Uber is set to announce it’s IPO very soon. Various publications have stated that Uber hopes to value it’s initial offering at about 100 billion squids. Where squids are in fact US Dollars and where if this valuation makes sense then the entire world has gone mad and should be overrun by 100 billion squid.
Not that Stewy here is the first to question the sanity of buying into a company that has yet to generate a single cent of profit in the 10 years of its existence. But one has to question how Uber has squandered so much money on essentially an app and some cloud servers. Sure I’m over simplifying here, but the point is the infrastructure that Uber has had to build out is nothing near to what a company like Amazon was attempting to build out when it was losing money for the first 10 years of its existence.
What is Uber’s rationale for its 100 billion dollar valuation? Uber claims it is going to completely reshape and dominate all transportation and delivery services. That is their claim. In Uber’s eyes most of us won’t own cars in the near future. Most investment in public transportation will decline over time. Uber will be who we turn to when we have to lift our corpulent self indulgent selves out of our recliners to head over to our friend’s house to sit in their recliner. Then binge watch 12 seasons of some just released Netflix series while we order up Uber Eats to deliver artisan baked, gluten free, farm raised, soy wheatgrass burgers.
All of this is fine, except that Uber doesn’t actually make money from its rideshare business.
Uber’s business model is based on providing fares to riders that are so low Uber can’t generate any profit off the fares. Keeping with our Amazon comparison one can state that Amazon also went over 10 years where it was losing money. But Uber’s losses aren’t the same as Amazon’s.
Amazon, in general, was actually making money from the prices it was selling products for. It was making enough to pay for the existing infrastructure and employees it took to sell those products. The reason they were losing money was they were spending so much money on future infrastructure.
Uber would like you to believe that is also the reason they are losing money. But that’s not the reason. Uber simply isn’t making money off it’s actual fares. In other words it costs Uber more to provide a passenger with a ride, than what that passenger is paying. The money Uber is spending buying up competitors, electric scooter companies, and developing autonomous vehicles is just adding to the losses it would have incurred anyways.
Uber counters that it WILL eventually make money. Not by increasing fares but by eliminating drivers. In the meantime they are hoping to drive every other form of transportation out of business by charging a rate no one can compete with. Unless they are willing to lose money as well. You know, like Lyft who has also never generated any profits either.
Fear not this will all work out once Uber eliminates all those overpaid drivers!
Driver’s are a large part of Uber’s expenses. But they should be. They are the only part of Uber’s business model that currently brings money into Uber. Replacing drivers with autonomous vehicle’s would eliminate a huge expense. But it would suddenly create new, very large expenses as well. You see those drivers bring a huge amount of infrastructure with them. At little or no expense to Uber.
The Uber driver brings with them, on average, a $20,000 investment (in a car), and then shoulders all the insurance, registration, gas, oil, tires, brake, dent, scratch (yes they require drivers to keep cars relatively dent and scratch free or they deactivate them) and depreciation and storage expenses.
In exchange for all of that Uber often pays the driver less than $5 per ride.
If you use Uber, believe it or not, the driver does NOT get the amount YOU paid for the ride. Stewy here is amused at the percent of rideshare riders that assume that the driver gets all (really?) or most of the money the passenger paid Uber for their ride. If drivers were getting paid a huge amount of each fare, then Uber getting rid of drivers might work to make Uber profitable. But the amount Uber pays drivers is far less than most people realize.
Ten years ago Uber paid drivers 75% of every fare. That was ten years ago and somehow Uber has kept that narrative alive. Keeping that narrative alive is important to Uber. First it is how they convince city councils and other local politicians to let them operate in their jurisdictions. Admitting that the jobs you provide barely cover the expenses of the costs of providing those rides probably would cause people to actually look into all the cab companies going bankrupt and cab drivers surging to the top of the list of professions committing suicide. I digress.
The reality is that Uber has reduced what they pay drivers pretty much every year they have been in business. They currently have in place a formula that often takes as much as 60 to 70% of many fares. It is on “short rides” that Uber claims such a high percentage of the passenger’s fare. But “Short rides” comprise the majority of rides Uber delivers according to, well, Uber.