[Note: This item comes from friend David Rosenthal. DLH]
Uber Is Headed for a Crash
By Yves Smith
Dec 5 2018
By steamrolling local taxi operations in cities all over the world and cultivating cheerleaders in the business press and among Silicon Valley libertarians, Uber has managed to create an image of inevitability and invincibility. But the company just posted another quarter of jaw-dropping losses — this time over $1 billion, after $4.5 billion of losses in 2017. How much is hype and how much is real?
The notion that Uber, the most highly valued private company in the world, is a textbook “bezzle” — John Kenneth Galbraith’s coinage for an investment swindle where the losses have yet to be recognized — is likely to come as a surprise to its many satisfied customers. But as we’ll explain, relying on the extensive work of transportation expert Hubert Horan, Uber’s investors have been buying your satisfaction in the form of massive subsidies of services. What has made Uber a good deal for users makes it a lousy investment proposition. Uber has kept that recognition at bay via minimal and inconsistent financial disclosures combined with a relentless and so far effective public-relations campaign depicting Uber as following the pattern of digitally based start-ups whose large initial losses transformed into strong profits in a few years.
Comparisons of Uber to other storied tech wunderkinder show Uber is not on the same trajectory. No ultimately successful major technology company has been as deeply unprofitable for anywhere remotely as long as Uber has been. After nine years, Uber isn’t within hailing distance of making money and continues to bleed more red ink than any start-up in history. By contrast, Facebook and Amazon were solidly cash-flow positive by their fifth year.
The fact that this glorified local transportation company continues to be a financial failure should come as no surprise. What should be surprising is that the business press still parrots the fond hope of Uber’s management that the company will go public in 2019 at a target valuation of $120 billion. That’s well above its highest private share sale, at a valuation of $68 billion. And Uber’s management and underwriters will no doubt hope that the great unwashed public looks past the fact that more recently, SoftBank bought out insiders at a valuation of $48 billion, and its offer was oversubscribed. Why should new money come in at a price more than double where executives and employees were eager to get out?
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.