its inception. Let’s not overlook right here that we’re speaking about an organization that has misplaced extra money sooner than any personal enterprise in historical past, that's second solely to Fb in destroying essentially the most shareholder worth inside the first 4 months of its IPO, and that has but to articulate a selected or credible path to profitability.

And to be trustworthy, I took your dismissive response considerably personally, for the reason that meme you referred to has precisely the identical title as my latest article, Can Uber Ever Be Profitable?, which explores the drivers of Uber’s monetary efficiency, previous, current and future. Whereas doing in depth analysis for article, I didn’t take into account it as a meme. Grumpy Cat is a meme, however asking reputable questions on Uber’s unsure future is decidedly not.

There are the truth is three causes to be very involved with Uber’s tortuous path to profitability.

1.    Uber operates in a really powerful enterprise class

Uber selected to enter the city transportation enviornment, which is and at all times has been an intrinsically tough business to make money – for good purpose. Each main public transport system within the US (and most worldwide) chronically loses money as a matter of public policy.  Why do cities select to subsidize money-losing operations (e.g. 24-hour transit service in NYC and low-density money-losing bus routes in most city/suburban areas)? The reputable rationale is that transportation methods function the lifeblood of a city’s financial system, vitality and social welfare. As such, governments can tax the constructive externalities related to enhanced mobility (e.g. extra entry to excessive paying jobs, extra consuming in downtown bars, and many others.) to offset their transit subsidies. In distinction, not solely can Uber not profit from the constructive externalities it creates (as you recognize, the Friday evening bar scene is nice for you and the bar house owners) , however your organization is being more and more penalized for its unfavourable impacts (congestion, air pollution and low pay for a big section of metropolis employment). As such, Uber will at all times be deprived competing towards money-losing public transportation and the watchdog governments that function them.

As for taxis, that enterprise has never been profitable when allowed to function in largely unregulated markets, due to extraordinarily low boundaries to entry and intrinsically undifferentiated service. It's ironic that you've constantly opposed laws that may cap rideshare provide in main cities, when the truth is unregulated taxi markets virtually assure low company profitability and skimpy driver compensation.

Briefly, Uber has chosen to compete in a very difficult enterprise sector, which partly explains why neither Uber nor any main rideshare firm on the planet (e.g., Lyft, Didi Chuxing, Seize, Ola) makes cash regardless of tens of billions of of VC and IPO funding and practically ten years of making an attempt

As you recognize, restaurant supply has additionally confirmed to be a fraught enterprise, and Uber Eats has not surprisingly change into a large money drain relatively than the salvation you had hoped. You aren't alone, as this class has suffered a number of bankruptcies and hearth gross sales previously few years. Furthermore, well-capitalized opponents like Doordash and Postmates are presently hemorrhaging money, and publicly traded class chief Grubhub has misplaced 60% of its market cap previously yr. It’s onerous to see how that is going to work out effectively for you and your fellow victims.

2.    Uber has a weak enterprise mannequin

You've counter-argued that Uber’s disruptive know-how can basically alter the economics transporting individuals and items in city areas. However we’ve now had a decade to watch Uber’s operations, and it's abundantly clear that each key assumption that the corporate made about its enterprise mannequin from inception has confirmed to be improper.

  1. Uber's asset-light enterprise mannequin and powerful community results will yield big economies of scale and an unassailable first mover benefit in every of the markets it enters.
  2. Uber's prodigious fundraising will give it ample reserves to drive competitors from the market and set up international monopoly management and pricing energy
  3. Uber’s scale benefit and complex AI algorithms will energy a superior service, translating into shorter wait occasions for passengers and drivers, and improved driver productiveness, which in flip will enable Uber to realize the trifecta of low fares, engaging driver compensation and company profitability.
  4. With customers on its facet, municipal governments will likely be unwilling or unable to limit its ever-expanding operations, even after recognizing that Uber’s enterprise priorities battle with public coverage objectives for sustainable, environment friendly modes of public transportation and enough compensation for a big and rising sector of metropolis employment.
  5. Product line extensions will present worthwhile development alternatives to offset lingering losses within the core ridesharing enterprise
  6. Over the long term, the mixture of accessible funds from capital markets and retained company earnings will fund a seamless transition to autonomous automobile operations, promising an much more utopian future.

The truth is, you inherited an organization with a cripplingly weak enterprise mannequin, characterised by:

  • Largely undifferentiated service
  • Comparatively low buyer and driver loyalty
  • Restricted economies of scale in a enterprise with stubbornly excessive and rising prices of income, and advertising and marketing bills.
  • Comparatively low gross margins. Throughout your convention name, you touted Uber's 20% gross margin. However tech superstars like Google and Amazon's AWS have working margins which might be significantly greater, in companies with a lot better economies of scale in addition.
  • Weak community results, provided that each riders and drivers routinely toggle between competing apps. As a putting instance, within the US, Lyft has virtually an many drivers on its platform as Uber , regardless of being roughly one-third your dimension
  • Just about no recurring income or efficient buyer lock-in mechanisms, in contrast for instance to Amazon
  • Relentless value competitors to draw riders
  • Perennial want for sizable incentive/bonus funds to recruit and retain drivers, pushed by widespread driver dissatisfaction with compensation and excessive turnover
  • Ample entry to capital, sustaining intense opponents in all of Uber’s main markets for core platform providers
  • Rising scalability constraints in main metro areas – bounded by limits on street capability and driver provide
  • Rising regulation geared toward recouping the prices of Uber’s unfavourable externalities (congestion, emissions) whereas guaranteeing enough compensation for a rising physique of metropolis workforces.

