Why Uber Keeps Raising Billions(mobile.nytimes.com)
mobile.nytimes.com
Why Uber Keeps Raising Billions
http://mobile.nytimes.com/2016/06/21/business/dealbook/why-uber-keeps-raising-billions.html
13 comments
EBIT (earnings before interest and taxes) is a real measure of earnings (i.e. they didn't make it up), but it looks like Uber just saw that on their income statements and latched on it. Not sure it's all that appropriate here.
This focus makes EBIT an especially useful metric for certain applications. For example, if an investor is thinking of buying a firm out, the existing capital structure is less important than the company's earning potential. Similarly, if an investor is comparing companies in a given industry that operate in different tax environments and have different strategies for financing themselves, tax and interest expenses would distract from the core question: how effectively do these companies generate profits from their operations?
This focus makes EBIT an especially useful metric for certain applications. For example, if an investor is thinking of buying a firm out, the existing capital structure is less important than the company's earning potential. Similarly, if an investor is comparing companies in a given industry that operate in different tax environments and have different strategies for financing themselves, tax and interest expenses would distract from the core question: how effectively do these companies generate profits from their operations?
"Uber's revenue is greater than its expenses, if you exclude a number of expenses"
Yes, Uber tries hard to avoid being held to GAAP numbers. This matters. If Uber is buying revenue at a loss, eventually the whole thing will come crashing down. Their business doesn't really have much lock-in; it's more about having the lowest rates.
Soon, it's going to be "Siri, get me a ride", and Apple's servers will find out what's available at what price.
Soon, it's going to be "Siri, get me a ride", and Apple's servers will find out what's available at what price.
I highly doubt they don't also have GAAP numbers. For marketing purposes, they use the numbers that put them in the best light.
The network effect of ride-sharing is considerably weaker than that of a social network. A social network’s effect is O(n²), as that is the number of meaningful connections.
Ride-sharing networks are O(n). They benefit from liquidity, but I derive only secondary benefit from being “connected” to others on the platform. It's not nothing, but it feels linear, not superlinear.
Ride-sharing apps are just apps, and the barrier for adopting a new one is low, for both sides of the market. Further, Uber’s political operations benefit the other apps equally.
Uber can defend its brand and its satisfied users. Size helps here. Think iTunes. But the “network” is replicable by others.
Ride-sharing networks are O(n). They benefit from liquidity, but I derive only secondary benefit from being “connected” to others on the platform. It's not nothing, but it feels linear, not superlinear.
Ride-sharing apps are just apps, and the barrier for adopting a new one is low, for both sides of the market. Further, Uber’s political operations benefit the other apps equally.
Uber can defend its brand and its satisfied users. Size helps here. Think iTunes. But the “network” is replicable by others.
IMO you can have network effects that don't have to do with connectivity. According to Wikipedia, a network effect is "the effect that one user of a good or service has on the value of that product to other people."
In this case... - more passengers lead to more drivers - more drivers lead to shorter pick up times - shorter pick up times lead to better UX/value to passengers
So even though passengers aren't connected to each other, additional passengers significantly increase the value of Uber for existing passengers. This is actually very hard to replicate for new entrants.
For example, let's say when Uber started, there were 20 drivers and 1000 passengers, and the average pick up time was 6 minutes. If the average ride was 9 minutes, then a driver could do 4 rides per hour. Those 4 rides had to provide a decent wage -- let's say $20/hour. That means each 9 minute ride was $6.25 ($1.25 for Uber's take rate, $5 to the driver).
Now, let's say 4000 additional passengers signed up over a few months, which led to 80 additional drivers. Now, because there are more drivers all over the city, the average pick-up time might be 3 minutes. That means a driver can now do five 9-minute rides per hour instead of four. That means each ride can now cost $5 instead of $6.25, and the driver still makes $20/hr.
For passengers, this is awesome: their wait times got cut in half while the cost of a ride dropped by 20%. For new entrants, this is awful: the two main levers for competition are cost and waiting time, and Uber broke both of those levers. New entrants can still match fast pick up times and low costs, but they have to bleed much, much more money to do so when they launch in a new market.
In a way, Uber's network effects are like economies of scale, but they're typically classified as network effects because the means of production come from more drivers and passengers signing up, not from Uber doing any "real" work itself.
