Hello and welcome to Oversharing, a newsletter about the proverbial sharing economy. A special welcome to the many new readers—I’m excited to have you here!
We talked Tuesday about a memo Uber CEO Dara Khosrowshahi wrote to staff, and the big question of whether Uber can be profitable. I condensed that newsletter into a Twitter thread which turned out to be pretty popular and sparked a lot of interesting conversations on Uber’s business model.
So I thought I’d open it up to the Oversharing community: Can Uber be profitable?
I’m including an updated chart that compares Uber’s quarterly net income to adjusted ebitda. The latter metric is used by Uber to evaluate operating performance and strips out a variety of costs, such as stock-based compensation expense, unrealized gains or losses on equity investments, and other items Uber doesn’t see as reflective of ongoing operating performance, like financial support for drivers affected by Covid-19. Uber has posted positive adjusted ebitda in each of the past three quarters, with $168 million in adjusted ebitda on $6.9 billion in revenue in the most recent quarter.
Participation in these threads is usually reserved for paying subscribers, but in honor of all the new readers, I’m making this forum available to free subscribers as well. Drop your thoughts in the comments below, and thanks again for signing up for Oversharing.
Second, re scale economies. Many tech entrepreneurs and investors have seen the incredible scale economies of the digital world (write an app, replicate it to millions of users for almost nothing) and then extrapolate them to the physical world. I don't see how this works for taxis aka ridehail (again, delivery MAY be a different beast). As far as I know, back in the Dark Ages of say, 1910-2010, I don't think anywhere in the world there was a NATIONAL scale taxi company (leaving aside small city-states like Singapore). You do need metro-level scale to serve a metro area, say, Boston. But expanding from Boston to Miami did not reduce per-drive or per-car unit costs. You didn't have cheaper fuel, drivers, or cars by adding another city. Sure, you shared overhead costs, but these have always been minimal for a taxi fleet. I guess the hope was on the revenue side: if I were in enough cities my brand name would be so strong that people would pay more for an Acme ride than for a Bizco ride. But a) the services are not differentiated enough between Acme and Bizco and b) ridehail companies have just spent the past DECADE telling customers they were CHEAPER than the local taxis. So not much room to raise price. I think Uber itself realized this problem with elusive scale economies: their accumulated losses would be even greater if we stripped out all the money they got for selling off operations to local operators in countries around the world (does anyone know the total cash they got for these sales?). I am willing to bet that their cumulative $30 billion or so of loss would be $60 billion if we stripped out a) these sales proceeds and b) the unsustainable margins earned during their period of regulatory evasion, which has now pretty much come to an end. Okay, end of rants 1 and 2.
Various subsets of Uber likely are profitable right now, given the amount they have pumped into the fight on food delivery. I don't think the question is can Uber be profitable, it's can it be profitable enough to align with it's valuation - that needs the NA food delivery market to rationalize the same way rideshare did in 2019.
The first question, I think, is why gig-platforms like uber experience exponentially increasing red numbers, compared to, say, the advertisement platforms like google that is extremely profitable. One of the most attractive answers is that it is capital-induced demand, they are relying on a constant stream of venture capital to keep prices artificially low. The second question the becomes, are there a demand for uber (or Foodora) in market-prices?
How expensive does a gallon of milk have to get before a five mile, hundred dollar car ride makes sense to average joes? You will see Americans actually ride bikes to work before Uber is a viable business serving anybody outside of the 1% on a regular basis. You are better off just having a car.
Uber started out with a basic concept, they wanted to enable people with cars to pick up other people in the way to work. They created a digital taxi management app to connect riders with drivers. What they did not account for are the marketing, support and operational fees that come with the management of such an enterprise because they were hell bent on taking over the world by storm as an emergent gig economy (together with others at the time). They then reduced the costs or fees of transport to make their cars attractive to potential riders to compete with the daily taxi service providers. What was ignored was the fact that metered taxi drivers operate at a very low cost where there is little margin for error. With this, they ignored the costs of car maintenance since they palmed this off onto their drivers (contractors) hoping that this little expense would be picked up by the driver. It doesn't matter how big or small you are, if your expenses are out of sync with your income you will make a loss, whether it is for one car or 10,000 cars, the difference between the two is that the bigger you get the higher the expenses, especially in the area of support, accounting and legal.
