There’s a handful of ways in which Uber might turn out to be worth its current market cap. Almost all of them spell expense and misfortune for the rest of us.
The business press has made hay this year of Uber’s staggering 2019 second-quarter loss of over $5 billion, a record even for Uber, which has been a firehose of cash to chase market share, acquire competitors and complementary businesses, and invest in core technology. One prominent headline recently proclaimed that Uber had “got lost” over the past few years, as it staggered from one challenge to another. One senses the bloom is off the rose of a once-feared giant.
Yet there has been surprisingly little serious media attention to the core issue from a market perspective: Under what conditions could Uber be worth its current market capitalization that is still hovering around $50 billion (UBER). A market cap is financial markets’ best guess of the net present value of future earnings, and for a company that’s hemorrhaging cash, one has to tell a story about where future profit will come from.
An important caveat from the get-go: there is nothing inherently amiss about a start-up with a long stretch of unprofitable years. Indeed, Amazon famously ignored short-term profits – and for a “short” period that included nearly two decades. But it had a vision of the fundamentals that ultimately came true, and the firm turned a corner when it had a quarter (Q4 2017) in which its profit exceeded all of the firm’s previous profit combined.
So what’s the vision for Uber? In the following, I attempt to dissect the plausible, and in some cases openly discussed, ways in which Uber might score big. Unfortunately, most of these potential profit centers have substantial downsides that we should consider – whether we are Uber shareholders, policy makers, city dwellers, or simply inhabitants of planet earth.
To be clear: I’m not saying Uber can never be profitable. Rather, the analysis below supports two related assertions. First, Uber faces many barriers to profitability in the markets in which it is active. Second, the scenarios under which Uber is highly profitable are undesirable for a wide variety of reasons. THAT IS …
Seven ways to profitability
Uber has seven main ways to make a profit; it could, for the most part, pursue these individually or in tandem. Some pairs are intertwined, but I’ll treat them separately for clarity. Let’s list them and then consider each in turn.
- Ride-hailing with human drivers
- Ride-hailing with autonomous vehicles
- Shared-use mobility services, including bikes, e-bikes, and e-scooters
- Ancillary services, such as Uber Eats
- Selling data
- Platform synergies
Again, these are not mutually exclusive. They also capture where (i.e., in which activities) Uber could be profitable but not why it would be profitable, so each category demands further explanation.
Spoiler alert: some of those whys aren’t good for anyone but Uber.
Profitability path #1: ride-hailing with human drivers
Uber’s core business and the one for which it is best known in fact offers several distinct paths to profitability. It’s easiest to proceed from the best established to the most speculative, so we begin with the garden-variety taxi-like service with human drivers.
As it turns out, this is a tough low-margin business, which we should have expected, given the absence of taxi conglomerates from the world’s finest stock exchanges. Indeed, taxi transportation is a niche transportation service, expensive compared to most other modes, and largely a plaything of the wealthy, tourists, and late-night drinkers. It was also a market ripe for disruption, and Uber, Lyft, and others have transformed the taxi sector globally over the past decade. They have not, however, made it profitable because individual rides are inherently expensive.
Again, this is no defense of the status quo. For a juicy example of how both Uber and taxi companies can be bad actors, consider the case of London, where Uber has gone head to head against disgustingly corrupt taxi companies (Uber was kicked out but then recently allowed back into the city). But the question here is about profitability, and ride-hailing is essentially taxi service, which is a low-margin business, even though it isn’t something that most people can afford to pay for often.
Or is it? There may be ways to spruce it up. The cut that drivers make is the largest share of an Uber ride, so Uber could increase profits by paying drivers less. Many observers have discussed this possibility (recently The Information) and drivers have complained, and not just in the US. Some recent reporting in Jalopnik suggests it is happening sneakily.
If you can’t cut driver pay, you might instead raise prices, which generally requires limiting competition. Another such technique, also noted in the May 2019 piece in The Information, is to limit competition in order to drive up prices. Uber has acquired all of or stakes in a wide range of ride-hailing firms, such as spending $3.1 billion to buy Careem, a ride-hailing firm in the Middle East. The bottom
Wait a second, you’re thinking. The only ways to make money in this low-margin business are to give drivers less or charge riders more? Surely Uber is doing those things already, and it’s still losing money! This may or may not bode ill for ride-hailing as a core business, but one thing is clear: a profitable Uber will, in these circumstances, be profitable at others’ expense.
