# Mythbusting Uber’s valuation



## Ca$h4 (Aug 12, 2015)

*Mythbusting Uber's valuation*
*Izabella Kaminska*
| Sep 13 17:33 | Comment | Share

Black cab drivers protesting in London in February. (Photo by Dan Kitwood/Getty Images)

Uber, the ride hailing app, is the archetypal billion dollar unicorn.

How it's managed to convince investors it's worth $62.5bn, however, is the real mystery, given its model is arguably neither innovative or viable.

Put bluntly, what Uber has really managed to do is persuade the world a smart and efficient urban transport system geared towards mass transit - within which taxis cater to the marginal client that's prepared to pay a premium for an occasional chauffeur-driven ride - can be transformed into a much less economical one, without any commensurate costs being passed on to anyone, whilst somehow also accommodating investor returns.

The key innovations the company has deployed, meanwhile, to convince investors that's possible have been anything but technological.

To the contrary, they've been based on the good old fashioned exploitation of suppliers, notably the paying of (_below-cost) _earnings to taxi drivers as well as the transfer of investor money directly to customers in the form of subsidies. Crucially, they've also been based on transference of risk from its own corporate balance sheet to those of its suppliers, most of whom lack the economies of scale or expertise to absorb those risks as efficiently.

Investors, for some inexplicable reason, have failed to see this.

If Uber is cheap it is not because it has out innovated the incumbent cab market, which at the end of the day has access to exactly the same ride-hailing technology. To the contrary, it's because investors have failed to recognise that the source of its greatest innovations is and always has been cheap money.

Indeed, from egregious undercutting tactics based on promotional giveaways to turning a blind eye to exploitative labour practices thanks to the cheap funding of aggressive lobbying campaigns aimed at changing legal frameworks or the reckless flooding of the market with huge amounts of spare capacity, none of it would be possible without access to cheap financing.

In this way, investors preoccupied with FOMO seem to have missed that for a bespoke chauffeur driven service to be readily available to anyone 24/7 at a price that is competitive with public transport, the ratio of spare drivers to potential riders at peak times must be 1:1. Extend that logic to off-peak times and you realise that for every potential user there must be a score of drivers or more sitting idly in standby mode to accommodate that luxury. Unless every single one of those drivers has a secondary job that doesn't require any real commitment, that's tantamount to the re-establishment of an upstairs downstairs server-master model, afforded by subsistence wages on labour's part.

In a conventional taxi model, of course, prices are smoothed throughout the day to ensure off-peak rates pay for peak services at affordable rates - hence why there are never any taxis around when you need them. You could also say, we all pay a little more at off-peak time to ensure desperate users don't get gouged at peak time and that as a whole we're all incentivised to make more responsible and efficient travel arrangements for our day-to-day travel.

In Uber's model, however, it's the exact opposite. Overcharging at peak time funds idle capacity at off-peak time, ensuring that whilst there's always a taxi when you need one, there's also a substantially larger amount of spare capacity when you don't.

That's an incentive model which might make sense for wooing unconscious or inanimate spare capacity back into marginal operation, but not necessarily one for the conscious sort, whose long-term security and welfare is supposed to be the actual objective of technological innovation.

So how has this happened?

BCA's Brian Piccioni and Paul Kantorovich had a stab at some of the causes of the insanity in a report out at the end of August.

As they noted, unlike many other unicorns, Uber's business model is frighteningly simple and highly replicable. The $62.5bn valuation can't consequently be a reflection of that. Perhaps then it's about something altogether different? Regulatory arbitrage perhaps?

That may be the case, but there are consequences to regulatory arbitrage, say Piccioni and Kantorovich. For one thing, regulation affects all players in the long run equally, so even though Uber has done the bulk of the heavy lifting on the legal cost side, the overall effect is still one that has seen the value of a taxi medallion in New York City drop by 50 per cent. There is also absolutely nothing preventing other companies from replicating its model or stealing market share with the use of even more egregious promotional tactics funded by profligate investors.

So perhaps it's about brand? By using Uber in an unfamiliar city, customers can be sure they know what they're getting at a price that's not exploiting their lack of local knowledge.

