Uber Case Study

Can Uber Ever Be Profitable? about:reader?url=https://www.forbes.com/sites/lensherman/2019...
forbes.com
Can Uber Ever Be

Profitable?
Len Sherman
9-11 minutes
This is the first of a four-part series on

Uber’s past and future. Today’s article
focuses on identifying the root causes of
Uber's deep losses to date. The full series
can be found at: 1.Why Uber May Never Be
Profitable, 2. Are There Quick Fixes To
Improve Uber's Profitability?, 3. What Else
Can Uber Do In The Short-Term To Reverse
Its Steep Losses?, 4. Can Uber Ever
Deliver The Transformative, Profitable
Future That Its CEO Has Promised?
1 of 14 30/07/19, 2:40 pm
May was a tough month for Uber. The

company that had lost more money, faster
than any venture in history, added the
distinction of having destroyed more
shareholder value in its first two days of
trading than any IPO in history – by a wide
margin.
In response, Uber CEO Dara Khosrowshahi

sent a letter to employees, striking a
decidedly somber tone.
There are many versions of our future that

are highly profitable and valuable, and there
2 of 14 30/07/19, 2:40 pm
are of course some that are less so…

Sentiment does not change overnight and I
expect some tough public market times
over the coming months.
Khosrowshahi’s candor was admirable, but

his appraisal could hardly be reassuring to
thousands of employees whose stock
options are under water, and who now find
themselves working for a company that is
neither profitable nor growing.
To calm nervous investors, Khosrowshahi

has been doing his best to provide
assurances of a bright future, emphasizing:
Uber is well positioned to penetrate a $12

trillion addressable market.
Uber’s platform is poised to become the

Amazon of transportation
Other companies like Amazon and
3 of 14 30/07/19, 2:40 pm
Facebook also had rocky IPOs (and look at

them now)
But Khosrowshahi’s vague promises and

selective comps neither explain why Uber
has been so singularly unprofitable, nor
clarifies how the company will finally
achieve profitable growth in the years
ahead. Investors are clearly not buying the
CEO’s palliatives -- and for good reason --
as I ‘ve described in prior commentary.
To fill the company’s void on future

guidance, this column addresses the first of
four questions Uber should have answered
prior to its broken IPO.
1. What are the root causes of the Uber’s

deep losses to date?
2. Are there quick fixes to improve Uber’s

profitability?
4 of 14 30/07/19, 2:40 pm
3. What can Uber do in the short- to medium-

term to reverse its steep losses?
4. How and when can Uber deliver the

transformative, profitable future that its CEO
has promised?
What are the root causes of Uber’s deep

losses to date?
The short answer is, a fundamentally flawed

business model.
From its inception, Uber’s ex-CEO Travis

Kalanick fervently believed his company
would transform urban mobility on a
massive global scale, based on six key
assumptions.
1. Uber's asset-light business model and

strong network effects would yield huge
economies of scale and an unassailable
first mover advantage in each of the
5 of 14 30/07/19, 2:40 pm
markets it entered.
2. Uber's prodigious fundraising would give it

ample reserves to drive competition from
the market and establish global monopoly
control and pricing power
3. Uber’s scale advantage and sophisticated

AI algorithms would power a superior
service, translating into shorter wait times
for passengers and drivers, and improved
driver productivity, which in turn will allow
Uber to achieve the trifecta of low fares,
attractive driver compensation and
corporate profitability.
4. With consumers on its side, municipal

governments would be unwilling or unable
to restrict its ever-expanding operations,
even after recognizing that Uber’s business
priorities conflict with public policy goals for
sustainable, efficient modes of public
6 of 14 30/07/19, 2:40 pm
transportation and adequate compensation

for a large and growing sector of city
employment.
5. Product line extensions would provide

profitable growth opportunities to offset
lingering losses in the core ridesharing
business
6. Over the longer term, the combination of

available funds from capital markets and
retained corporate earnings would fund a
seamless transition to autonomous vehicle
operations, promising an even more utopian
future.
But Uber’s first five assumptions have

already proved demonstratively false, while
the last still remains to be seen in the
distant future.
In August 2017, Dara Khosrowshahi was
7 of 14 30/07/19, 2:40 pm
hired to replace Travis Kalanick, inheriting

the company’s deep losses, flawed
business, model, fractious board,
dysfunctional culture, dwindling cash
reserves and a raft of legal woes. Four
months later, Khosrowshahi made a
Faustian bargain with Softbank that solved,
at least for the moment, all but the first two
challenges.
With Softbank’s $9 billion investment,

Khosrowshahi was able to reconstitute and
unite his board, preempt the threat of a
Softbank investment in archenemy Lyft, and
gain the breathing room needed to instill
new cultural values. In return, Uber
promised to reward early investors
(including major VC’s on the board) by
allocating the vast majority of Softbank’s
cash to buying back existing shares, while
8 of 14 30/07/19, 2:40 pm
mollifying remaining shareholders with a

commitment to take the company public in
2019.
Khosrowshahi kept his promise on IPO

timing, despite being unable to stem Uber’s
chronic deep losses or to address the
crippling weaknesses in the company’s
business model.
Undifferentiated service
Low customer and driver loyalty
Limited economies of scale
Weak network effects
Virtually no recurring revenue or customer

lock-in mechanisms
Intense price competition to attract riders
Perennial need for sizable incentive/bonus

payments to recruit and retain drivers, given
widespread driver dissatisfaction with
9 of 14 30/07/19, 2:40 pm
compensation
Low barriers to entry and relatively