In this case... - more passengers lead to more drivers - more drivers lead to shorter pick up times - shorter pick up times lead to better UX/value to passengers
So even though passengers aren't connected to each other, additional passengers significantly increase the value of Uber for existing passengers. This is actually very hard to replicate for new entrants.
For example, let's say when Uber started, there were 20 drivers and 1000 passengers, and the average pick up time was 6 minutes. If the average ride was 9 minutes, then a driver could do 4 rides per hour. Those 4 rides had to provide a decent wage -- let's say $20/hour. That means each 9 minute ride was $6.25 ($1.25 for Uber's take rate, $5 to the driver).
Now, let's say 4000 additional passengers signed up over a few months, which led to 80 additional drivers. Now, because there are more drivers all over the city, the average pick-up time might be 3 minutes. That means a driver can now do five 9-minute rides per hour instead of four. That means each ride can now cost $5 instead of $6.25, and the driver still makes $20/hr.
For passengers, this is awesome: their wait times got cut in half while the cost of a ride dropped by 20%. For new entrants, this is awful: the two main levers for competition are cost and waiting time, and Uber broke both of those levers. New entrants can still match fast pick up times and low costs, but they have to bleed much, much more money to do so when they launch in a new market.
In a way, Uber's network effects are like economies of scale, but they're typically classified as network effects because the means of production come from more drivers and passengers signing up, not from Uber doing any "real" work itself.
> This is actually very hard to replicate for new entrants.
I've seen many drivers running both lyft and uber at the same time. A third company comes along that pays drivers better? Why not keep all three apps up. There's no cost to running an additional app. Literally none at all. And if it pays slightly better, or has a fairer reputation system...
The same thing works on the rider side as well. If you've got an app (like what's the fair) that can let you query any number of providers and get the cheapest price, maybe you're happy to wait a few minutes to save money.
I've seen many drivers running both lyft and uber at the same time. A third company comes along that pays drivers better? Why not keep all three apps up. There's no cost to running an additional app. Literally none at all. And if it pays slightly better, or has a fairer reputation system...
The same thing works on the rider side as well. If you've got an app (like what's the fair) that can let you query any number of providers and get the cheapest price, maybe you're happy to wait a few minutes to save money.
The problem is that Uber/Lyft make it so that they are cheaper AND faster than a new entrant. I think if a 3rd company came along and it paid drivers better, then drivers would install a 3rd app. But Uber/Lyft's network effects makes that a very expensive proposition. For example, if an Uber driver gets $5/ride and can do 6 rides/hour, they make $30/hour. If a new entrant can only offer 4 rides/driver/hour (at $5/each) because there aren't enough riders using its app yet, then either the riders or the new entrant have to subsidize drivers the additional $10/hour. Riders won't pay extra -- why would they when they can use Uber instead? -- so the new entrant ends up paying 1/3 of each ride to get the network effect going, and that can be quite expensive if you're doing thousands of rides per day in a single city.
There are some complications to consider. Maybe a 3rd company can pay drivers a little less because it treats them more nicely than Uber does, or maybe riders will be willing to pay more or wait more for a 3rd company's cars for some reason (e.g. Lyft's tends to be friendlier while Uber is more formal, and some users are willing to pay more for the former). But in general the more passengers and drivers an app has, the better off both sides of that app's market will be.
There are some complications to consider. Maybe a 3rd company can pay drivers a little less because it treats them more nicely than Uber does, or maybe riders will be willing to pay more or wait more for a 3rd company's cars for some reason (e.g. Lyft's tends to be friendlier while Uber is more formal, and some users are willing to pay more for the former). But in general the more passengers and drivers an app has, the better off both sides of that app's market will be.
True in theory, but incumbents can (and do) reward drivers for completing lots of trips. This makes it easier to lock out a new entrant, especially if they're attacking city by city. Just ramp up the rewards for drivers who complete X trips per week, and you can fend off the new guy.
Someone if goes bankrupt and then making the app open source and not a taking cut at all..can it kill Uber eventually?
Or the tech benefit of actively working people in Uber will be much better ROI for drivers to give a 20% cut -- which other industry gives such high a cut? (airlines or movie ticket booking doesnt)
Or the tech benefit of actively working people in Uber will be much better ROI for drivers to give a 20% cut -- which other industry gives such high a cut? (airlines or movie ticket booking doesnt)
> Someone if goes bankrupt and then making the app open source and not a taking cut at all..can it kill Uber eventually?