Piccioni and Kantorovich say that doesn't really cut it either. Most cab rides are made by local people, and a local version of Uber is sufficient. It would not in their opinion take much for a company to set up shop as a sort of clearing house of taxi apps, a la Expedia.

So perhaps autonomous cars will be the ultimate moat building exercise for Uber?

Again here, there are issues. As Piccioni and Kantorovich note, Uber has literally zero experience managing an asset-heavy business with large capital and maintenance costs, and significant liability exposure. Nor is Uber the one doing the innovation, so they will always have rent someone else's technology:

We believe it is highly unlikely a non-car company such as Uber will become a leader in AV technology, despite their partnership with Volvo. Even though Uber has been able to raise an unprecedented amount of money for a private company, they do not have the financial resources to directly compete with Google in developing AV technology while losing money on their main business.

So perhaps it's about the profitability of the underlying sector?

Again no. As Piccioni and Kantorovich say, the provision of taxi services is not an intrinsically profitable undertaking. Most adults have a driver's license, many own cars, and modern GPS systems mean drivers do not even have to acquire an encyclopedic knowledge of streets, routes and points of interest:

To the extent the taxi business was profitable, it was mainly profitable for wealthy permit holders who leased out their permits to drivers who earned modest incomes. If those permits disappear the artificial barrier to entry disappears and the returns on the business will plummet - as can be expected.

To all extents and purposes Uber's technology is banal, barriers to entry are negligible and unionisation/legal risk is substantial. Piccioni and Kantorovich conclude the valuations being ascribed by venture capital funds are indeed fantastical, and predicated mostly on what the shares might sell for if the company were sold or taken public. But, as they note, few companies have $69bn to spend and fewer still would spend it on a car service. What's more, given that the enterprise value of Southwest Airlines, one of the best run airlines in the world, is about $23bn, it seems unlikely to them that Uber is worth any more than a small fraction of that figure in an IPO.

Ultimately Uber's success comes down to convincing the world that it has made a progressive leap by allocating cheap human resources towards the job of waiting around at the beck and call of an increasingly powerful elite.

From an aggregate economic allocation and welfare point of view that's an obviously nuts proposition. What it amounts to is a transfer of labour from high productivity sectors to ultra low productivity sectors on the assumption that if this workforce is given autonomy over their non-productive time they can deploy it more efficiently in the market than if it was being allocated by a scaled-up specialist operator.

Since that, by definition, inhibits specialisation or skill acquisition in labour markets, all it really encourages is the purposeful unscaling of the economy and thus the entrenchment of a suppressed, underpaid, servant class with no prospect to ever benefit from a consumer surplus.


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## ubershiza (Jan 19, 2015)

Bravo well said!


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## rembrandt (Jul 3, 2016)

Simply put it , uber is not patented iPhone loaded with IOS nor it is AT&T. The backend technology that powers Uber app does not exclusively belong to Uber and a new investor does not need to invest a lot in either infrastructure or production facilities. Brand loyalty is in a market for a five dollar ride can be very fluid because minimum risk involved in switching the brand. Ubers market share is heavily dependent on the massive subsidies that Uber provides to it's customers in the form of subsidized rides and driver incentives that is not indefinitely sustainable for a private sector company. All these factors make Uber susceptible to formidable competitions from prospective rivals.

However, financial regulators might want to look deeper if a loss making company continues to draw huge investment funds. No one prevents someone to make informed decisions before burning cash but we live in a complex world. Once upon a time, there was a company called BCCI - Bank of Credit and Commerce International which made a lot of noise before huge scandal that sent shockwave all over the globe http://www.peterdalescott.net/q4.html and we all know what followed next.


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## tohunt4me (Nov 23, 2015)

Ca$h4 said:


> *Mythbusting Uber's valuation*
> *Izabella Kaminska*
> | Sep 13 17:33 | Comment | Share
> 
> ...


Uber Drivers subsidise Uber more than Uber Investors do.
And we don't get invited to the parties. . .