abundant access to capital, sustaining
intensifying competition in all of Uber’s
major markets for core platform services
Need to compete against public

transportation that is inherently cheaper
than ridesharing, and heavily subsidized
Subject to growing scalability constraints in

major metro areas – bounded by limits on
available road space and driver supply
Regulatory threats concerned with

recouping the costs of Uber’s negative
externalities (congestion, emissions) and/or
to ensure adequate compensation for a
growing body of city workforces.
Uber has not been able to achieve

advantaged economies of scale or network
10 of 14 30/07/19, 2:40 pm
effects, despite its massive size. With

respect to scale economies, in Uber’s
asset-light business model, the vast
majority (78%) of gross bookings must be
paid out to drivers, whether it delivers one
trip, or 10 billion. Moreover, Uber’s next two
largest expense categories – Cost of
Revenue and Marketing – are also highly
related to the number of rides
delivered, limiting scale efficiencies.
Network effects are much weaker than Uber

envisioned, because of extremely low
switching costs and dual-apping between
competing rideshare services. A large
number of riders and drivers toggle
between multiple rideshare companies. As
a result, Uber and Lyft are served by
roughly the same number of US drivers,
despite Uber’s US revenue being roughly
11 of 14 30/07/19, 2:40 pm
2.5 times greater. So much for Uber’s

supposed network effects that assumed it
could attract more drivers because it has
more riders, which in turn would attract
more drivers, in a winner-take-all virtuous
cycle. Given ridesharing industry
characteristics, smaller competitors are able
to vigorously compete against Uber in every
market it serves.
As a result, Uber has been deeply

unprofitable in the US, its biggest and most
mature market, while also struggling in
international markets. Uber has already
withdrawn from China, Russia and
Southeast Asia. In Brazil, despite its 80%
market share, Uber remains unprofitable, as
fierce competition from Cabify and 99 (now
owned by Didi) has kept prices low and
marketing expenses high.
12 of 14 30/07/19, 2:40 pm
And Uber is not alone. For the similar

reasons, none of the other major rideshare
providers around the world are profitable
either, including Lyft in North America, Didi
Chuxing in China, Ola in India, or Grab in
Southeast Asia.
Many of the structural weaknesses

undermining ridesharing profitability apply
to Uber’s adjacent businesses as well,
including local package delivery (UberRush,
which the company recently discontinued),
its Xchange auto leasing program (which
the company sold off last year) and its
UberEats restaurant delivery business,
which is currently engaged in a fierce food
fight amongst unprofitable but well-
capitalized competitors around the world.
Indicative of the growing severity of Uber’s

market and competitive challenges, the
13 of 14 30/07/19, 2:40 pm
company’s growth and profitability

weakened considerably over the last twelve
months, contributing to its broken IPO.
Investors have also been dismayed by
Uber’s lack of transparency on key
operating metrics (e.g. driver churn, unit
economics, financials by geography and
business segment), and to its frustrating
lack of detail on profit improvement
strategies (beyond vague references to
leveraging its superior scale or becoming
the “Amazon of transportation”).
Until and unless Uber can find ways to

overcome the numerous weaknesses in its
business model, the company will never be
profitable. The second article in this
series will explore whether there are any
quick fixes to improve Uber's financial
performance (spoiler alert: no).
14 of 14 30/07/19, 2:40 pm

Uber Case Study

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Can Uber Ever Be Profitable? about:reader?url=https://www.forbes.com/sites/lensherman/2019...

Can Uber Ever Be

This is the first of a four-part series on

May was a tough month for Uber. The

In response, Uber CEO Dara Khosrowshahi

There are many versions of our future that

are of course some that are less so…

Khosrowshahi’s candor was admirable, but

To calm nervous investors, Khosrowshahi

Uber is well positioned to penetrate a $12

Uber’s platform is poised to become the

Other companies like Amazon and

Facebook also had rocky IPOs (and look at

But Khosrowshahi’s vague promises and

To fill the company’s void on future

1. What are the root causes of the Uber’s

2. Are there quick fixes to improve Uber’s

3. What can Uber do in the short- to medium-

4. How and when can Uber deliver the

What are the root causes of Uber’s deep

The short answer is, a fundamentally flawed

From its inception, Uber’s ex-CEO Travis

1. Uber's asset-light business model and

2. Uber's prodigious fundraising would give it

3. Uber’s scale advantage and sophisticated

4. With consumers on its side, municipal

transportation and adequate compensation

5. Product line extensions would provide

6. Over the longer term, the combination of

But Uber’s first five assumptions have

In August 2017, Dara Khosrowshahi was

hired to replace Travis Kalanick, inheriting

With Softbank’s $9 billion investment,

mollifying remaining shareholders with a

Khosrowshahi kept his promise on IPO

Low customer and driver loyalty

Limited economies of scale

Weak network effects

Virtually no recurring revenue or customer

Intense price competition to attract riders

Perennial need for sizable incentive/bonus

Low barriers to entry and relatively

Need to compete against public

Subject to growing scalability constraints in

Regulatory threats concerned with

Uber has not been able to achieve

effects, despite its massive size. With

Network effects are much weaker than Uber

2.5 times greater. So much for Uber’s

As a result, Uber has been deeply

And Uber is not alone. For the similar

Many of the structural weaknesses

Indicative of the growing severity of Uber’s

company’s growth and profitability

Until and unless Uber can find ways to

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