Uber’s Dubious Path To Profitability Is Not A Meme

Dear Dara:

I’m writing to share my reactions to your Q2 earnings call earlier this month. Despite the disturbing news of Uber’s $5.2 billion dollar quarterly loss that clearly rattled many analysts, I admired your preternatural optimism throughout the session. 

You set an upbeat tone from the outset, citing the progress Uber made last quarter “toward becoming the platform of choice for the movement of people and powering global commerce all around the world.” To that end, even your skeptics should acknowledge that it’s hard to think of another company that has delivered as much compelling consumer value, built as strong a global brand, or demonstrated as much operational prowess in creating Uber’s scale, reach and breadth in less than a decade.

As for that breathtakingly large quarterly loss, you were right to remind us that three-fourths of the red ink came from a “once in a lifetime” accounting charge that’s actually sort of confusing to most of us. Moreover, while $5.2 billion may sound like a big number, it’s not even close to making the top-ten list of largest quarterly losses ever. Heck, AIG posted a quarterly loss of $61 billion in 2008, GM came up $48 billion short in a bad quarter the following year, and GE lost nearly $23 billion in Q3 of last year. Last I checked, all these companies are still humming (or at least limping) along. So you have every reason to be proud, optimistic and focused on the prize — delivering immense profits in the unspecified future by realizing Uber’s mission “to ignite opportunity by setting the world in motion.”

I do however have to quibble with how you answered one analyst who asked you to share a big picture view of Uber’s path to profitability. In case you forgot, here’s what you said (with my emphasis added):

“I think that there’s a meme around, which is can Uber ever be profitable? I’ve certainly heard that meme along with others. And I’ll tell you, we have a business … that has the potential and if we execute to be a spectacular business long term.” 

By swatting away this question about Uber’s future profit potential as an inconsequential meme, you failed to take accountability for the fundamental flaws in your business model that have dogged Uber from its inception. Let’s not forget here that we’re talking about a company that has lost more money faster than any private enterprise in history, that is second only to Facebook in destroying the most shareholder value within the first four months of its IPO, and that has yet to articulate a specific or credible path to profitability.

And to be honest, I took your dismissive response somewhat personally, since the meme you referred to has exactly the same title as my recent article, Can Uber Ever Be Profitable?, which explores the drivers of Uber’s financial performance, past, present and future. While doing extensive research for article, I didn’t consider it as a meme. Grumpy Cat is a meme, but asking legitimate questions about Uber’s uncertain future is decidedly not.

There are in fact three reasons to be very concerned with Uber’s tortuous path to profitability.

1.    Uber operates in a very tough business category

Uber chose to enter the urban transportation arena, which is and always has been an intrinsically tough business to make money – for good reason. Every major public transport system in the US (and most worldwide) chronically loses money as a matter of public policy.  Why do cities choose to subsidize money-losing operations (e.g. 24-hour transit service in NYC and low-density money-losing bus routes in most urban/suburban areas)? The legitimate rationale is that transportation systems serve as the lifeblood of a city’s economy, vitality and social welfare. As such, governments can tax the positive externalities associated with enhanced mobility (e.g. more access to high paying jobs, more drinking in downtown bars, etc.) to offset their transit subsidies. In contrast, not only can Uber not benefit from the positive externalities it creates (as you know, the Friday night bar scene is great for you and the bar owners) , but your company is being increasingly penalized for its negative impacts (congestion, pollution and low pay for a large segment of city employment). As such, Uber will always be disadvantaged competing against money-losing public transportation and the watchdog governments that operate them.

As for taxis, that business has never been profitable when allowed to operate in largely unregulated markets, because of extremely low barriers to entry and intrinsically undifferentiated service. It is ironic that you have consistently opposed legislation that would cap rideshare supply in major cities, when in fact unregulated taxi markets almost guarantee low corporate profitability and skimpy driver compensation.

In short, Uber has chosen to compete in a particularly challenging business sector, which in part explains why neither Uber nor any major rideshare company in the world (e.g., Lyft, Didi Chuxing, Grab, Ola) makes money despite tens of billions of dollars of VC and IPO investment and nearly ten years of trying

As you know, restaurant delivery has also proven to be a fraught business, and Uber Eats has not surprisingly become a sizable cash drain rather than the salvation you had hoped. You are not alone, as this category has suffered multiple bankruptcies and fire sales in the past few years. Moreover, well-capitalized competitors like Doordash and Postmates are currently hemorrhaging cash, and publicly traded category leader Grubhub has lost 60% of its market cap in the past year. It’s hard to see how this is going to work out well for you and your fellow sufferers.

2.    Uber has a weak business model

You have counter-argued that Uber’s disruptive technology can fundamentally alter the economics transporting people and goods in urban areas. But we’ve now had a decade to observe Uber’s operations, and it is abundantly clear that every key assumption that the company made about its business model from inception has proven to be wrong.

1. Uber’s asset-light business model and strong network effects will yield huge economies of scale and an unassailable first mover advantage in each of the markets it enters.
2. Uber’s prodigious fundraising will 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 will 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 will 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 transportation and adequate compensation for a large and growing sector of city employment.
5. Product line extensions will 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 will fund a seamless transition to autonomous vehicle operations, promising an even more utopian future.

