Uber would need to quadruple fares to become profitable, expert claims
DECEMBER 2, 20162:39PM
The company is “staggeringly unprofitable” and relies on billions of dollars in subsidies to undercut taxi operators. And once the competition is wiped out, the transportation giant would need to “quadruple” fares to become profitable.
That’s the warning from Hubert Horan, an expert with 40 years’ experience in the management and regulation of transportation companies, who has dug into the sparsely available financial info of the most highly valued private company in the world.
“Unlike most start-ups, Uber did not enter the industry in pursuit of a significant market share, but was explicitly working to drive incumbents out of business and achieve global industry dominance,” Mr Horan writes in Naked Capitalism.
“Uber’s growth to date is entirely explained by its willingness to engage in predatory competition funded by Silicon Valley billionaires pursuing industry dominance.”
With operating losses of $US2 billion ($2.7 billion) a year — more than any other start-up in history — Mr Horan argues there is “no evidence that Uber’s rapid growth is driving the rapid margin improvements achieved by other prominent tech start-ups as they ‘grew into profitability’.”
In fact, the “absolute magnitude of losses has been increasing”, he writes.
According to limited financial information provided to investors, for the year ending September 2015, Uber posted losses of $US2 billion ($2.7 billion) on revenue of $1.4 billion ($1.9 billion), a negative 143 per cent profit margin.
“Thus Uber’s current operations depend on $US2 billion in subsidies, funded out of the $US13 billion ($17.5 billion) in cash its investors have provided,” he writes.
“Uber passengers were paying only 41 per cent of the actual cost of their trips; Uber was using these massive subsidies to undercut the fares and provide more capacity than the competitors who had to cover 100 per cent of their costs out of passenger fares.”
The Financial Times argues Uber’s “entire business model [is] questionable”.
“This is critical because it suggests we’re dealing with a charity case in disguise,” the paper notes.
“Silicon Valley elites justify the subsidies in the name of monopolistic growth expectations and the building of ‘eco-systems’. They believe if monopoly status is achieved, profitability will follow naturally from that point.
“[But] there is no reason to assume Uber’s obliteration of local competition across the planet will create a sustainable business in the long term.
“Costs are costs, even if you’re a monopoly. As long as people have cheaper alternatives (public transport, legs), they will defect if the break-even price is higher than their inconvenience tolerance threshold.”
Mr Horan said claims in recent media articles that markets in developed countries were expected to generate “billions of dollars in profit” in coming years would require fares to quadruple.
“[The] $US4 billion ($5.4 billion) profit improvement needed to convert today’s $US2 billion losses into a $US2 billion profit would require some combination of the most staggering efficiency gains in the history of private enterprise … and humungous fare increases (fares would need to have quadrupled to have produced a $US2 billion profit in 2015).”
The Financial Times points out that “with the economics of the core business model looking that bad, small surprise Uber is currently preoccupied with pivoting its way to viability”, with initiatives such as carpooling, “optimised pick-up points”, and the “equally questionable” UberEats.
“[Customers’] preferences are … subtly massaged and managed with discount incentives and other behaviour moderating mechanisms (like crappy app navigation which makes it impossible to opt out of a pooled journey),” the paper writes.
Mr Horan argues that Uber’s refusal to consider an IPO “may best be explained by the recognition that publishing detailed, audited financial data confirming these massive losses and the complete lack of progress towards profitability could undermine public confidence about its inevitable march to industry dominance”.
However, Bloomberg reporter Eric Newcomer, the original source of some of the financial information cited in the report, said the analysis was “flawed”. Newcomer said Mr Horan was mistaken in claiming the losses from Uber’s China venture were not included in the financial figures.
“Uber’s first-half of 2016 losses included China,” he tweeted. “Uber owned 87.5 [per cent] of Uber China. Losses WERE consolidated. Support Uber scrutiny. Agree Uber is so big it should share its numbers. But this analysis seems flawed.”
Blair Davies, chief executive of the Australian Taxi Industry Association, said consumers should “prepare themselves for significantly higher prices … as Uber marches on to monopolise ride-sourcing markets in Australian cities”.
“Up until recently, Governments around Australia regulated taxi fares to protect consumers and the public benefit of that protection was commonly accepted,” he said.
“In the personalised transport market, there are many opportunities for service providers to exploit periods of high demand and take unfair advantage of consumers.
“Uber’s surge pricing is a classic example of how prices can be increased elastically when demand exceeds supply, reaching levels that have absolutely no connection with the real costs of the service being provided.
“The surge pricing rates of [New Year’s Eve] 2016 will likely become the new norm as Uber transitions from expansion mode to milking mode. And ordinary consumers will probably be left wondering why on earth their state governments abdicated their role of protecting them from price gouging in the personalised transport market.”
Uber declined to comment.