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## tohunt4me (Nov 23, 2015)

rembrandt said:


> Simply put it , uber is not patented iPhone loaded with IOS nor it is AT&T. The backend technology that powers Uber app does not exclusively belong to Uber and a new investor does not need to invest a lot in either infrastructure or production facilities. Brand loyalty is in a market for a five dollar ride can be very fluid because minimum risk involved in switching the brand. Ubers market share is heavily dependent on the massive subsidies that Uber provides to it's customers in the form of subsidized rides and driver incentives that is not indefinitely sustainable for a private sector company. All these factors make Uber susceptible to formidable competitions from prospective rivals.
> 
> However, financial regulators might want to look deeper if a loss making company continues to draw huge investment funds. No one prevents someone to make informed decisions before burning cash but we live in a complex world. Once upon a time, there was a company called BCCI - Bank of Credit and Commerce International which made a lot of noise before huge scandal that sent shockwave all over the globe http://www.peterdalescott.net/q4.html and we all know what followed next.


Uber was merely the first to bring summoning a taxi to your doorstep as easy as pushing a button.
Imagine how amazed people must have been at the first food delivery,or the first " drive through" restaurant ?
Think I will patent an app. That makes Dr.' S do housecalls.
Then charge the Dr.' S 25%.
Perhaps throw in a " safe prescription" fee.


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## RamzFanz (Jan 31, 2015)

Ca$h4 said:


> If Uber is cheap it is not because it has out innovated the incumbent cab market, which at the end of the day has access to exactly the same ride-hailing technology.


Really? Where is it? It's not in my market, they are counting on the corruption to bail them out.



Ca$h4 said:


> In this way, investors preoccupied with FOMO seem to have missed that for a bespoke chauffeur driven service to be readily available to anyone 24/7 at a price that is competitive with public transport, the ratio of spare drivers to potential riders at peak times must be 1:1. Extend that logic to off-peak times and you realise that for every potential user there must be a score of drivers or more sitting idly in standby mode to accommodate that luxury. Unless every single one of those drivers has a secondary job that doesn't require any real commitment, that's tantamount to the re-establishment of an upstairs downstairs server-master model, afforded by subsistence wages on labour's part.


We call those spare drivers newbies. If you sit around at off peak times, and your not at home chilling and doing other things, that's on the driver. In a part time gig, there is no reason to be there when you aren't needed and thus, this is a logical fallacy.



Ca$h4 said:


> In a conventional taxi model, of course, prices are smoothed throughout the day to ensure off-peak rates pay for peak services at affordable rates - hence why there are never any taxis around when you need them.


OR when you DO need them. Taxis suck. Promoting their system as advantageous is nonsense. Claiming they have affordable rates is laughable.

This article ignores that people DON'T USE TAXIS because they are so often unavailable and unaffordable. Makes for an easy argument.



Ca$h4 said:


> In Uber's model, however, it's the exact opposite. Overcharging at peak time funds idle capacity at off-peak time, ensuring that whilst there's always a taxi when you need one, there's also a substantially larger amount of spare capacity when you don't.


Again, nonsense. We go home. We aren't committed to schedules by some hack boss. There is no efficiency in taxis, there's cherry picking and poor service.

I got bored at this point.


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## uberdriverfornow (Jan 10, 2016)

Great article. The main point people seem to be missing is that with their undertaking of self-driving cars, when will they be forced to concede they are no longer a "technology" company as they always claim. They will soon be forced to concede they really are a "transportation" company.


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## 4736353377384555736 (Aug 27, 2016)

Nice, OP, one of the very few articles written by people who have a brain and are decent at business analysis and valuation.

The fact that RamzFanz doesn't like it proves its validity.

The big questions though are: when will the façade come crumbling down? How long can Uber sustain the fantasy before the man behind the curtain is revealed? And what inciting incident will begin its downfall?

"If we don't get the (autonomous car) software thing nailed, we're not going to be around much longer," 
-Travis Kalanick, CEO, Uber
interview, August 18, 2016


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## rembrandt (Jul 3, 2016)

4736353377384555736 said:


> Nice, OP, one of the very few articles written by people who have a brain and are decent at business analysis and valuation.
> 
> The fact that RamzFanz doesn't like it proves its validity.
> 
> ...


The man behind the curtain is not Kalanick for sure. It could be either someone from the middle east or with a Sino - Soviet background. The profile fits to an Ex KGB turned businessman with middle east connection.


