Is Uber in trouble?

Uber has become ubiquitous, as people have come to rely on the app-based transportation networking company to provide a ride to the airport, or from the bar, or as an easy and convenient form of mobility in general. But it is also hemorrhaging money: it posted a $1 billion loss last quarter, after losing $4.5 billion in all of 2017. Uber presents itself as a "techy" business concept, but is its fundamental practice sustainable over the long haul?

Uber has never presented a case as to why it will ever be profitable, let alone earn an adequate return on capital. Investors are pinning their hopes on a successful IPO, which means finding greater fools in sufficient numbers.

Uber is a taxi company with an app attached. It bears almost no resemblance to internet superstars it claims to emulate. The app is not technically daunting and and does not create a competitive barrier, as witnessed by the fact that many other players have copied it. Apps have been introduced for airlines, pizza delivery, and hundreds of other consumer services but have never generated market-share gains, much less tens of billions in corporate value. They do not create network effects. Unlike Facebook or eBay, having more Uber users does not improve the service.

Nor, after a certain point, does adding more drivers. Uber does regularly claim that its app creates economies of scale for drivers — but for that to be the case, adding more drivers would have to benefit drivers. It doesn’t. More drivers means more competition for available jobs, which means less utilization per driver. There is a trade-off between capacity and utilization in a transportation system, which you do not see in digital networks. The classic use of “network effects” referred to the design of an integrated transport network — an airline hub and spoke network which create utility for passengers (or packages) by having more opportunities to connect to more destinations versus linear point-to-point routes. Uber is obviously not a fixed network with integrated routes — taxi passengers do not connect between different vehicles.

Nor does being bigger make Uber a better business. As Hubert Horan explained in his series on Naked Capitalism, Uber has no competitive advantage compared to traditional taxi operators. Unlike digital businesses, the cab industry does not have significant scale economies; that’s why there have never been city-level cab monopolies, consolidation plays, or even significant regional operators. Size does not improve the economics of delivery of the taxi service, 85 percent of which are driver, vehicle, and fuel costs; the remaining 15 percent is typically overheads and profit. And Uber’s own results are proof. Uber has kept bulking up, yet it has failed to show the rapid margin improvements you’d see if costs fell as operations grew.

The article, which is worth reading in its entirety, explains that Uber has undercut traditional taxi companies not because it is a better product, but because the $20 billion in investor funding that it has raised over time has allowed it to subsidize its customer base, giving it a competitive advantage over taxi companies that must recover all their costs. Compared to taxi companies, however, Uber is actually at a disadvantage in the long term: it has higher overhead costs, and it cannot manage schedules or capacity to optimize efficiency. The considerable data Uber collects about the rides it provides, moreover, does not appear to have made much difference in terms of its profitability.

Uber’s struggle to turn a profit has also had a negative impact on its drivers:

While Uber has reduced its negative gross margin over time, those improvements have come mainly from squeezing driver compensation, so that they now net less per hour on average than taxi operators. Through 2015, 80 percent of fares went to drivers. In its early years, Uber gave drivers high payouts to attract good drivers and also offered drivers incentives to buy cars. Uber cut that to as low as 68 percent, then partially reversed it as driver turnover became acute to its current, roughly 70 percent level. In 2017, Uber’s margin as reported using GAAP was a negative 57 percent. It would have stayed at the negative triple-digit level absent the driver pay-throttling.

The pay cuts have led to more driver turnover, which leads to higher managerial costs. And it is degrading service quality.

But what if Uber were to get rid of their drivers entirely? Autonomous vehicles would surely allow the company to begin turning a profit, right?

But what about driverless cars? Let’s put aside that some enthusiasts like Apple co-founder Steve Wozniak now believe that fully autonomous cars are “not going to happen.” Fully autonomous cars would mean Uber would have to own the cars. The capital costs would be staggering and would burst the illusion that Uber is a technology company rather that a taxi company that buys and operates someone else’s robot cars.

The article doesn’t mention that there’s evidence that TNCs such as Uber may contribute to congestion and may negatively impact public transportation. Granted, those are probably not things investors care about when they put money into Uber: they're simply looking for a return on that investment. Unfortunately, Uber has failed miserably in that regard:

Uber has succeeded in getting the business press to treat its popularity as the same as commercial success. A few tech reporters, like Eric Newcomer of Bloomberg, have politely pointed out that Uber’s results fall well short of other tech illuminati prior to going public. The pitch that dominance would produce profits is demonstrably false and Uber seems unable to come up with a new story. There’s every reason to think that investors, not local cab companies, will wind up being Uber’s biggest roadkill.

I wonder how many of Uber's users and drivers even understand how unsustainable Uber's business model is. I'd hate for all of them to have to find out the hard way.