Let’s break it down.
>Uber takes 25% of the money from each ride on the app.
>It does not pay for any of the costs involved in the actual rides, not fuel, insurance, or vehicle costs, all that is paid by the driver.
>Their customer service is outsourced to India
>Each city they operate in requires a tiny office with very few people, simply to screen drivers
>They maintain mobile apps to operate their service.
Now, based on this, there is no reason why they should not be turning a profit on their $11.27 Billion annual revenue. What causes the $1.8 billion loss?
In: Economics
Because they don’t have a viable business model. However, they are kept afloat via loose monetary policy and investors seeking good returns no matter the risks.
I can’t speak to Uber specifically but more generally, being unprofitable is not necessarily bad (at least for some period of time). If you pour all of the money you earn directly back into the company (more employees, equipment, marketing, etc) and you can continually pull in more and more money each period then you won’t be “profitable” but you’ll have grown a ton. Then, you can start to ease back on investment at some point and the money you make can be used to pay ownership.
When exactly you pull back is a question of the needs of ownership. A small business whose owner is using the business as their livelihood doesn’t have a lot of freedom here. They need to take home money made by the business so they can eat. So small businesses tend to grow very slowly, if at all. But an enterprise backed by deep pockets can be play the long game and run on zero-profits and high-growth for a while.
That 25% is a bit low IMO. As a driver, a trip from my area to a bar a couple miles away nets me around $3. However, when I book my own Uber to said bar, it costs me over $10 for the trip.
Anecdotal, I know, but you’ll find hundreds of stories like this on here.
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No one is really identifying the big cost for Uber and most tech startups. The technology they’re building from scratch. Their AI is pretty phenomenal, they also have nascent businesses in self driving vehicles, large scale shipping, bikes, scooters, and research research research to build their version of the future from scratch. It’s like those clickbait articles about how Apple “rips you off” because they sell a phone that costs $200 to make for $1100. Invention is a costly and risky business with way more losers than winners.
First of all, they don’t really make 25% of the money of each ride, it’s actually a lot less than that. I don’t have the exact figure though, but some are barely breakeven. They keep their prices low to flush the competition out and the biggest gain market share possible.
Secondly, they spend a ton on advertising, R&D and promotions. People saying they just update their app don’t understand the vision Uber has. Imagine the same service in 5-10 years but with driverless electric cars. No drivers to pay, no fuel, only maintenance – which will be a minimum. That takes enormous infrastructure and testing. Investors keep Uber afloat with money because they know this WILL happen soon and at that point the profits will skyrocket.
Lastly, a lot of money is used in stock compensation for early investors that want to get out or higher ups in the company. It was a long time coming for a lot of them so many are cashing out and the company is paying for it.
It’s two years old now, but definitely worth a listen.
[Uber – The Dollop](https://thedollop.libsyn.com/271-uber)
Don’t forget Uber is investing a lot of money in technology; most specifically on autonomous vehicles, flying taxis, drones etc.
“Failure to turn a profit” is actually cooking the books for tax purposes. Any good (shady) business owner knows better than to show profits.
Just because they’re not turning profits doesn’t mean they’re not generating cashflow, or people aren’t earning money off of it.
They’re in the red to avoid paying taxes. It’s standard business practice.
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