Profitability path #2: ride-hailing with autonomous vehicles
Now step a little ways into the future and consider autonomous vehicles. By replacing the driver with a dash of tech, Uber can eliminate its single largest expense.
On its face, this vision is hugely promising. It’s understandable that automobile manufacturers (especially Tesla, GM, Ford, and Chrysler), tech giants (notably Google and Apple), upstream tech firms (such as Intel), and major ride-hailing firms (Uber, Lyft, and Didi Chuxing) are all angling for leading roles in that future. Combined with electrification, which promises huge long-term cost reductions through energy efficiency and maintenance advantages, this vision starts to look like a bargain. Largely by combining current predictions of technological change in autonomous driving and batteries, a 2017 report from RethinkX makes the jaw-dropping prediction that autonomous electric Ubers and Lyfts will represent 95+% of passenger miles in the U.S. by 2030, and at a 70-75% reduction in total cost.
There are, however, at least two major related problems in a world of widespread autonomous ride-hailing: more traffic and less transit.
Consider that future world in which Uber is profitable with widespread autonomous ride-hailing. That is a world with a lot of vehicles on the road. Transportation planning currently worries about the congestion resulting from too many single-occupancy vehicles, but autonomous ride-hailing cars will often be zero-occupancy vehicles as they travel to pick up riders. This is not mere speculation: we have some inkling of this congestion effect in both New York and San Francisco, two densely populated urban areas where ride-hailing has found an ample supply of affluent customers.
To be completely fair, there’s a way for autonomous electric ride-hailing to be a boon for cities: sharing. Research by the Institute for Transportation and Development Policy offers a distinction between a future of “two revolutions” (electrification and automation) and one with “three revolutions” (those two plus sharing). The latter vision is the one that makes cities livable, renders transportation less expensive, and more fully addresses the climate challenge – and it hinges on technology that the ride-hailing firms already have, namely Uber Pool and Lyft Line. Those services deliver less expensive rides, as long as customers are willing to share the car with a stranger and to deal with slightly longer trips in order to accommodate the overlapping but not identical itineraries.
Sadly, we have reason to suspect that genuine sharing is good for everyone and everything except profits. The ride-hailing firms offer it only in a few large cities, and scattered data suggests that these services are less than a fifth of rides in the U.S. We should learn more in coming years, but the firms’ reticence to offer these shared rides suggests that they are at odds with profit. This is a shame because the sharing is what holds promises for congested spaces.
Profitability path #3: beyond the car to shared-use micro-mobility
Uber and Lyft have both acquired bikeshare, electric bikeshare, and electric scooter systems. Shared-use mobility services – despite some early glitches in safety, governance, and technology – are widely viewed by transportation planners as promising first- and last-mile solutions, as well as potentially powerful tools for reducing automobile dependence.
Uber in particular has widely publicized its successful integration of JUMP’s e-assist bicycles into its app in San Francisco. In addition to fostering a convenient and cost-effective transportation mode that complements its core ride-hailing business without adding to traffic congestion, Uber has hereby identified a new way to make money. Or rather, it was going to happen anyway (there are hundreds of bikeshare systems around the world), so bikes are now another potential source of profit, along with e-scooters.
This profitability path is, in my view, the one that is most appealing for Uber’s future and most consistent with a friendly vision of the company. However, it is unlikely to add much profit for three largely unrelated reasons. First, the micromobility modes likely cannibalize Uber’s core business: the more people choose bikes and scooters, the less they choose other modes, including ride-hailing. Second, the profit per trip is destined to be less because cars go farther (and fare is related to distance and time) and because people simply pay more when they want to be chauffeured. And third, these modes often have small market shares – not because bikes and scooters aren’t awesome (they are! especially bikes), but because they never scale inside a single proprietary platform. Quite simply, the world’s great bicycle cities are cities where people own their own bikes. You can find bikeshare in Copenhagen and bike rental in Amsterdam, but they principally serve tourists. Maybe that’s a big niche, but it’s a niche.