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## Gi joe (Sep 19, 2015)

RamzFanz said:


> Really? Where is it? It's not in my market, they are counting on the corruption to bail them out.
> 
> We call those spare drivers newbies. If you sit around at off peak times, and your not at home chilling and doing other things, that's on the driver. In a part time gig, there is no reason to be there when you aren't needed and thus, this is a logical fallacy.
> 
> ...


Again this was not billed as a part time gig for the first few years of Uber world. This was billed as a potential 90,000 a year or as one comcercial showed a 667 dollar a week gig. When prices fell and Uber claimed it would bring more money for the driver, and when it obviously didnt do that, they then backed down and now say its only for part timers. Just a part time gig so its our fault now if we dont make the money we thought we would. So please stop blaming people for making this a full time gig... newbies yes u can blame them, but old timers who been doing this for a few years, just simply stop.


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## andaas (May 19, 2015)

tohunt4me said:


> Think I will patent an app. That makes Dr.' S do housecalls.
> Then charge the Dr.' S 25%.
> Perhaps throw in a " safe prescription" fee.


Too late, old news, already been done. Heal.


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## KevinH (Jul 13, 2014)

> "If we don't get the (autonomous car) software thing nailed, we're not going to be around much longer,"
> -Travis Kalanick, CEO, Uber
> interview, August 18, 2016


When I read this, I am not sure if Kalanick is admitting the failure of the current business model or the fact that the world is certainly headed to autonomous vehicles and they need to be at least "tied for number one" in that race.


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## naplestom75 (May 3, 2015)

If I had a dollar for every internet start-up that failed because their idea was not profitable, I'd have the average net cash flow of an internet start-up.


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## RamzFanz (Jan 31, 2015)

4736353377384555736 said:


> Nice, OP, one of the very few articles written by people who have a brain and are decent at business analysis and valuation.
> 
> The fact that RamzFanz doesn't like it proves its validity.
> 
> ...


I see you quoted him out of context to support your anti-Uber agenda. We all know he was referring to needing to get SDCs sooner rather than later so he wouldn't be left behind by the dozens of others who are about to have them. It had nothing to do with their stability or profitability. Not very imaginative of you.


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## Fireguy50 (Nov 23, 2015)

Gee too bad about that Uber company. I was getting rich!


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## 4736353377384555736 (Aug 27, 2016)

KevinH said:


> When I read this, I am not sure if Kalanick is admitting the failure of the current business model or the fact that the world is certainly headed to autonomous vehicles and they need to be at least "tied for number one" in that race.


In that case his company is really ubered because SDC investment will take a generation to recoup its costs. In my opinion. The major car companies can weather that but Uber is bleeding money like crazy.


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## RamzFanz (Jan 31, 2015)

4736353377384555736 said:


> In that case his company is really ubered because SDC investment will take a generation to recoup its costs. In my opinion. The major car companies can weather that but Uber is bleeding money like crazy.


Which is why they have partnerships with Volvo and Toyota.


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## phillipzx3 (May 26, 2015)

RamzFanz said:


> Really? Where is it?


We've been using app-based ordering of our cabs for almost 8 years. Just because you have your anti-cab blinders on, doesn't mean it doesn't exist.

Hell...Taxi magic was around before Uber was known of.


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## TwoFiddyMile (Mar 13, 2015)

KevinH said:


> When I read this, I am not sure if Kalanick is admitting the failure of the current business model or the fact that the world is certainly headed to autonomous vehicles and they need to be at least "tied for number one" in that race.


Yeah, that's a hail Mary pass right there. Good catch!


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## RamzFanz (Jan 31, 2015)

phillipzx3 said:


> We've been using app-based ordering of our cabs for almost 8 years. Just because you have your anti-cab blinders on, doesn't mean it doesn't exist.
> 
> Hell...Taxi magic was around before Uber was known of.


Never heard of it. I guess that's because I wouldn't use a taxi anyways.


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## Santa (Jan 3, 2016)

Didn't the Chinese ridesharing company bought Uber's China operation for like $35 billion recently?!


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## TwoFiddyMile (Mar 13, 2015)

Santa said:


> Didn't the Chinese ridesharing company bought Uber's China operation for like $35 billion recently?!


Nope.
They bought it for 2 billion, and let Uber keep 18℅ share on its own company.
I think it was 2 billion.
I have been getting very little sleep lately.


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