Uber/Lyft have defective business model?

[DTEJD1997]

Hey all:

 

I've always questioned whether Uber/Lyft had a "defective" business model...it now appears that there is a significant chance that this is correct.

 

MIT published a study claiming that most drivers NET something like $3.25/hour.  Apparently the eggheads at MIT got it wrong, and the drivers really make $8/hour on average:

 

Please see:

 

https://nypost.com/2018/03/05/revised-study-finds-uber-drivers-make-more-than-first-reported/amp/

 

I've known a few attorneys that drive for Uber.  Most no longer do it.  They made money but it just was not enough after expenses.

 

One attorney said he did reasonably well IF he drove during PEAK DEMAND hours.  This would be weekend evenings and late at night when college kids were coming out of the bars.  He would also do airport runs.  He reported to me that if you were selective about WHEN you drove, you could make OK money....if you just drove all the time and during the day, then it was usually not very remunerative.

 

If I am not mistaken, NEITHER Uber or Lyft has ever reported a profit.

 

Some analysts speculate that these companies will turn profitable once "self driving" cars become available and they can cut out the driver.

 

If the driver is only earning $8/hour, just how much "profit" is there in the business model to begin with?

 

Further, these drivers are shouldering the capital cost of the vehicle and fronting the expenses.  If/when Uber/Lyft has to do this...they are going to require BIGLY amounts of capital.

 

I am also going to guess that a fully autonomous car is going to cost at a MINIMUM $50k.  What if these cars cost $75k or $100k?  They are going to buy a very expensive piece of machinery to capture $8/hour in profit (maybe?).

 

So color me skeptical...I think these companies do not have a viable business model.

 

Any thoughts?

 

 

[VAL9000]

Here is the information you are looking for:

 

https://www.wsj.com/graphics/uber-financials/

 

Of $11bn revenue $7.5bn goes to drivers and their cars.  It's an enormous opportunity for both revenue growth and cost optimization.

 

Self driving cars will cost less than a typical vehicle today and will be much better utilized.

 

[DooDiligence]

I think the taxicab model is just a path to an autonomous model.

 

Tie ins with insurance could add incrementally?

https://www.bloomberg.com/gadfly/articles/2018-02-12/softbank-billionaire-bets-on-a-world-without-car-crashes

 

In the short run, the IPO should be profitable for some (Masa being one.)

[Spekulatius]

Here is the information you are looking for:

 

https://www.wsj.com/graphics/uber-financials/

 

Of $11bn revenue $7.5bn goes to drivers and their cars.  It's an enormous opportunity for both revenue growth and cost optimization.

 

Self driving cars will cost less than a typical vehicle today and will be much better utilized.

 

But what is Uber’s edge running a large fleet of cars exactly?

[SlowAppreciation]

https://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-one-understanding-ubers-bleak-operating-economics.html

[cwericb]

Anyone expecting to see autonomous cars running on our highways has a long, long wait ahead.

 

Perhaps in sunny south California, but not in the snow belt and not on rural two lane highways during the winter where there are no lines on the roads and where snow drifts and whiteouts can crop up in minutes.

[Uccmal]

DTEJD,

 

Leaving aside the concept of automous vehicles and focussing only on the business of Uber/Luft.

 

It doesn't surprise me that it took a study to reveal that drivers aren't making any, or at least very little money.  Most people dont have a good sense of what the overall costs of driving are.  Insurance, wear and tear, fuel costs, and so forth add up. 

 

Uber/Lyft, if they make any money at all, are making it on the backs of their (suckers) drivers. 

 

In every city in the world there are cab companies, usually a few, in some degree of competition with one another.  This has been going on for a hundred years.  Why would we think that they haven't optimized the cost structure?  And the cabbies and cab companies have been operating with the above mentioned driving costs all in.  If Uber and Lyft had to start paying the full costs they cannot beat a cab company. 

 

Needless to say, I wouldn't touch an IPO in either company with a barge pole. 

 

 

[EliG]

DTEJD linked MIT study.

 

Chief Economist of Uber challenged the validity of the study.

 

https://medium.com/uber-under-the-hood/an-analysis-of-ceeprs-paper-on-the-economics-of-ride-hailing-1c8bfbf1081d

 

He claims that MIT used a flawed methodology.

 

twitter discussion

 

 

[CorpRaider]

I received from amazon like a tube of toothpaste in a 12 x 8 (ish) corrugated box delivered by a union member UPS carrier in a $100K truck that gets crappy mileage yesterday.  The last 6 Netflix originals I watched were MEH. I frequently wonder about business models.

[VAL9000]

But what is Uber’s edge running a large fleet of cars exactly?

 

Oh, I don't think this is Uber's game to win.  They have done a fantastic job of creating a centralized service for ride hailing which gives us great insight into the economics of the business.  I don't believe Uber will develop the technology needed to create a very profitable business.  This game will be won by whomever does.  Probably Google and/or GM based on what I've read.

 

 

 

[Spekulatius]

I don’t really care about their business model or how much money their drivers make. I Luke them as a customer, they have created a way better way and interface to hire transportation, when I need it.

[StevieV]

Yes, I think they do have a defective business model.