Uber and Lyft provide a substantial amount of infrastructure and staffing; they wouldn't function without that. Someone has to keep the server infrastructure running and scaling, and even more importantly, someone has to maintain the support, rating, and qualification system to maintain quality.
Uber and Lyft provide a substantial amount of infrastructure and staffing; they wouldn't function without that. Someone has to keep the server infrastructure running and scaling, and even more importantly, someone has to maintain the support, rating, and qualification system to maintain quality.
Do more drivers lead to shorter pickup times or more drivers without a passenger.
Also, I did some math and it takes n^2 drivers to half the distance between drivers areas.
Also, I think as the food delivery companies get bigger it all starts to merge into one industry. Imagine some kind of loyalty program were if free ride or delivery after so many meals delivered.
If you had the drivers out delivering flyers for the local food companies they could make money while waiting on a fare.
ebay and amazon have network effects because it has so many different items for sale, not just drivers.
Also, I did some math and it takes n^2 drivers to half the distance between drivers areas.
Also, I think as the food delivery companies get bigger it all starts to merge into one industry. Imagine some kind of loyalty program were if free ride or delivery after so many meals delivered.
If you had the drivers out delivering flyers for the local food companies they could make money while waiting on a fare.
ebay and amazon have network effects because it has so many different items for sale, not just drivers.
> Do more drivers lead to shorter pick-up times or more drivers without a passenger.
That's an interesting question. I think in this case it's shorter pick-up times because the system can somewhat self-correct in real-time:
1) If a someone is thinking about going out and driving, they check the app, see that there are lots of drivers out and not many passengers, so they might decide not to go out at that moment.
2) If there are too many requests and not enough drivers, Uber increases surge pricing. The greater the increase, the more drivers come out and the more requests get withdrawn until an equilibrium is reestablished.
Finally, there's some data at https://newsroom.uber.com/uber-expectations-as-we-grow/ that shows that the longer Uber is in a city, the more pick-up times drop and passengers expect shorter pick-up times.
I agree with you about food companies: at some point they might become competitive with Uber, or they might outsource logistics to Uber while they handle the food ordering and preparation aspects.
That's an interesting question. I think in this case it's shorter pick-up times because the system can somewhat self-correct in real-time:
1) If a someone is thinking about going out and driving, they check the app, see that there are lots of drivers out and not many passengers, so they might decide not to go out at that moment.
2) If there are too many requests and not enough drivers, Uber increases surge pricing. The greater the increase, the more drivers come out and the more requests get withdrawn until an equilibrium is reestablished.
Finally, there's some data at https://newsroom.uber.com/uber-expectations-as-we-grow/ that shows that the longer Uber is in a city, the more pick-up times drop and passengers expect shorter pick-up times.
I agree with you about food companies: at some point they might become competitive with Uber, or they might outsource logistics to Uber while they handle the food ordering and preparation aspects.
> The network effect of ride-sharing is considerably weaker than that of a social network.
If Uber actually did ride-sharing, in the social sense, it would have a significant network effect: it would get more valuable for everyone the more people used it. But Uber isn't "ride-sharing"; it's just a normal service business, with no significant benefit from network effects.
If Uber actually did ride-sharing, in the social sense, it would have a significant network effect: it would get more valuable for everyone the more people used it. But Uber isn't "ride-sharing"; it's just a normal service business, with no significant benefit from network effects.
> Ride-sharing apps are just apps, and the barrier for adopting a new one is low, for both sides of the market.
It's easy for two people to start using a new social network as well. That doesn't mean they'll want to do it if they're the only two people on it.
More Uber users -> larger market for Uber drivers -> more Uber drivers -> higher availability of drivers for Uber users -> more Uber users -> etc etc
> Further, Uber’s political operations benefit the other apps equally.
They could push for monopolies at the municipal level, much like cable companies do.
It's easy for two people to start using a new social network as well. That doesn't mean they'll want to do it if they're the only two people on it.
More Uber users -> larger market for Uber drivers -> more Uber drivers -> higher availability of drivers for Uber users -> more Uber users -> etc etc
> Further, Uber’s political operations benefit the other apps equally.
