Writing in New York Magazine, Naked Capitalism’s Yves Smith draws on Hubert Horan’s outstanding series on the underlying economics of Uber to describe why the company’s IPO will be a terrible bet for the investors who buy into it.

It’s only been a year since Softbank offered to buy out shareholders on a valuation of $48B (and had more takers than they were prepared to buy from!); and now Uber is hoping to float on a valuation of $120B, asking suckers to pay more than double what the company’s top execs were willing to sell their shares for a year ago.

Uber claims it’s a tech company and can benefit from the economics of scale that tech companies enjoy. But it’s not. It’s “a taxi company with an app attached.” Uber’s spent billions of its investors’ cash subsidizing rides in a largely successful bid to kill local taxi companies, but even if every other cab company goes out of business, Uber won’t be able to jack up the prices, because starting another Uber to compete with it just isn’t that hard.

Uber has disadvantages of scale. Beyond a certain critical threshold, adding drivers to Uber’s pool of employees (who it claims are not employees) just lowers everyone’s wages, and individual drivers spend much more maintaining their cars than yellow cab companies do maintaining their fleets.

Uber’s data-richness doesn’t confer much of an advantage, either: no amount of data will change the fact that commuters mostly go in one direction in the morning and the other direction at night, leaving drivers with empty cars half the time (it’s even worse with airport runs).

Indeed, Uber’s scale has many disadvantages: with tons of sunk costs and investors expecting a return on their capital, Uber can’t afford to be nimble and flexible in the way that future competitors will, as they explore the regulatory landscape and changed consumer expectations that Uber paid to create but can’t stop others from enjoying.

Uber has enjoyed a long subsidy in the form of drivers’ financial illiteracy: drivers failed to account for their cars’ depreciation in figuring their take-home pay, and as they wake up to a take-home pay that is lower than a starting wage at McD’s, expect them to bail. Of course, Uber might be able to replace all those drivers with autonomous vehicles — a dream that, like AI, will likely be ten years away for the next forty years.

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.

But, you may argue, Uber has all that data about rides! Certainly that allows it to be more efficient than traditional cabs. Um, no. Local ride services have backhaul problems that no amount of cleverness can remedy, like taking customers to the airport and either waiting hours for a return fare or coming back empty, or daily urban commutes, where workers go overwhelmingly in one direction in the morning rush and the other way in the evening. Similarly, Uber’s surge pricing hasn’t led customers to change their habits and shift their trips to lower-cost times, which could have led to more efficient utilization. If Uber had any secret sauce, it would have already shown up in Uber revenues and average driver earnings. Nine years in, and there’s no evidence of that.

 

 

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