Last month Uber debuted on the NYSE. Poised to be one of the largest tech IPO’s in stock market history, the company got off to a rocky start. Listed at $45, the stock now trades at around $40, translating to a doomy decline of 8% - a larger initial loss than any other IPO in the US. Valued at around $75 billion, yet incurring a net loss of almost $2 billion last year, the prosperity of the company is steeped in uncertainty and complexity. It is, therefore, worth untangling the situation and shedding light on whether Uber will ever profit.
Uber simply connects drivers with passengers, and thus embodies the most prominent business model today - the platform. Generally, the platform model is only feasible or profitable provided a sufficient number of people use it; once you’ve acquired a sufficient number of people, you can monetize via advertisement, data, private label etc. Growth rate is therefore the yardstick for future profitability, so investors initially prioritise marketshare (rather than profit).
The typical evolution of the platform, therefore, entails hefty seed capital to get the company off the ground. Investors continue to pour money into these companies in the hope that they’ll eventually reap a profit. It took Amazon and Spotify close to 10 years to turn a profit; Twitter have only just started making money; whilst many are still rooted in the red, namely snapchat.
As the platform company matures, they tend to lower prices, primarily by virtue of economies of scale. Spotify and Netflix, for example, continually reduce their subscription prices, whilst Amazon relentlessly streamline the UX yet maintain customer costs. Jeff Bezos, in fact, recently stated how Amazon can ‘have their cake and eat it’ - they paradoxically provide stellar customer service at a dirt cheap price (whereas a 7* hotel, for example, is high-priced because of its exceptional customer service).
Contrary to the norm, Uber will inevitably raise prices as they scale. Why? Uber subsidise the taxi fare for the passenger, hence why the service is so cheap. This also explains why they have scaled at an unprecedented rate. Essentially, they pay for you to use their service, so the current model is evidently unsustainable. In order for Uber to profit or to stay afloat, they must either minimise their costs (overheads) or raise prices.
Minimising their overheads requires Uber to minimise their labor costs. The solution? The driverless car, which would evidently obviate the need for human labor, diminishing costs dramatically. This is the plan A and Uber’s ‘ultimate vision’ - a world pervaded with their driverless car, transporting customers to their destinations expeditiously. Investors, accordingly, are pouring cash into Uber’s R and D division. To date, efforts have supposedly proved fruitless- despite their relentlessness. In conjunction with the socio-political complexities of deploying the driverless car, it makes you question the feasibility of Uber’s long-term strategy, and echoes the angst amongst Uber investors.
Investors have injected so much cash they’ve surely come too far to turn back now. The dilemma for the investor mirrors a common dilemma for the poker player. Picture a game of texas hold’em: you’re dealt a promising hand; naturally, you stake high; you continue to raise, despite the first 3 community cards offering little value to you; you’re then left in a state of crippling uncertainty - do you continue to call/raise, unbeknownst to what the final community cards have in store? Do you cut your losses and cash out, unbeknownst to whether the company will ever crack the driverless car? Or do you go all in, in the hope of striking gold?
Assuming plan A fails to take flight, Uber will be forced to raise the price of their service. Early signs suggest this transition has already begun - incentives for drivers are being furtively withdrawn, leaving drivers disgruntled, and has actually resulted in strikes. With financial pressures mounting, one can only assume the price for the passenger will also increase steadily. Raising prices, however, would surely be catastrophic, as exemplified through the reaction of Uber drivers.
Raising prices would almost ‘commoditise’ the company, meaning Uber would be confronted with the issue experienced by any ordinary cab company - competition from alternate modes of transport, which are being continually streamlined. Additionally, consumer behaviour is shifting in two damaging ways for Uber: consumers are seemingly more rational in their spending; consumers are also more active, with a growing desire to walk, run or cycle to destinations. Both behavioural shifts evidently render an Uber journey increasingly less popular. Additionally, passengers reportedly feel little to no loyalty with Uber (the vulnerability of the platform model is often the company does not own anything as they are merely an intermediary, thus, forging brand loyalty is somewhat difficult). Under this assumption, passengers will blithely switch to a more competitively-priced ride-hailing service, and reinforces their inclination towards other modes of transport.
A topic that I’ve largely sidelined for this article is how Uber are diversifying. Inroads into the electric bike and food delivery sector (UberEats) have proven promising and profitable so far. These efforts will help subsidise R and D for the autonomous vehicle division, dragging the ‘ultimate vision’ back into the bounds of possibility.
Regardless, the future of Uber seems truly unpredictable and significantly complex. The two most extreme outcomes both seem perfectly sound predictions - A ubiquity of Uber driverless cars or a company that overleveraged and were forced under before ever reaping a profit? Time will tell, but what is for certain, is that the evolution of Uber will be truly fascinating, and has the makings for a compelling case study.
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