They could push for monopolies at the municipal level, much like cable companies do.
Also, FWIW, the article really doesn’t explain much, and might be plain wrong. It’s far from a zero-sum game, the overall market has very little ceiling in the foreseeable future.
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Social networks are sparse graphs with a linear number of edges.
Why Uber Keeps Raising Billions - yes, it's trying to build marketshare, and intimidate others from backing rivals.
But the reason isn't because ride-sharing is a network-effect heavy industry.
It's because logistics is an industry that is cheaper at scale.
The long game for Uber isn't ride sharing, it's logistics, and "people delivery" is only one (fairly minor) part. If Uber can pick up enough scale, then every time a delivery is picked up (in one of the driverless vans of course) it can also deliver multiple packages along the way. That's where scale is important, and why the capital is important.
Talk to an UberX driver: here anyway (in Australia) Uber is already sending them on optimized delivery paths when they do delivery.
But the reason isn't because ride-sharing is a network-effect heavy industry.
It's because logistics is an industry that is cheaper at scale.
The long game for Uber isn't ride sharing, it's logistics, and "people delivery" is only one (fairly minor) part. If Uber can pick up enough scale, then every time a delivery is picked up (in one of the driverless vans of course) it can also deliver multiple packages along the way. That's where scale is important, and why the capital is important.
Talk to an UberX driver: here anyway (in Australia) Uber is already sending them on optimized delivery paths when they do delivery.
"The ride-sharing industry has long been seen as a zero-sum game because of the “network effect”"
I am not sure how true this is, both drivers and riders will always follow the money, and there is not a lot you can do on the experience side that can't be replicated by competitors. This will never be a zero sum game at scale.
When Uber & Lyft moved out of Austin, drivers rallied to make a quick network. In India, drivers already have their closed networks, and many work for both Uber & it's competitor Ola, which just goes to show there is no driver lock-in.
I am not sure how true this is, both drivers and riders will always follow the money, and there is not a lot you can do on the experience side that can't be replicated by competitors. This will never be a zero sum game at scale.
When Uber & Lyft moved out of Austin, drivers rallied to make a quick network. In India, drivers already have their closed networks, and many work for both Uber & it's competitor Ola, which just goes to show there is no driver lock-in.
But there is a user lock in. After a while users won't switch. No matter the difference.
Also, they are not really on it because of the drivers and users game.
The end game is self driving cars to rent.
Also, they are not really on it because of the drivers and users game.
The end game is self driving cars to rent.
There is about as much lockin as Groupon.
And yet, people do switch browsers on the desktop, if slowly. Do you think that get-a-ride apps are stickier than browsers?
Just note that in the end game the switching cost is much lower. You don't have to convince users and drivers, only users and buy a bunch of cars in one location.
Not so sure about user lock in. Whenever I need a ride i always check both apps and pick the one offering the lower price and I know several people who do the same.
But there is a user lock in. After a while users won't switch. No matter the difference.
Users will switch if someone raises billions and spends that money subsidising rides for users and increasing the revenue for drivers. It's exactly the same model that Uber used to compete with taxis, and it works.
If Uber proves there's a huge market for their product then people will compete with them. This will happen whether or not there are humans or machines driving the cars.
Users will switch if someone raises billions and spends that money subsidising rides for users and increasing the revenue for drivers. It's exactly the same model that Uber used to compete with taxis, and it works.
If Uber proves there's a huge market for their product then people will compete with them. This will happen whether or not there are humans or machines driving the cars.
A good analogy is the Airline industry. It is on demand just like uber, in transport just like uber, has pilots instead of driver (more expensive of course). Even with loyalty programs only a very small percentage of users lock-in with a single airline.
"But there is a user lock in."
Huh? How? I always check traditional taxi and Uber (Lyft is not in my town yet) to see which is cheaper at a given time. Or do people get attached to buses too?
Huh? How? I always check traditional taxi and Uber (Lyft is not in my town yet) to see which is cheaper at a given time. Or do people get attached to buses too?
They want a cash horde that will allow them to continue to invest and expand through the next business cycle.
They need money to find a new business plan. Money comes pretty easily due to publicity, and that the people with money to invest are more likely to be people that use Uber, at least that's my guess. So they feel it's a solid business. People tend to believe that products they use are a good investment, because "everyone is using it".