Bottom line is this; the current model or any model that Uber provides will not succeed because it is still a taxi service, you can dress it up and call it a Gig economy, a rideshare or dress it down and call it a BPO , whatever you call it doesn't matter, the service it offers is a taxi service and Uber manage the taxi rank and all the expenses of building a community of riders and onboarding drivers, dealing with local regulators and handling customer issues.
Can Uber ever be profitable? Yes, push up the fares and you will make a profit, it is simple maths, there is no other way around this and no number of fancy algorithms will change this.
With traditional taxi service, the drivers rented the car from the taxi company, not the other way around like Lyft and Uber. They also had the depreciation on the fleet they owned, as well as write-off expenses like maintenance and marketing. So they could operate on very narrow margins as despite the overhead of maintaining a large fleet the net costs were lower.
Two comments, posted separately. First, since a post earlier this week raised this question, I'll repeat my comment on that one. I promise to stop repeating this (after this one last time.... promise!). "I would say I sound like a broken record but that would give away my age, and erode my cred, which is already abysmal. So I'll just say I will repeat myself. Taxi economics: cost of car, cost of driver, cost of gasoline, plus minimal (dispatch and maintenance) overhead = minimal profit and no particular scale economies beyond any one city. Uber economics: cost of car, cost of driver, cost of gasoline, plus massive corporate overhead = significant losses. And if no particular advantage to scale (as Ms. Griswold points out), then why would Uber (the ridehail part, not the delivery part) ever make money? The things they do at the margin to be more efficient than taxis (e.g. algorithmic tweaking of drivers and cars) don't move the needle enough to offset costs like paying a CEO $20 or $40 million (let alone the other 25,000+ Uber employees (not counting drivers oops I mean earners)). Short of the eventual Holy Grail of driverless robotaxis, how does any ridehail company fundamentally alter the cost triad of fuel, driver, and car?"
Your equation misses utilization as a factor. If Uber drive is constantly getting g fares thanks for more liquid marketplace and cab spends half of time waiting for fare, Uber is more profitable for drivers.
Idk the facts on this. May well be that their overhead doesn’t nearly offset this efficiency gain. But you can at least see a reason it might.
I really don’t see how utilization rates matters for Uber. Utilization matters a ton for traditional yellow cab companies that are paying for a medallion and maintenance. Uber fobs those costs off onto their drivers by not paying maintenance and ignoring existing regulations designed to reduce the number of cabs. These are bad for drivers, since it means that they pay more for maintenance and have to compete in over saturated markets, but it should improve Uber’s bottom line. It’s hard to see how a higher utilization rate would help.
Edit: now that I think about it, low utilization might be good for Uber. They offer financing for potential drivers, and depending on the exact terms of those deals (I am assuming they’re not in the drivers favor), Uber could conceivably make money by tricking drivers to lease cars and not use them for paid trips often. Given that Uber loses money per trip, having a lease that generates monthly revenue but doesn’t take many money losing trips might be good for them.
I agree 100%. I just don't think I have seen good data PROVING Uber and Lyft have higher utilization rates than boring old taxis. As far as the driver profitability issue goes, the number of white papers and reports and academic articles on all sides of that issue would... fill an entire car trunk! I don't think we know that ridehail drivers are on average higher or lower earners than taxi drivers, across time and space: it seems to vary a lot. Uber's and Lyft's own admission that they are having trouble recruiting drivers may imply that they are having to pay them more and more bucks. But in any case, I was arguing about COMPANY profits, not DRIVER profits. They are related but not the same thing.
