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Uber Is A Quasi-Ponzi Scheme

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George, 35, protests with other commercial drivers with the app-based, ride-sharing company Uber against working conditions outside the company’s office in Santa Monica, California June 24, 2014. REUTERS/Lucy Nicholson (UNITED STATES – Tags: BUSINESS EMPLOYMENT TRANSPORT CIVIL UNREST) – RTR3VKJ9

One of the benefits of Uber for residents was that it used to be essentially impossible to get cab service in Queens and most parts of Brooklyn. Only that’s a little misleading. When I lived in Brooklyn and Queens, I could get on the horn and have a clean car drive me wherever I wanted to go within 15 minutes. I didn’t do it very often not because the service was unavailable and unreliable but because it was really expensive. The thing is that Uber hasn’t actually solved this problem — it’s just offering massive subsidies to riders and drivers:

But more than any technical advantage, the key to Uber’s growth has been its $15 billion of venture-capital funding. The company has long acknowledged that most of its losses come from subsidizing rides. (The most progressive argument for using Uber may be the fact that it has been a considerable redistribution of wealth from investors to working-class drivers.) But even close observers were surprised last November when a transportation-industry analyst named Hubert Horan published an examination on Naked Capitalism of the limited financial information Uber had made public and determined that it was covering around 60 percent of the cost of each Uber ride. Horan’s article expanded into a nine-part series that went as viral as 39,000 words with 89 footnotes on transit economics can. The 60 percent number was widely cited in various prominent outlets, and Uber has never contested Horan’s math.

More worrying to Horan than the losses themselves, which any growing company has to endure, was the fact that it didn’t seem Uber had brought significant efficiencies that would lower the cost of driving people from point A to point B, a difficult business with thin margins. Hailing a car with an app had been a magical experience when it was first released, but to Horan, it hadn’t changed the economics much more than the Domino’s app for ordering a large pepperoni. “You go through this checklist of stuff and the old bullshit meter goes into overdrive,” Horan told me. “They haven’t done anything to solve any underlying problems. It’s all people who have this quasi-religious belief that technology will solve every problem known since the dawn of time.”

There’s lot of excitement about Uber and Lyft coming upstate and I can understand it — I can’t speak for other similar cities but certainly in Albany taxi service is a disaster. I will pay a premium to drive to and park at the airport or train station because if you call for a cab you have no idea if a cab will actually come or what they’ll charge you or if there will be some kind of smelly gook on the seats that forces you to pay for overpriced hotel dry cleaning when you reach your destination (true story.) And if you’re getting a cab at the airport or train station, you’re generally forced into full-fare ridesharing with the destinations of the passengers and the routes being entirely random. I won’t weep when most of these companies are put out of business, and in the short term service will greatly improve. But once the subsidies are limited or vanish, it’s going to be a tough business, because most locals have cars, are used to not relying on taxis, are in the habit of limiting their alcohol consumption if they’re not walking or taking the bus, etc. Essentially, in large urban areas with high demand it’s not going to be possible for Uber to maintain a monopoly and in smaller cities (especially typically sprawling ones) it’s questionable whether even a monopoly can actually be profitable.

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