Uber’s Path of Destruction (AmericanAffairs)

Since it began operations in 2010, Uber has grown to the point where it now collects over $45 billion in gross passenger revenue, and it has seized a major share of the urban car service market. But the widespread belief that it is a highly innovative and successful company has no basis in economic reality.

An examination of Uber’s economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate. Uber not only lacks powerful competitive advantages, but it is actually less efficient than the competitors it has been driving out of business.

Uber’s investors, however, never expected that their returns would come from superior efficiency in competitive markets. Uber pursued a “growth at all costs” strategy financed by a staggering $20 billion in investor funding. This funding subsidized fares and service levels that could not be matched by incumbents who had to cover costs out of actual passenger fares. Uber’s massive subsidies were explicitly anticompetitive—and are ultimately unsustainable—but they made the company enormously popular with passengers who enjoyed not having to pay the full cost of their service.

The resulting rapid growth was also intended to make Uber highly attractive to those segments of the investment world that believed explosive top-line growth was the only important determinant of how start-up companies should be valued. Investors focused narrow­ly on Uber’s revenue growth and only rarely considered whether the company could ever produce the profits that might someday repay the multibillion dollar subsidies.

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2 comments

  1. There is no doubt that, ethically, Uber is a wholly disreputable company and I am amazed that it has been able to sustain its level of losses for so long. When the bubble does eventually burst it will be painful for all sorts of people. At the same time, traditional taxi regulation has been over protective of drivers and has created many unnecessary barriers to entry, whether these be artificial caps on numbers (which, for example, led to New York taxi licenses changing hands for tens of thousands of dollars) or over-stringent entry requirements (such as the knowledge in London). Had the market in traditional taxis been able to operate more effectively then Uber wouldn’t have stood a chance from the outset. I do find it hard to believe, though, that it is impossible to find a profitable business model from ride sharing and perhaps an Uber crash would allow something better to emerge.

  2. The article ahs two “killer” sentences at the start of the penultimate paragraph:
    Uber, meanwhile, is unique because it is entirely exploitive. It has not created any sustainable offsetting benefits.
    Quite

    When the crash finally comes, it’s going to be … interesting.

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