Given these structural business traits, it isn't stunning your seek for profitability has confirmed to be a Sisyphean quest.

three.  Uber's is sticking to a flawed technique

Over the previous 4 years, Uber has repeatedly modified its narrative to divert consideration from the company’s big losses.

2016

Narrative: Uber’s losses have been adversely impacted by intense competitors in China. With the profitable divestiture of Uber’s Chinese language operations, we must always present vital enchancment in our monetary efficiency.

Actuality: Uber's losses from operations have really deepened for the reason that firm divested its Chinese language operations. Furthermore, after buying Uber’s China enterprise, Didi Chuxing has continued to lose billions of , regardless of its stronger market place

2017

Narrative: We're making progress In our autonomous automobile (AV) analysis program and anticipate to start deploying AV's by as early as the tip of 2018, which ought to enhance our economics.

Actuality: In March 2018, Uber skilled a deadly pedestrian accident with considered one of its AV check automobiles. Uber suspended its AV street check program for 9 months, general progress has slowed and the corporate now solely refers to deployment of AV's as “an essential a part of our choices over the long run,” with the warning that “new ventures are inherently dangerous, and we might by no means notice any anticipated advantages from them.”

2018

Narrative: Uber Eats has emerged as a development star, propelling us to change into the biggest meals supply service on the planet exterior of China.

Actuality: Restaurant supply has at all times been a financially fraught class. A number of well-capitalized opponents are engaged in fierce competitors on this sector, together with DoorDash, Postmates, Grubhub and Uber Eats, none of whom made cash in 4Q 2018. Grubhub's inventory value has declined by 60% from final year’s excessive, reflecting a particularly difficult aggressive surroundings. When Sq. bought its restaurant supply enterprise earlier this month to DoorDash at a hearth sale value, Square’s market cap dropped by practically $5 billion (14%) in sooner or later. Clearly Square’s buyers had positioned a better worth on its restaurant supply enterprise. The flexibility of Uber to earn sustainable engaging returns on this section is much from sure.

2019

Narrative: Uber's platform now incorporates a number of modes and product line extensions, making Uber the “Amazon of transportation.” Our expanded providing will enable Uber to penetrate a $12 trillion whole accessible market.

Actuality: That is a pretty narrative for Uber for 2 causes. First, it performs into a standard perception that Amazon was not worthwhile throughout its first twenty years, so Uber's early losses needn't be of nice concern. Second, Amazon has emerged because the second highest valued publicly traded company on the planet, indicative of Uber's huge upside potential. However neither of these premises is remotely true. Amazon has been a far larger money generator all through its historical past than generally believed. And Uber's operations have nearly nothing in frequent with Amazon's terribly profitable enterprise mannequin.

The frequent theme underlying these false narratives is that Uber can outgrow its losses with out basically altering its core enterprise. You've invested a variety of PR effort and cash in a variety of recent companies – intercity freight, scooters, bicycles, autonomous automobiles, pilotless city air automobiles and bundle supply drones – in hubristic however dubious pursuit of your aspiration to change into the Amazon of transportation. However your core enterprise – ridesharing and Eats — rests on a particularly shaky basis, and you've got spent far too little time explaining about how and whenever you plan to cease the bleeding.

If you wish to quell a growing wave of skeptics who query Uber’s revenue potential, my unsolicited recommendation is to obviously articulate your plans in additional concrete phrases on how you'll ship sustainable monetary efficiency (income, development or each) in Uber’s core enterprise on a definitive timeline. It’s time to maneuver past imprecise guarantees (2019 will likely be Uber’s peak funding yr), unfounded enterprise visions (changing into the Amazon of transportation) and reminders of how a lot cash you continue to have within the financial institution.

Listed here are some questions I want you’d reply earlier than or throughout your subsequent earnings name.

Ridesharing

  • What number of of Uber’s metropolis operations are presently worthwhile? Do you actually must be in all of them? 
  • How are you going to handle your inevitable want to lift costs with out stunting your already declining development fee?
  • Do you propose to additional lower driver compensation, as you've got over the previous few years? What are Uber’s developments in driver compensation, turnover fee and driver recruiting prices? 

Uber eats

  • Please cut up out your P&L reporting on ridesharing and Eats. Particularly how worthwhile is Uber Eats, general and by geography?
  • What have been the developments in your restaurant take fee and driver pay and incentives? 
  • Are you gaining share within the US and abroad or is your aggressive advertising and marketing spend merely the continued value to play on this aggressive market?
  • Does the dearth of profitability throughout this sector sign that Uber Eats is profitable within the market or is restaurant supply proving to be a profitless development class for all? 
  • Beneath any circumstances, what particular steps are you taking to make sure this enterprise will likely be accretive to Uber’s P&L inside the subsequent yr or two? 

New companies

  • You've in contrast Uber to Amazon, however Amazon has largely funded its development from working money movement over the previous fifteen years. Given Uber’s un-Amazon-like monetary efficiency, is it fiscally prudent to proceed investing closely in a variety of extremely unsure new companies?
  • Do it's a must to personal the costly property you're investing in, or are you able to lease or purchase bodily property (autonomous automobiles, city mobility plane) when they're accessible, like different transportation service suppliers?
  • Are you rethinking your dedication to new enterprise funding over the approaching yr?

Dara, I hope to listen to from you quickly on Uber’s thrilling future. The corporate has made superb progress in its first decade. Now comes the onerous half.

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