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
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.
Former taxi business exec here…Uber and all other “unicorns” basically observe some form of [blutzscaling](https://hbr.org/2016/04/blitzscaling). Coined by Reid Hoffman, it’s the practice of being the early or first mover in a market to rapidly grow market share.
This is designed to disrupt and destabilize traditional markets in a way that they cannot catch up. These companies rely on venture capitalist funds to stay alive and purposely lose tons of money until they have the share of the market or have created a new market which is profitable.
What does that mean for Uber…essentially Uber has destabilized the personal transportation market and gotten a tremendous market share by over supplying it. This basically means…when you click on the Uber app and see a 10 min wait time it’s not because of fancy algorithms, it’s because Uber basically has drivers everywhere just in case you want to ride. What’s great for Uber (and shitty for the drivers) is that unlike traditional personal transportation markets (taxi), Uber drivers only get paid when they carry a fare, but when they do carry someone, Uber has artificially held prices down so people will take the service. So, even though they pay less for the driver, the driver isn’t making enough for the company to turn a profit.
Ok…now to answer your question, because of this over supply and not charging as much, Uber loses on every ride.
Further, Uber’s customer acquisition costs are very high, it costs them tens or more millions to enter a new city.
All that is to say, without taking more subsidies from public entities, or charging more, Uber can’t make a profit for a little while on their core business. Which is why utilization is so important.
Utilization is making sure the driver is generating revenue for every hour they are out there. That’s why Uber eats, and deliveries, and ancillary services like that will be Uber’s cash generators for a little while until they figure out the core business model.
They subsidize the price of a ride to gain market share. Lyft has very high insurance expenses, so, could be the same for Uber.
consumer brands with a monopoly on the market frequently become massively profitable.
don’t count on the R&D costs at Uber being real. there is surely transfer pricing going on with that to help reduce taxes.
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.
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.
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