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Capital uber alles

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The largest private company in the world loses enormous amounts of money, has always lost enormous amounts of money, and has no discernible prospect of not losing enormous amounts of money at any point in the foreseeable future.  This fabulous portfolio has allowed it to raise $20 billion from investors:

Uber has never presented a case as to why it will ever be profitable, let alone earn an adequate return on capital. Investors are pinning their hopes on a successful IPO, which means finding greater fools in sufficient numbers. Uber is a taxi company with an app attached. It bears almost no resemblance to internet superstars it claims to emulate. The app is not technically daunting and and does not create a competitive barrier, as witnessed by the fact that many other players have copied it. Apps have been introduced for airlines, pizza delivery, and hundreds of other consumer services but have never generated market-share gains, much less tens of billions in corporate value. They do not create network effects. Unlike Facebook or eBay, having more Uber users does not improve the service.

But it’s so . . . cool!

But, but, but — you may say — Uber has established a large business in cities over the world. Yes, it’s easy to get a lot of traffic by selling at a discount. Uber is subsidizing ride costs. Across all its businesses, Uber was providing services at only roughly 74 percent of their cost in its last quarter. Uber was selling its services at only roughly 64 percent of their cost in 2017, with a GAAP profit margin of negative 57 percent. As a reference point, in its worst four quarters, Amazon lost $1.4 billion on $2.8 billion in sales, for a negative margin of 50 percent. Amazon reacted by firing over 15 percent of its workers.

Yeah but what about when they drive all their competitors out of business? Then they can raise their prices!  Except . . .

If Uber were to drive all competitors out of business in a local market and then jack up prices, customers would cut back on use. But more important, since barriers to entry in the taxi business are low, and Uber lowered them further by breaking local regulations, new players would come in under Uber’s new price umbrella. So Uber would have to drop its prices to meet those of these entrants or lose business.

Moreover, Uber is a high-cost provider. A fleet manager at a medium-scale Yellow Cab company can buy, maintain, and insure vehicles more efficiently than individual Uber drivers. In addition, transportation companies maintain tight central control of both total available capacity (vehicles and labor) and how that capacity is scheduled. Uber takes the polar opposite approach. It has no assets, and while it can offer incentives, it cannot control or schedule capacity.

The only advantage Uber might have achieved is taking advantage of its drivers’ lack of financial acumen — that they don’t understand the full cost of using their cars and thus are giving Uber a bargain. There’s some evidence to support that notion. Ridester recently published the results of the first study to use actual Uber driver earnings, validated by screenshots. Using conservative estimates for vehicle costs, they found that that UberX drivers, which represent the bulk of its workforce, earn less than $10 an hour. They would do better at McDonald’s. But even this offset to the generally higher costs of fleet operation hasn’t had an meaningful impact on Uber’s economics.

In other words, customers like Uber because they don’t have to pay anything like the actual cost of the service Uber provides, even with a healthy assist from the false economic consciousness of the “independent contractors” Uber exploits to make its money-incinerating business go.

Why is the world like this?  Natalie Wynn explains below (Full disclosure: I am now officially obsessed with Wynn, who is a genius).

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