 

They don't make money now.

 

I don't know when AVs will come, but when they do, I agree that they won't have a competitive advantage there.  The current MOAT is the driver network.  When there are AVs, why won't the car companies directly win that business.  Or rental car companies.  Or folks signal their own car to pick them up.  I think that will be a tough business and I don't see that Uber will have a big advantage.

[Pelagic]

Yes, I think they do have a defective business model.

 

They don't make money now.

 

I don't know when AVs will come, but when they do, I agree that they won't have a competitive advantage there.  The current MOAT is the driver network.  When there are AVs, why won't the car companies directly win that business.  Or rental car companies.  Or folks signal their own car to pick them up.  I think that will be a tough business and I don't see that Uber will have a big advantage.

 

I don't see the driver network as a defensible moat for them, drivers can and do switch between Uber/Lyft and other smaller ridesharing apps where they exist - most drivers will use both at the same time and pick up rides interchangeably between them. Furthermore, save for a small minority of drivers, most drivers don't see driving for Uber/Lyft as a long term gig, they work when they want, when they feel it makes economic sense to do so. Should they be priced out by higher costs (fuel costs for instance) or cheaper AV rides they'll stop driving.

 

Where I see Uber and Lyft currently having a moat relative to taxi companies is in the platform used to hail drivers. People like being able to summon a ride through their phone and whether it's a human driver or an AV I don't see this disappearing anytime soon - not that taxi companies can't replicate it easily enough if they choose to. It all comes down to price though, if they're not providing the cheapest, or close to it, ride - riders can easily open another app. I usually price shop between Uber and Lyft before summoning a ride and there's no reason to think if a company running a fleet of AV pops up in my area and offers an app to summon them with transparent pricing, I wouldn't also check their rates.

 

The "let's use our drivers as guinea pigs to prove the platform can work then undercut them with our own fleet of AVs" model has always struck me as funny. Technology is great, don't get me wrong I love tech and can't wait for self driving personal cars. But I feel Uber/Lyft are pushing for AVs because the technology exists rather than because of an economic case for it. If you have people willing to work for essentially minimum wage as drivers, is switching to a capital intensive model where you own and have to maintain massive fleets of self driving vehicles really the path you want to take? Perhaps they're making the case that driver's earnings are higher than estimated to justify their push toward AV to their investors.

[StevieV]

The "let's use our drivers as guinea pigs to prove the platform can work then undercut them with our own fleet of AVs" model has always struck me as funny.

 

Good point.

 

I don't see the driver network as a defensible moat for them ,....  Where I see Uber and Lyft currently having a moat relative to taxi companies is in the platform used to hail drivers.

 

I am not sure we understand each other here.  IMO, the reason why you or I would have difficulty starting a ride-sharing company today, among others, is scale.  People use Uber and Lyft because they are well-known and available.  I can go to many cities and be confident it has Uber and there are a reasonable number of Uber drivers around, so that I can get a ride.  Drivers want to be with Uber or Lyft because they have the customers.  I called that the driver network, but perhaps network effects or scale would be more appropriate.

[Pelagic]

The "let's use our drivers as guinea pigs to prove the platform can work then undercut them with our own fleet of AVs" model has always struck me as funny.

 

Good point.

 

I don't see the driver network as a defensible moat for them ,....  Where I see Uber and Lyft currently having a moat relative to taxi companies is in the platform used to hail drivers.

 

I am not sure we understand each other here.  IMO, the reason why you or I would have difficulty starting a ride-sharing company today, among others, is scale.  People use Uber and Lyft because they are well-known and available.  I can go to many cities and be confident it has Uber and there are a reasonable number of Uber drivers around, so that I can get a ride.  Drivers want to be with Uber or Lyft because they have the customers.  I called that the driver network, but perhaps network effects or scale would be more appropriate.

 

Makes sense, I was thinking more in terms of the drivers themselves which have little attachment to either and are a sort of revolving door of people that use the apps to make extra money until they tire of it, which I don't see as being their moat. Their platform connecting drivers/riders is the real moat as I see it.

[KCLarkin]

I don't see the driver network as a defensible moat for them ,....  Where I see Uber and Lyft currently having a moat relative to taxi companies is in the platform used to hail drivers.

 

I am not sure we understand each other here.  IMO, the reason why you or I would have difficulty starting a ride-sharing company today, among others, is scale.  People use Uber and Lyft because they are well-known and available.  I can go to many cities and be confident it has Uber and there are a reasonable number of Uber drivers around, so that I can get a ride.  Drivers want to be with Uber or Lyft because they have the customers.  I called that the driver network, but perhaps network effects or scale would be more appropriate.

 

Yes, this is the classic example of a two-sided network. The demand will go to the network(s) with the most supply. And the supply will go to the network(s) with the most demand. And the moat increases as the network grows since the dynamic is self-reinforcing. These are very, very powerful moats.

[rkbabang]

Anyone expecting to see autonomous cars running on our highways has a long, long wait ahead.

 

Perhaps in sunny south California, but not in the snow belt and not on rural two lane highways during the winter where there are no lines on the roads and where snow drifts and whiteouts can crop up in minutes.