Profitability path #4: ancillary services
Uber has aggressively branched into some new services, notably Uber Eats, a food delivery service. I focus entirely on food delivery here because it’s the largest such foray so far.
Yet again, Uber finds itself in a problematic market. Recent evidence reported in Vox suggests that not only is Uber Eats not profitable, its customers aren’t even loyal, with many of them also patronizing competitors DoorDash, Grub Hub, and Postmates. Perhaps we’re on the verge of a golden age of eating in, but early evidence suggests it won’t be consistently profitable for Uber.
Perhaps more problematic, it isn’t even clear that this business model is inherently profitable at all. As one observer reports, “Uber Eats sold $7.9 billion worth of food deliveries last year and still lost money.” Uber isn’t alone: Doordash wasn’t profitable as of May 2019, and Grubhub, after some initial signs of profitability, appears to have lost money as it has fought for market share. It’s fine if you’re still trying to get to scale, but as the old expression goes, you can’t lose a little on each one and make it up on volume.
Uber Eats could eventually be profitable, but such a scenario probably means, once again, a niche service for the affluent. And an extra dose of traffic for the rest of us, as vehicles carrying fresh-cooked comestibles clog the streets around mealtimes. Unless there’s some dramatic tech shift (not inconceivable, as Nuro.ai has shown), this profit stream has limited promise for Uber and isn’t particularly appealing for the rest of us.
Profitability path #5: advertising
Return for a moment to the notion of low-cost rides in autonomous electric vehicles. Some observers have openly speculated that, when those rides are extremely inexpensive to provide, it might be worth offering the rides for free in exchange for “eyeballs” – that is, riders’ attention. Imagine an autonomous taxi, available for a small charge if you prefer, or at no charge if you’re willing to endure an immersive (and surely targeted) advertising experience during your ride.
This may sound far-fetched or even invasive, but the precedent is all around us. Google offers us search and mail in exchange for knowing us better and targeting us with ads. Facebook and Twitter offer us social networking in exchange for “sponsored posts” that are eerily tailored to whatever we have thought about recently. Free and “freemium” web business models abound, from useful apps to time-wasting games. We sell ourselves daily in these trades.
A world of free transportation is harder to imagine – bits and bytes, for all their trouble, are small potatoes compared to cars and they energy they use – but you should imagine it in a particular way: consider the ads and targeting you must endure to get free e-mail and social networking, and then multiply it times a hundred, or perhaps ten thousand. Honestly, what makes it worthwhile to driving your around for 10-15 minutes in exchange for access to your eyeballs? Considering the many orders of magnitude of greater energy and materials, it is worthwhile only if there’s a good chance you’ll make a large purchase. Specifically, the one offered in the advertising.
This advertising hellscape is grim for two distinct reasons. First, it portends yet another invasion into our lives and the space of our minds by profit-seekers. That alone is a source of concern. But worse, the consumer benefit will likely accrue disproportionately to rich people. Think about it: Uber doesn’t really care about the eyeballs making minimum wage, so it may not offer a free ride. But rich eyeballs? Those are the best! Take them on the scenic route if they are willing!
(If you doubt the existence of this cynical dynamic, I encourage you to browse the advertising in The New Yorker, and think about the median household income at which those adds are targeted.)
Profitability path #6: the data play
It used to be a profound observation, but we all know now: when companies know something about us, that knowledge can be valuable. Uber is accumulating data on transportation (and some other things we’ll ignore for the moment) at such a substantial scale that the data could well be valuable to land use and transportation planners, transportation system operators, and maybe even people stuck in traffic.
Uber clearly recognizes the value as it now offers an entire tool devoted to reselling the data, aptly named Uber Movement. Following a tried-and-true model, Uber offers some data for free (on speeds and travel times), and some for pay (“A metrics-driven dashboard for city managers to understand dockless bike and scooter programs”).
On its face, this is promising. Indeed, a publication no less august and mainstream than The Economist noted recently that, in the global economy, data is now more valuable than oil – though the subtitle ominously (for Uber) suggests that “The data economy demands a new approach to antitrust rules” so don’t count your market cap before it hatches. Perhaps still within some antitrust guardrails, Uber can find another important revenue stream.