It wouldn't surprise me if Uber is realising that there isn't actually that much money to be made driving people around. Taxies are a artificially limited business, in most places, but you're not seeing a ton of wealthy taxi drivers. Why should Uber be that much better at making money in the taxi business. I'm not saying that there's not money to be made, or room for improvements and increased profits. I just question the size of that potential profit.
It wouldn't surprise me if Uber is realising that there isn't actually that much money to be made driving people around. Taxies are a artificially limited business, in most places, but you're not seeing a ton of wealthy taxi drivers. Why should Uber be that much better at making money in the taxi business. I'm not saying that there's not money to be made, or room for improvements and increased profits. I just question the size of that potential profit.
You are making the mistake of comparing the Uber market size to the taxi market size.
Uber, by providing an easier way to take rides, has made an existing market much bigger, and they are taking over it. The market size has changed thanks to Uber.
Uber, by providing an easier way to take rides, has made an existing market much bigger, and they are taking over it. The market size has changed thanks to Uber.
>Uber, by providing an easier way to take rides, has made an existing market much bigger,
I honestly doubt it. The market size is the same, Uber just made it easier to get a taxi by adding more of them. Taxi drivers often have a second job (at least in some countries), they aren't wealthy people, despite having essentially a monopoly. The only thing Uber can do, and have done, is add more cars, at the right time.
The issue is mostly that you can't get a taxi when you need one, because most of us need them at the same time, at 2AM on Sunday morning or when it's raining. That's a severely limited niche and the only reason you can't a taxi at these time is because there isn't a business case for have those cars on the road for the rest of the week.
I honestly doubt it. The market size is the same, Uber just made it easier to get a taxi by adding more of them. Taxi drivers often have a second job (at least in some countries), they aren't wealthy people, despite having essentially a monopoly. The only thing Uber can do, and have done, is add more cars, at the right time.
The issue is mostly that you can't get a taxi when you need one, because most of us need them at the same time, at 2AM on Sunday morning or when it's raining. That's a severely limited niche and the only reason you can't a taxi at these time is because there isn't a business case for have those cars on the road for the rest of the week.
Maybe you're from Manhattan or somewhere taxis are ubiquitous? Where I'm from (Portland) nobody ever used to take cabs, myself included, because they were so sparse and terrible. I'm talking about regular 30min waits. I take Uber all the time now.
>because they were so sparse and terrible
My point is: They're sparse, and terrible, because that's what the market will sustain. Uber is making more cars, better cars, available, but I don't think that sustainable in the long run. It's my belief that Uber, and it's drivers, will come to the conclusion that there simply aren't that much money to be made, unless you restrict the supply of cars.
Honestly, does any one believe that the reason of taxies being sparse or terrible is because the taxi companies doesn't give a shit? If they could make more money by having cars on the road, then why shouldn't they work towards that?
My point is: They're sparse, and terrible, because that's what the market will sustain. Uber is making more cars, better cars, available, but I don't think that sustainable in the long run. It's my belief that Uber, and it's drivers, will come to the conclusion that there simply aren't that much money to be made, unless you restrict the supply of cars.
Honestly, does any one believe that the reason of taxies being sparse or terrible is because the taxi companies doesn't give a shit? If they could make more money by having cars on the road, then why shouldn't they work towards that?
At least in my area, all of the Uber drivers are fully or semi-retired older people. These are people that certainly wouldn't want to work full-time as taxi drivers, and assuredly aren't going to jump through all the hoops and regulation to run their own taxi company. Uber is really taking advantage of under-utilized resources that would otherwise be wasted.
> Honestly, does any one believe that the reason of taxies being sparse or terrible is because the taxi companies doesn't give a shit? If they could make more money by having cars on the road, then why shouldn't they work towards that?
No, they were sparse and terrible because of the medallion system limiting the supply.
No, they were sparse and terrible because of the medallion system limiting the supply.
That argument only applies in locations that have such systems.
When it describes a pile of cash that a dragon/'ride-sharing' company jealously guards, it's "hoard". When it describes a big group of investors desperately trying to give Uber even more money, it's "horde".
Apparently they run at a loss in new cities for months even into years. They give away tons and tons of free rides on the client side and actually pay drivers more than they get in payment (even ignoring their overhead) until they can guarantee a pretty full day of driving people around.
