25 February 2015

Different perspectives on Uber

Hardly a week goes by without a story about Uber, the most controversial Silicon Valley startup, despised and loved at the same time. Depending on who you ask, it’s either the future of transportation and home delivery or an evil corporation preying on the poorer classes and undermining the social fabric of society. Here are some of my observations on different aspects of Uber.

Taxi vs. ‘ride-sharing’

The concept most associated with Uber is the ‘sharing economy’. As the story goes there’s higher demand for car rides than taxis can cover and Uber enables private car owners to share rides and make an extra buck, while satisfying some of that demand. The thing is though, if Uber really were operating a ride-sharing business, drivers could set their own prices by negotiating directly with the passengers – Airbnb lets home owners set their prices or how the German Mitfahrgelegenheit system works. But instead Uber controls the prices – and notoriously decides when they should ‘surge’ based on their opaque data about demand – and so the economic model is very similar to a taxi company. As someone observed on Twitter, a true ride-sharing company wouldn’t be so eager to cut drivers out of the picture as Uber seems by investing in autonomous cars. This probably explains why the company is fighting regulation every step of the way – being bound by the same strict regulations as taxis would push them into the same low-profit business.


Other arguments in Uber’s favor include the better experience, the convenience of ordering cabs with an app and paying with the credit card, the assurance of seeing driver ratings in advance and giving ratings afterwards. But these features can be easily replicated by other apps and companies, as long as there is some investment in developers. I have a perfect example here in Bucharest, an app I started to use more frequently in the rare occasions I need a taxi. Just like Uber, you can follow the assigned cab on a map along with the time until arrival, you can rate the trip and pay by card in-app – although I suspect that’s very uncommon here. The app works like an aggregator, searching available cars across multiple cab companies. Collaborating could be an efficient tactic against Uber locally, creating a larger pool of taxis, as long as the existing companies can agree on the terms. It’s also the reason why Uber is pushing so aggressively for rapid growth: it needs the network effects to stave off future competition.

As a side note, today UberX launched in Bucharest!

Economic advantages

Another common narrative about Uber is how it will soon be cheaper and more convenient to only ride Uber instead of owning a car. But for me, on the economic aspect the real competitor to Uber (and indeed individual cars) is a city’s public transport network. Uber’s early success came in San Francisco, where public transportation is poorly developed. A solid, modern public transport, who can reliably service the suburbs and the crowded city center, will reduce the need for individual rides, be it with a personal car or taxi. It’s also a more efficient way of travelling and certainly more environmentally-friendly. At some point I looked up some numbers online: in New York for example, the subway system transported some 1.7 billion people in 2013, compared to 240 million taxi passengers. The London Underground comes close, with 1.26 billion passengers per year, while the London Taxi transports only about 100 million people, tourists included. If a company truly wanted to improve the quality of transportation, it would focus on public transportation (something like this), not on increasing the number of cars on the roads, causing more congestion and air pollution. But hey, that would require massive investments in infrastructure and a slow and low return on investment, the exact opposite of what Silicon Valley startups and investors seek.

To finish things off, I would like to mention another article about Uber’s valuation, where prof. Aswath Damodaran invites people to use his models to calculate a valuation for Uber, based on a number of assumptions. Unfortunately, basic information about revenue and cost structure are still only estimates, since the company hasn’t released official numbers. I couldn’t resist, so here are my choices, resulting in a valuation of about 9.5 billion $:

  • Potential market: ‘Logistics’ – including existing services and future ambitions like local deliveries;
  • Uber’s effects on growth in the potential market: ‘Increase by 25%’ – a cautious estimate;
  • Within this market, Uber will have: ‘Strong local network effects’ – if you are a customer already, it makes sense to use more services provided by Uber, but expansion into other cities will not be impacted significantly by dominance in an area;
  • Competitive advantages in that market: ‘Weak’ – cautious again, because of the increasing possibility that Google and Amazon will enter the same markets. And by the time Uber develops self-driving cars, Amazon’s drones will dominate the delivery market;
  • Reinvestment for growth: ‘Minimal capital needs, small acquisitions’ – as long as Uber keeps the business model as ‘platform’ and does not acquire the vehicles needed for its fleet;
  • Uber’s operating risk will result in a cost of capital that puts it in: ‘75th percentile of US companies’;
  • Chance of failure: 20% – I’m very tempted to go higher here, because I actually think the company is stretching itself thin and is over-reliant on its CEO. If for some reason the optimistic attitude of investors toward Uber changes, the company will have a tough time staying afloat.

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