The Off Topic Topic

[KRonn]

Wow, that is scary and despicable.

[celedhring]

Uber starts operations in Barcelona today, checking the app it's not radically cheaper than a regular cab, and you get creamed by dynamic pricing if you aren't careful.

They have been forced to modify their business model in order to operate legally - drivers must have insurance and a commercial vehicle driving license (which is still far easier to get than a cab license).

[Zanza]

https://www.bloomberg.com/news/articles/2018-02-13/uber-sales-reach-7-5-billion-in-2017-despite-persistent-turmoil

Despite a turbulent year for the ride-hailing company, sales were $7.5 billion. But the company also posted a substantial loss of $4.5 billion. There are few historical precedents for the scale of its loss.

How is that a viable business model? The market they are trying to corner doesn't seem to have very high barriers of entry, so what do investors see in the company?

[ulmont]

The market they are trying to corner doesn't seem to have very high barriers of entry

The hell it doesn't.  It has a massive network effect - users won't go to "new ridesharing app" if it doesn't have local drivers, and local drivers won't go to "new ridesharing app" if it doesn't have users.

[celedhring]

The market they are trying to corner doesn't seem to have very high barriers of entry

The hell it doesn't.  It has a massive network effect - users won't go to "new ridesharing app" if it doesn't have local drivers, and local drivers won't go to "new ridesharing app" if it doesn't have users.

Even if they succeed in that, they will still compete with cabs, public transportation, limo services... which will limit their profit margins regardless of their success in cornering ridesharing. And they seem to require hefty margins if they are bleeding so much money.

Also in the particular case of Spain they have been pre-empted by a local company that's already established in all big cities. So network effects can work against them, too.

[Admiral Yi]

Even if they succeed in that, they will still compete with cabs, public transportation, limo services... which will limit their profit margins regardless of their success in cornering ridesharing. And they seem to require hefty margins if they are bleeding so much money.

Also in the particular case of Spain they have been pre-empted by a local company that's already established in all big cities. So network effects can work against them, too.

Their losses are generated by new driver bonuses.  Their operating margins are great: once the driver is signed up they take a nap, let the software operate, and get a cut.

[Jacob]

The market they are trying to corner doesn't seem to have very high barriers of entry

The hell it doesn't.  It has a massive network effect - users won't go to "new ridesharing app" if it doesn't have local drivers, and local drivers won't go to "new ridesharing app" if it doesn't have users.

I think the network effect is overstated. There is no significant cost to either drivers nor passengers to use more than one app. Drivers and passengers can sign up to both Lyft and Uber (and any other rival) trivially, and go with whichever one is the most beneficial to them. Sure, I might check Uber first if that's my habit, but if they give me a long wait I can use Lyft - and if I get better fares at Lyft I can use that easily. And if a competitor - say Lyft - offer slightly better rates to the drivers then drivers will likely pick Lyft rides over Uber rides when there's a choice.

IMO the network effect is there, but it's not substantial enough to deter new entrants if there are significant rents to be made.

[Zanza]

This is a picture a friend of mine took in China last year, so it's definitely possible for the drivers to use multiple apps. 



In general there is plenty of competition from other modes of transportation, there is the possibility for other ride shareing brokers to enter the same market. In markets where multiple modes of transportation exist, you have apps that combine all modes of transporation in one app. And then there is the spectre of self-driving cars. Operating a fleet of those would be more capital-intensive than Uber, but then it would probably also offer better service and potentially lower costs.

Combine that with the fact that studies have shown that Uber drivers are basically just consuming their asset (i.e. their car) and long-term come out with a loss from driving for Uber due to deprecation and there is little that would make the business model long-term sustainable.

[Zanza]

Their operating margins are great: once the driver is signed up they take a nap, let the software operate, and get a cut.

Are their operating margins great? As far as I know, they lose money on each ride.

[Admiral Yi]

Jeff Bezos is now #1 on Forbes' list of billionaires. (I think he booted Carols Slim.)  He's worth 112 billion. 

Donald Trump dropped 222 spots, to #766.  Forbes thinks he's worth 3.1.

[Eddie Teach]

Yeah I saw an SNL clip where Bezos asks Alexa who is the richest man in the world for reassurance.

[Admiral Yi]

Are their operating margins great? As far as I know, they lose money on each ride.

Maybe I'm using the wrong jargon.

Seems to me that when talking about a given ride, the only cost incurred by Uber is the computing power used to generate the price, match up driver and passenger, and plot the map.  That has to be essentially zero.

[celedhring]

Are their operating margins great? As far as I know, they lose money on each ride.

Maybe I'm using the wrong jargon.

Seems to me that when talking about a given ride, the only cost incurred by Uber is the computing power used to generate the price, match up driver and passenger, and plot the map.  That has to be essentially zero.

I think the structural problem for Uber is the costs of mantaining both driver and passenger in the network. The driver demands a fare high enough to make a living, the passenger wants a fare low enough to forego a regular cab or other means of transportation. To my knowledge Uber is hemorrhaging cash in order to keep drivers working for them.

Maybe the efficiency of the system can be improved with more people in the network, but those losses are really big.

[Admiral Yi]

The driver demands a fare high enough to make a living

I don't know about this part.  Around here at least I don't think anyone is doing it as a full time gig.

[Jacob]

Maybe I'm using the wrong jargon.

Seems to me that when talking about a given ride, the only cost incurred by Uber is the computing power used to generate the price, match up driver and passenger, and plot the map.  That has to be essentially zero.

Unless they subsidize the rides: https://www.fastcompany.com/4026256/investors-are-paying-2-billion-per-year-to-subsidize-your-uber-ride