The big swings (positive and negative) in net income have been driven by valuation swings in their investments in other gig economy companies (Didi, Grab et al). But this raises a relevant question: why have NONE of these companies (Uber, Lyft, Ola, Grab, Didi…) been able to achieve sustained profitability? The short answer is, flawed business models. Longer answer here: https://len-sherman.medium.com/is-uber-finally-turning-the-corner-fc1cbf671cc7
I doubt it. I just use the yellow cab app in Sf now. There’s been long following of Uber as just not a profitable business for its type of travel. https://www.motherjones.com/politics/2021/11/uber-profit-kalanick-hubert-horan/ There are no network effects from urban rides. The deregulated driver market doesn’t help.
Second, re scale economies. Many tech entrepreneurs and investors have seen the incredible scale economies of the digital world (write an app, replicate it to millions of users for almost nothing) and then extrapolate them to the physical world. I don't see how this works for taxis aka ridehail (again, delivery MAY be a different beast). As far as I know, back in the Dark Ages of say, 1910-2010, I don't think anywhere in the world there was a NATIONAL scale taxi company (leaving aside small city-states like Singapore). You do need metro-level scale to serve a metro area, say, Boston. But expanding from Boston to Miami did not reduce per-drive or per-car unit costs. You didn't have cheaper fuel, drivers, or cars by adding another city. Sure, you shared overhead costs, but these have always been minimal for a taxi fleet. I guess the hope was on the revenue side: if I were in enough cities my brand name would be so strong that people would pay more for an Acme ride than for a Bizco ride. But a) the services are not differentiated enough between Acme and Bizco and b) ridehail companies have just spent the past DECADE telling customers they were CHEAPER than the local taxis. So not much room to raise price. I think Uber itself realized this problem with elusive scale economies: their accumulated losses would be even greater if we stripped out all the money they got for selling off operations to local operators in countries around the world (does anyone know the total cash they got for these sales?). I am willing to bet that their cumulative $30 billion or so of loss would be $60 billion if we stripped out a) these sales proceeds and b) the unsustainable margins earned during their period of regulatory evasion, which has now pretty much come to an end. Okay, end of rants 1 and 2.
Various subsets of Uber likely are profitable right now, given the amount they have pumped into the fight on food delivery. I don't think the question is can Uber be profitable, it's can it be profitable enough to align with it's valuation - that needs the NA food delivery market to rationalize the same way rideshare did in 2019.
I think the question I’m stuck on is this: at what point does this “adjusted” ebidta just represent straight up fraud?
The first question, I think, is why gig-platforms like uber experience exponentially increasing red numbers, compared to, say, the advertisement platforms like google that is extremely profitable. One of the most attractive answers is that it is capital-induced demand, they are relying on a constant stream of venture capital to keep prices artificially low. The second question the becomes, are there a demand for uber (or Foodora) in market-prices?
How expensive does a gallon of milk have to get before a five mile, hundred dollar car ride makes sense to average joes? You will see Americans actually ride bikes to work before Uber is a viable business serving anybody outside of the 1% on a regular basis. You are better off just having a car.
Uber started out with a basic concept, they wanted to enable people with cars to pick up other people in the way to work. They created a digital taxi management app to connect riders with drivers. What they did not account for are the marketing, support and operational fees that come with the management of such an enterprise because they were hell bent on taking over the world by storm as an emergent gig economy (together with others at the time). They then reduced the costs or fees of transport to make their cars attractive to potential riders to compete with the daily taxi service providers. What was ignored was the fact that metered taxi drivers operate at a very low cost where there is little margin for error. With this, they ignored the costs of car maintenance since they palmed this off onto their drivers (contractors) hoping that this little expense would be picked up by the driver. It doesn't matter how big or small you are, if your expenses are out of sync with your income you will make a loss, whether it is for one car or 10,000 cars, the difference between the two is that the bigger you get the higher the expenses, especially in the area of support, accounting and legal.
Bottom line is this; the current model or any model that Uber provides will not succeed because it is still a taxi service, you can dress it up and call it a Gig economy, a rideshare or dress it down and call it a BPO , whatever you call it doesn't matter, the service it offers is a taxi service and Uber manage the taxi rank and all the expenses of building a community of riders and onboarding drivers, dealing with local regulators and handling customer issues.