The business ecosystem of transportation data, however, is getting extremely crowded. Firms such as TomTom and INRIX provide connected-vehicle data, while Streetlight Data produces analytics from those and other companies’ anonymized and aggregated data. Google and (increasingly) Apple are owning the once-open-source platform known as maps, and monetizing that platform. Tech firms as diverse as Verizon and IBM have staked claims to the emerging “smart cities” space that typically features data-informed transportation solutions, and Google acquired up-and-comer Sidewalk Labs that has a similar value proposition.
Profitability path #7: the power of the platform
With all of that mixed or bad news under our belt, let’s turn to Uber’s substantial retail assets: its brand presence and its relationship with consumers. Uber is a household name, and people have a reason to have the Uber app. Those massive advantages open the possibility of offering many related (or semi-related things, or unrelated things) in one place. There’s a reason that the general store was foundational in small-town America, that the Sears catalog was iconic in consumer culture for several generations, that Walmart became a behemoth, and that Amazon has refined retail as it has extinguished one part of the competitive landscape after another.
There’s an obvious advantage to providing a multi-option platform for transportation in particular. Indeed, the investments in scooters and bikes are acknowledgments – quite enlightened ones, at that – of the multi-modal future that “new mobility” advocates are agitating for. Uber has clearly moved in this direction, opening its API to transit-related applications and beginning to partner with transit agencies. If it is to be believed, Uber is joining hands with transit agencies and “Building the future of public transit together” (though the examples are few and narrow so far).
Unfortunately for those seeking profit, transportation services are not profitable. Indeed, transit loses money everywhere – and not because transit is poorly run, but because the purpose of a transit system isn’t to be profitable. In its social purpose, transportation embraces access and equity. A transit system recaptures some of the economic benefit it provides through fares; but it is widely understood in transportation planning that you want to maximize ridership, not profit. Transportation services are promising for Uber as a platform wannabe, but highly profitable transportation services wouldn’t be good for the rest of us.
Ironically, our best glimpse into this potential profit center is through DiDi Chuxing, Chinese a company that vanquished Uber on its home turf. Uber sold its Chinese operations to DiDi in 2016, but more important is the model the firm represents: it combines ride-hailing and related urban mobility services (bikes and scooters) with a wide range of delivery services and much, much more.
Yet again, we return to the two facets of our question, and it looks grim. Like Uber, DiDi is bleeding cash as if the corporate version of its femoral artery has been sliced open, losing an estimated $1.8 billion in 2018. It’s selling a lot, but it’s showering drivers and riders with incentives to foster growth in the ride-hailing business at its core. Other parts of its business
But let’s suspend disbelief and say Uber can turn a profit this way, i.e., by exploiting the advantages of a platform that reaches consumers through diverse purchases and forms of engagement. Is that the world you want? In the absence of inherent efficiencies of production, delivery, or information – and Uber is hard pressed to demonstrate such efficiencies so far – this business model as an intermediary may simply profit at the expense of buyers and sellers by limiting options, squeezing margins, and raising prices to consumers.
Evidence is mounting that the largest shopping platform, Amazon, doesn’t always serve consumers well. It isn’t just that you can get better deals by going directly to certain sellers, (which is true for both some online brands and some brick-and-mortar retailers). It’s that any giant platform has immense power to squeeze the most out of consumers. With the smorgasbord of options and one-click convenience, we are too often “suckers” when we shop online, the Atlantic argues. For all the seductive allure of platforms, buyer beware. (Note: I don’t provide links to examples of Amazon’s misdeeds because the point here is to examine its inevitable dark side as a platform.)
So do you like the world of Uber domination?
It’s clear that important chapters in Uber’s story are still to be written. Yet the conclusion is striking: the vast majority of the firm’s paths to potential profit involve significant downsides for cities, markets, and people.
I’ve asked you to imagine some alternate futures in which Uber is not just ubiquitous but also profitable at a scale that corresponds to its current market capitalization and share price. Sure enough, it is possible to imagine a kinder gentler Uber, focused on its most beneficent services and operating under governance over its market power. It is also possible to imagine a profit-making behemoth. But can we imagine an Uber that’s good for society and worth $50 billion to its shareholders? The word for that goes beyond imagination; that word is fantasy.