Uber’s CEO has resigned, not unexpectedly, but unexpectedly quickly- they also lack a slew of other C-suite operatives, is this a sign that these insiders really did know that Uber had no conceivable path to profitability.
Its business model has been based on a massive internal contradiction: using a ginormous war chest to try to achieve a near-monopoly position in a low-margin, mature business that is fragmented geographically and locally.
Uber had no ability to either reduce their costs below the levels of existing taxi-companies, nor were they able to derive a high enough price to make money. Maybe the original Uber idea of high class black town-cars in key US cities, offering a value added product could have made a modest profit from their premium offering.
If you are interested in an in depth review of Uber and it’s failing business model, here is a link to a 10part take down of Uber by analyst Hubert Horan
Here’s how you can lok at the cost/premium price trade off…
Monopolies and oligopolies are sustainable only when certain factors are operative: the ability to attain a superior cost position through scale economies, which include network effects, or barriers to entry, such as regulations, very high skill levels, or high minimum investment requirements. Neither of these apply in the local car ride business. Even if Uber were able to drive literally every competing cab operator in the world out of business due to its ability to continue its predatory pricing, once Uber raised prices to a level where it achieved profits, new entrants (or revived old entrants) would come in.
Uber will thus never be able to charge the premium prices (in excess of the level for a traditional taxi operator to be profitable) for the very long period necessary for Uber to merely be able to recoup the billions of dollars it had burned, mainly in subsidizing the cost of rides, let alone to achieve an adequate return on capital. And that’s before you get to the fact that systematically much higher prices would mean fewer fares and thus lower revenues and profit potential at the new pricing level.
But more than that, in addition to a strategy that identifies a route to profitability, successful companies seek to build “moats”- defences to retain their customers. Uber doesn’t have a moat.
It is just an app, nothing more. Amazon have built a formidable distribution machine, Google’s IP is unassailable, even Netflix is now creating some unique content, but Uber could be replicated by a proficient teenager. Yes, they have data about preferred destinations and routes and congestion but any competitor could gain the same level of data after surviving for a couple of years. And taxi companies and Lyft/Grab have access to this data, as does Google through maps.
Even beyond that the fundamental flaw in the Uber model is that there is no inherent penalty in a driver working for multiple networks nor for the customer using multiple networks. In fact it makes economic sense for the drivers to do this as they can play the networks against each other.
There was one opportunity for Uber, and that was to use its proprietary data. In the world where uber owns a fleet of autonomous vehicles (capable of delivering passengers at a sustainably lower cost than human Drivers) first mover advantage would have been huge and unassailable. This is likely decades away however and I doubt uber will still be around then (not to mention the fact that the motor giants are probably perfectly capable of running their own fleets of autonomous cars and buying or creating the necessary passenger data).
The typical approach to turning around businesses where you can quickly cut operations back 25% and raise prices in order to get the cash flow needed for a more serious restructuring don’t apply. There are no billions in dollars in costs to cut, and to raise prices will hand the future to Lyft/Grab and legacy taxi companies.
It will be interesting to see how investors can recoup their $25 billion in the next few years…