So they need billions to sponsor these expansions.
As a non-public company, nobody's really seen their financials. So it could be anywhere from the next Google/Facebook to a complete scam. Only a few people have the information to know either way.
So they need billions to sponsor these expansions.
As a non-public company, nobody's really seen their financials. So it could be anywhere from the next Google/Facebook to a complete scam. Only a few people have the information to know either way.
I almost think that it would be worth it to subsidize Uber to keep operating, even in areas that they could never break even. I live in an area that, technically, has some taxis services, but they are incredibly bad, unsafe, and over-priced. Uber is a fantastic option here, far better quality and cheaper than the existing services.
I'd be okay with that as long as private investors are subsidizing it.
I've suspected that Uber and AirBnB know they need a legal warchest.
I have a great dislike of Uber. They say they are "breaking the taxi monopoly" but they're literally just building a new one, and they're doing that by starving out the existing taxi services with the billions and billions of dollars they keep fundraising. It's fucking dirty.
Why do you choose to label competition and development of a better product as 'fucking dirty'? Criticizing Uber for some imaginary future world where it has captured the market via regulatory mechanisms (like taxis), seems premature to me.
I don't understand how this article is claiming that ride-sharing is a zero-sum game. It's not a search engine or social network that "network effect" or customer experience is the main motivation for customer to choose the service.
People will choose another provider if they offer the service for pennies less. Heck people switch to Bing search for a few pennies a week in "Bing rewards".
I'm sure Uber/Lyft competition in the United States is going to be like Coke/Pepsi competition. It's a low margin business and a lot of people can do it. Therefore there is no way you can have a "winner take it all" situation.
People will choose another provider if they offer the service for pennies less. Heck people switch to Bing search for a few pennies a week in "Bing rewards".
I'm sure Uber/Lyft competition in the United States is going to be like Coke/Pepsi competition. It's a low margin business and a lot of people can do it. Therefore there is no way you can have a "winner take it all" situation.
Seems like Uber has quite a bit of competition in the US market besides Lyft, namely:
1) Juno -- https://www.gojuno.com/
2) Gett -- http://gett.com/nyc/
3) Via -- http://ridewithvia.com/
Seem like all our starting out in NY, but it is just a matter of time before margins are squeezed to zero.
Seem like all our starting out in NY, but it is just a matter of time before margins are squeezed to zero.
The article is quite superficial on many aspects:
i) first, Uber is not in the sharing economy but in the on-demand: you don't share and monetize an asset (vs AirBnb), you offer a service activated by demand;
ii) in my opinion, Uber keeps raising funds for multiple reasons and some of them are simply overlooked in the article:
- from a global market point of view: money (especially in the form of debt) is historically cheap
- from an investor point of view: investors are looking for proven business models as VC funding is slowing down
- from an employee point of view: the multiple funding rounds maintain/increase the valuation, which preserves the stock-based incentive for employees (and we know that's a key reason why so many great programmers joined Uber)
- from a competitor point of view: Uber opens the market and evangelizes (pays the legal cost, advertises in new markets, etc.)
iii) it never really analyses the on-demand transport economics = is it a "winner takes all" market structure? The article keeps suggesting it is while it is clearly not
So they raise money and subsidize drivers to use their service.
Makes you wonder if Taxi companies would have increased services / hired more drivers/ lowered prices if the money went directly to them?
Now most of the artificially created suppliers will likely drop out the moment the driving becomes unprofitable or switch provider as the barriers to entry in this market are not that high.
Makes you wonder if Taxi companies would have increased services / hired more drivers/ lowered prices if the money went directly to them?
Now most of the artificially created suppliers will likely drop out the moment the driving becomes unprofitable or switch provider as the barriers to entry in this market are not that high.
One important factor is the TEAM. They have one of the finest workforce. Extremely talented people driving the growth of the company.
It's easy to understand why they'd want this, and as for why people invest... hope, greed, the usual things.
The second there's a Tesla icon on my phone that summons a driverless car, goodbye Uber. Not sure how they're going to buy and maintain a fleet of cars below Musk's cost.
There's a level of immaturity in the current definitions of profitability that the Valley is pushing. Being privately held ensures that no sensible accounting system will be anywhere near their books.