Can Uber ever be profitable? Yes, push up the fares and you will make a profit, it is simple maths, there is no other way around this and no number of fancy algorithms will change this.
With traditional taxi service, the drivers rented the car from the taxi company, not the other way around like Lyft and Uber. They also had the depreciation on the fleet they owned, as well as write-off expenses like maintenance and marketing. So they could operate on very narrow margins as despite the overhead of maintaining a large fleet the net costs were lower.
Two comments, posted separately. First, since a post earlier this week raised this question, I'll repeat my comment on that one. I promise to stop repeating this (after this one last time.... promise!). "I would say I sound like a broken record but that would give away my age, and erode my cred, which is already abysmal. So I'll just say I will repeat myself. Taxi economics: cost of car, cost of driver, cost of gasoline, plus minimal (dispatch and maintenance) overhead = minimal profit and no particular scale economies beyond any one city. Uber economics: cost of car, cost of driver, cost of gasoline, plus massive corporate overhead = significant losses. And if no particular advantage to scale (as Ms. Griswold points out), then why would Uber (the ridehail part, not the delivery part) ever make money? The things they do at the margin to be more efficient than taxis (e.g. algorithmic tweaking of drivers and cars) don't move the needle enough to offset costs like paying a CEO $20 or $40 million (let alone the other 25,000+ Uber employees (not counting drivers oops I mean earners)). Short of the eventual Holy Grail of driverless robotaxis, how does any ridehail company fundamentally alter the cost triad of fuel, driver, and car?"
Your equation misses utilization as a factor. If Uber drive is constantly getting g fares thanks for more liquid marketplace and cab spends half of time waiting for fare, Uber is more profitable for drivers.
Idk the facts on this. May well be that their overhead doesn’t nearly offset this efficiency gain. But you can at least see a reason it might.
I really don’t see how utilization rates matters for Uber. Utilization matters a ton for traditional yellow cab companies that are paying for a medallion and maintenance. Uber fobs those costs off onto their drivers by not paying maintenance and ignoring existing regulations designed to reduce the number of cabs. These are bad for drivers, since it means that they pay more for maintenance and have to compete in over saturated markets, but it should improve Uber’s bottom line. It’s hard to see how a higher utilization rate would help.
Edit: now that I think about it, low utilization might be good for Uber. They offer financing for potential drivers, and depending on the exact terms of those deals (I am assuming they’re not in the drivers favor), Uber could conceivably make money by tricking drivers to lease cars and not use them for paid trips often. Given that Uber loses money per trip, having a lease that generates monthly revenue but doesn’t take many money losing trips might be good for them.
I agree 100%. I just don't think I have seen good data PROVING Uber and Lyft have higher utilization rates than boring old taxis. As far as the driver profitability issue goes, the number of white papers and reports and academic articles on all sides of that issue would... fill an entire car trunk! I don't think we know that ridehail drivers are on average higher or lower earners than taxi drivers, across time and space: it seems to vary a lot. Uber's and Lyft's own admission that they are having trouble recruiting drivers may imply that they are having to pay them more and more bucks. But in any case, I was arguing about COMPANY profits, not DRIVER profits. They are related but not the same thing.
The big swings (positive and negative) in net income have been driven by valuation swings in their investments in other gig economy companies (Didi, Grab et al). But this raises a relevant question: why have NONE of these companies (Uber, Lyft, Ola, Grab, Didi…) been able to achieve sustained profitability? The short answer is, flawed business models. Longer answer here: https://len-sherman.medium.com/is-uber-finally-turning-the-corner-fc1cbf671cc7
I doubt it. I just use the yellow cab app in Sf now. There’s been long following of Uber as just not a profitable business for its type of travel. https://www.motherjones.com/politics/2021/11/uber-profit-kalanick-hubert-horan/ There are no network effects from urban rides. The deregulated driver market doesn’t help.