>> "Uber says it is profitable in North America, Europe, the Middle East, Africa and Australia — if you factor out taxes and interest payments."
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.
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?
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.
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.
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.
> 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.
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.
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.
"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.
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.
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.
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.
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.
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.
[+] [-] iaw|9 years ago|reply
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.
[+] [-] refurb|9 years ago|reply
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?
[+] [-] NeutronBoy|9 years ago|reply
[+] [-] Animats|9 years ago|reply
Soon, it's going to be "Siri, get me a ride", and Apple's servers will find out what's available at what price.
[+] [-] ojbyrne|9 years ago|reply
[+] [-] mwsherman|9 years ago|reply
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.
[+] [-] lpolovets|9 years ago|reply
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.
[+] [-] JoshTriplett|9 years ago|reply
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.
[+] [-] deciplex|9 years ago|reply
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.
[+] [-] mwsherman|9 years ago|reply
[+] [-] unknown|9 years ago|reply
[deleted]
[+] [-] adrianN|9 years ago|reply
[+] [-] nl|9 years ago|reply
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.
[+] [-] ravivyas|9 years ago|reply
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.
[+] [-] Bombthecat|9 years ago|reply
Also, they are not really on it because of the drivers and users game.
The end game is self driving cars to rent.
[+] [-] elgabogringo|9 years ago|reply
[+] [-] mrweasel|9 years ago|reply
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.
[+] [-] justratsinacoat|9 years ago|reply
[+] [-] iofj|9 years ago|reply
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.
[+] [-] bdcravens|9 years ago|reply
[+] [-] personjerry|9 years ago|reply
[+] [-] gwright|9 years ago|reply
[+] [-] msoad|9 years ago|reply
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.
[+] [-] dannylandau|9 years ago|reply
Seem like all our starting out in NY, but it is just a matter of time before margins are squeezed to zero.
[+] [-] ProfChronos|9 years ago|reply
[+] [-] jsemrau|9 years ago|reply
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.
[+] [-] growthape|9 years ago|reply
[+] [-] Aelinsaar|9 years ago|reply
[+] [-] tacos|9 years ago|reply