Apps Data & Expense Fleet Why can’t Uber make money? By BMaaS Contributor Posted on December 14, 2017 11 min read By any measure, Uber’s seven-year entrepreneurial journey has been extraordinary. No venture has ever raised more capital, grown as fast, operated more globally, reached as lofty a valuation — or lost as much money as Uber. Last month, Uber reported a third-quarter loss of nearly $1.5 billion, bringing its 2017 year-to-date red ink to $3.2 billion. Losses of this magnitude are clearly not sustainable, and call for an explanation of why Uber has been unable to rein in ballooning costs and what it will need to do to survive, let alone prosper. Much of the recent discourse on Uber has focused on the numerous unethical and possibly illegal corporate behaviors that continue to dog the company, six months after founder Travis Kalanick resigned as CEO. But while the reputational damage from Kalanick’s win-at-all-costs ethos has certainly not helped Uber’s cause, it has masked a far deeper problem facing the company. Uber’s elephant in the room is that its business model is fundamentally broken. To understand why, it is useful to assess Uber’s business model in the context of the history of the taxi industry. Shortly after launching an app-hailing black car limo service in San Francisco in 2010, Uber founders Garrett Camp and Travis Kalanick recognized the potential to disrupt the $100 billion global taxi industry. After all, this heavily regulated sector had seen little innovation over the prior century, leaving customers to cope with an expensive, inconvenient service that rarely seemed available when most needed. Enter Uber, who incorporated widely available technologies – GPS, Google Maps and mobile computing – into a well-designed app to create a customer pleasing, smartphone-enabled urban transportation service. Not only did Uber offer enhanced urban mobility, but it was usually cheaper and more convenient than taxis as well. Ride hailing and payment processing were fully automated and Uber was priced well below (30% or more) comparable taxi services. With better/faster/cheaper service, Uber became an immediate hit with consumers, emboldening the company to expand rapidly. To recruit drivers in Uber’s two-sided market, Uber promised high pay and flexible working hours as a compelling value proposition to independent contractors looking to supplement their income. Venture capitalists were enthralled with the bold ambition of Uber’s disruptive business model, and eagerly jockeyed for the right to invest in the growing, if unprofitable enterprise. Uber raised a record-setting $11.5 billion through 18 funding rounds, ultimately valuing the company at $68 billion. Flush with cash, Uber raced to launch operations in 737 cities across 84 countries, delivering over 5 billion rides as of this writing. There’s a lot to like in this story, except for one thing. The taxi industry that Uber is seeking to disrupt was never profitable when allowed to expand in unregulated markets, reflecting the industry’s low barriers to entry, high variable costs, low economies of scale and intense price competition — and Uber’s current business model doesn’t fundamentally change these structural industry characteristics. It is indeed ironic that Uber’s fierce determination to avoid regulatory oversight condemns the company to unprofitable operations that the taxi industry experienced during its pre-regulatory era. To see these parallels, a little history is in order. The first gas-powered taxis appeared in New York City in 1907, and began replacing horse drawn carriages in for-hire service. Taxicabs gained momentum when the affordable Ford Model T was introduced shortly thereafter, ushering in a wave of new low-price taxi operators. This posed a serious threat to incumbent taxi companies wedded to higher cost automotive fleets, which precipitated violent protests in many major metro areas in support of regulations to severely constrain new entrants to the taxi market. Sound familiar? Although a few cities legislated restrictions on the permissible number of taxi operators, the largest U.S. taxi market – New York City – remained largely unregulated well into the 1930’s. With the onset of the Great Depression, many unemployed workers turned to the taxi industry to try to earn a living. The resulting oversupply of taxis led to a collapse of fares, as taxi companies and drivers competed in a race to the bottom to attract additional customers. Driver net income and taxi company profits evaporated, the quality of drivers, cars and passenger safety deteriorated, and taxi oversupply exacerbated congestion on city streets. This historical experience exhibits several parallels to Uber’s current business model, presaging the company’s dismal financial performance. The pre-regulated taxi industry was characterized by bounded demand, abundant supply, relatively undifferentiated service quality, extremely low barriers to entry, low customer switching costs, high variable costs and virtually no economies of scale. Many of these same conditions exist today for Uber and its competitors in the shared-ride market. While both then and now, consumers benefitted from low fares and short wait times, structural industry characteristics precluded profitable operations in both unregulated eras. To “fix” this problem eighty years ago, New York City (and many other major metros) made a political decision to favor taxi companies and drivers at the expense of city residents. The Haas Act of 1937 established a licensing system, requiring a medallion for every taxi in New York City, and made it illegal to operate without one. This proved highly lucrative to the government, which sold the medallions in public auctions, and to successful bidders who could operate comfortably with the assurance of tight controls over competition. Originally, New York set a limit of 16,900 taxi medallions, reducing that number to 11,787 after World War II. Fifty years later, the medallion cap was inched up to 11,900, and today, remains capped at 13,587. In contrast, absent regulatory oversight, the current number of shared ride cars operating in NYC has swelled to well over 60,000. The impact of regulations arbitrarily capping taxi supply in NYC has been significant. While the population of New York City grew by 20% since the passage of the Haas Act in 1937, over the same period, the regulated cap on taxi medallions shrank by 20%. As a result, consumers have been subjected to longer wait times, higher fares, deteriorating vehicle quality and shoddy service, while incumbent taxi operators enjoyed escalating profits and soaring medallion values. This is clearly evident in the secondary market for NYC taxi medallions, which serves as leading indicator of expected industry profitability. Between 1975 and 2013 (largely pre-dating Uber’s entrance), medallion prices in NYC increased by over 2,700%, far outpacing the growth of the Dow Jones stock price index.