 

Easiest places to implement due to population density and weather will be first, other places will get it slowly over time.  I remember as a kid waiting for cable TV.  The small city next to my town had it a good 5 years before my town started getting it, and even then it was a year or two before it reached my street. Kids at school would brag about getting cable and it seemed like forever before it reached my neighborhood.  Population centers always get stuff first if population density is an issue.  And eventually the weather condition concern will be solved as the AI gets better.  Eventually it will be available everywhere but the most rural places (the type of places where dialup internet is still the only option today).

 

[DanielGMask]

Here is the information you are looking for:

 

https://www.wsj.com/graphics/uber-financials/

 

Of $11bn revenue $7.5bn goes to drivers and their cars.  It's an enormous opportunity for both revenue growth and cost optimization.

 

Self driving cars will cost less than a typical vehicle today and will be much better utilized.

 

But what is Uber’s edge running a large fleet of cars exactly?

 

Network effects, scale economics, brand recognition, market share, etc, etc, etc. I have no clue if they are making money right now but moving people within a town or city is more necessary than ever and I’m confident there will be a lot of money to make and the first move advantage of these companies it’s going to be difficult to overcome.

[LC]

 

I am also going to guess that a fully autonomous car is going to cost at a MINIMUM $50k.  What if these cars cost $75k or $100k?  They are going to buy a very expensive piece of machinery to capture $8/hour in profit (maybe?).

 

 

Autonomous cars will kill Uber/Lyft.

 

Why wouldn't I take out a loan, have the car drive itself for the 22 hrs/day when I don't use it myself, and capture that $ myself?

[DanielGMask]

Yes, I think they do have a defective business model.

 

They don't make money now.

 

I don't know when AVs will come, but when they do, I agree that they won't have a competitive advantage there.  The current MOAT is the driver network.  When there are AVs, why won't the car companies directly win that business.  Or rental car companies.  Or folks signal their own car to pick them up.  I think that will be a tough business and I don't see that Uber will have a big advantage.

 

I think that’s a fallacy. Having a huge fleet of cars is going to be expensive to set and expensive to mantain - It’s today and it will always be. Having a real and huge network of cars/drivers on demand an the digital ecosystem supporting that network is the most valuable thing here.

 

Just as anybody can replicate the ITunes’ model (but in reality is not just that easy!), anybody would be able to replicate Uber’s model but it’s not going to be that easy!

[rkbabang]

 

I am also going to guess that a fully autonomous car is going to cost at a MINIMUM $50k.  What if these cars cost $75k or $100k?  They are going to buy a very expensive piece of machinery to capture $8/hour in profit (maybe?).

 

 

Autonomous cars will kill Uber/Lyft.

 

Why wouldn't I take out a loan, have the car drive itself for the 22 hrs/day when I don't use it myself, and capture that $ myself?

 

And how are people going to find and call your personal car to them if not through the Uber or Lyft app?

 

[LC]

They could just hail it down with a sharp whistle like in the good ole days  :-X

[Pelagic]

 

I am also going to guess that a fully autonomous car is going to cost at a MINIMUM $50k.  What if these cars cost $75k or $100k?  They are going to buy a very expensive piece of machinery to capture $8/hour in profit (maybe?).

 

 

Autonomous cars will kill Uber/Lyft.

 

Why wouldn't I take out a loan, have the car drive itself for the 22 hrs/day when I don't use it myself, and capture that $ myself?

 

And how are people going to find and call your personal car to them if not through the Uber or Lyft app?

 

That's Uber v3.0 after they figure out owning and maintaining a massive fleet of AVs is an expensive, low margin proposition. Uber 3.0 will connect your car with customers where their platform just acts as a middleman. Like the current version but without the drivers demanding better wages. WSJ headline circa 2032 - "MIT Study Reveals Autonomous Vehicles are Working Well Below Minimum Wage"

[Jurgis]

Here is the information you are looking for:

 

https://www.wsj.com/graphics/uber-financials/

 

Of $11bn revenue $7.5bn goes to drivers and their cars.  It's an enormous opportunity for both revenue growth and cost optimization.

 

Self driving cars will cost less than a typical vehicle today and will be much better utilized.

 

But what is Uber’s edge running a large fleet of cars exactly?

 

I would guess scheduling and routing algorithms are not trivial. Is that enough of a moat, I don't really know.  8)

[Jurgis]

 

I am also going to guess that a fully autonomous car is going to cost at a MINIMUM $50k.  What if these cars cost $75k or $100k?  They are going to buy a very expensive piece of machinery to capture $8/hour in profit (maybe?).

 

 

Autonomous cars will kill Uber/Lyft.

 

Why wouldn't I take out a loan, have the car drive itself for the 22 hrs/day when I don't use it myself, and capture that $ myself?

 

A company that owns a fleet and optimizes routing/scheduling will kill your one car operation. Although you could try to limit your car to profitable airport routes... but then everyone else will try this too. And if company optimizes to predict good locations for its cars, your car will always lose the pickups.

 

Also, people will order through some portal, so you'll have to pay for your car to be included in one. So perhaps portal with no car fleet will win. Who knows.