The reality is, you inherited a company with a cripplingly weak business model, characterized by:

• Largely undifferentiated service
• Relatively low customer and driver loyalty
• Limited economies of scale in a business with stubbornly high and growing costs of revenue, and marketing expenses.
• Relatively low gross margins. During your conference call, you touted Uber’s 20% gross margin. But tech superstars like Google and Amazon’s AWS have operating margins that are considerably higher, in businesses with much better economies of scale to boot.
• Weak network effects, given that both riders and drivers routinely toggle between competing apps. As a striking example, in the US, Lyft has almost an many drivers on its platform as Uber , despite being roughly one-third your size
• Virtually no recurring revenue or effective customer lock-in mechanisms, compared for example to Amazon
• Relentless price competition to attract riders
• Perennial need for sizable incentive/bonus payments to recruit and retain drivers, driven by widespread driver dissatisfaction with compensation and high turnover
• Abundant access to capital, sustaining intense competitors in all of Uber’s major markets for core platform services
• Growing scalability constraints in major metro areas – bounded by limits on road capacity and driver supply
• Growing regulation aimed at recouping the costs of Uber’s negative externalities (congestion, emissions) while ensuring adequate compensation for a growing body of city workforces.

Given these structural industry characteristics, it is not surprising your search for profitability has proven to be a Sisyphean quest.

3.  Uber’s is sticking to a flawed strategy

Over the past four years, Uber has repeatedly changed its narrative to divert attention from the company’s huge losses.

2016

Narrative: Uber’s losses have been adversely impacted by intense competition in China. With the successful divestiture of Uber’s Chinese operations, we should show significant improvement in our financial performance.

Reality: Uber’s losses from operations have actually deepened since the company divested its Chinese operations. Moreover, after acquiring Uber’s China business, Didi Chuxing has continued to lose billions of dollars, despite its stronger market position

2017

Narrative: We are making progress In our autonomous vehicle (AV) research program and expect to begin deploying AV’s by as early as the end of 2018, which should improve our economics.

Reality: In March 2018, Uber experienced a fatal pedestrian accident with one of its AV test vehicles. Uber suspended its AV road test program for nine months, overall progress has slowed and the company now only refers to deployment of AV’s as “an important part of our offerings over the long term,” with the caution that “new ventures are inherently risky, and we may never realize any expected benefits from them.”

2018

Narrative: Uber Eats has emerged as a growth star, propelling us to become the largest food delivery service in the world outside of China.

Reality: Restaurant delivery has always been a financially fraught category. Several well-capitalized competitors are engaged in fierce competition in this sector, including DoorDash, Postmates, Grubhub and Uber Eats, none of whom made money in 4Q 2018. Grubhub’s stock price has declined by 60% from last year’s high, reflecting an extremely challenging competitive environment. When Square sold its restaurant delivery business earlier this month to DoorDash at a fire sale price, Square’s market cap dropped by nearly $5 billion (14%) in one day. Obviously Square’s investors had placed a higher value on its restaurant delivery business. The ability of Uber to earn sustainable attractive returns in this segment is far from certain.

2019

Narrative: Uber’s platform now incorporates multiple modes and product line extensions, making Uber the “Amazon of transportation.” Our expanded offering will allow Uber to penetrate a $12 trillion total accessible market.

Reality: This is an attractive narrative for Uber for two reasons. First, it plays into a common belief that Amazon was not profitable during its first two decades, so Uber’s early losses need not be of great concern. Second, Amazon has emerged as the second highest valued publicly traded corporation in the world, indicative of Uber’s vast upside potential. But neither of these premises is remotely true. Amazon has been a far bigger cash generator throughout its history than commonly believed. And Uber’s operations have virtually nothing in common with Amazon’s extraordinarily successful business model.

The common theme underlying these false narratives is that Uber can outgrow its losses without fundamentally changing its core business. You have invested a lot of PR effort and money in a wide range of new businesses – intercity freight, scooters, bicycles, autonomous vehicles, pilotless urban air vehicles and package delivery drones – in hubristic but dubious pursuit of your aspiration to become the Amazon of transportation. But your core business – ridesharing and Eats — rests on an extremely shaky foundation, and you have spent far too little time explaining about how and when you plan to stop the bleeding.

If you want to quell a growing wave of skeptics who question Uber’s profit potential, my unsolicited advice is to clearly articulate your plans in more concrete terms on how you will deliver sustainable financial performance (profits, growth or both) in Uber’s core business on a definitive timeline. It’s time to move beyond vague promises (2019 will be Uber’s peak investment year), unfounded business visions (becoming the Amazon of transportation) and reminders of how much money you still have in the bank.

Here are some questions I wish you’d answer before or during your next earnings call.

Ridesharing

• How many of Uber’s city operations are currently profitable? Do you really need to be in all of them? 
• How are you going to manage your inevitable need to raise prices without stunting your already declining growth rate?
• Do you plan to further cut driver compensation, as you have over the past few years? What are Uber’s trends in driver compensation, turnover rate and driver recruiting costs? 

Uber eats

• Please split out your P&L reporting on ridesharing and Eats. Specifically how profitable is Uber Eats, overall and by geography?
• What have been the trends in your restaurant take rate and driver pay and incentives? 
• Are you gaining share in the US and overseas or is your aggressive marketing spend simply the ongoing price to play in this competitive market?
• Does the lack of profitability across this sector signal that Uber Eats is winning in the marketplace or is restaurant delivery proving to be a profitless growth category for all? 
• Under any circumstances, what specific steps are you taking to ensure this business will be accretive to Uber’s P&L within the next year or two? 

New businesses

• You have compared Uber to Amazon, but Amazon has largely funded its growth from operating cash flow over the past fifteen years. Given Uber’s un-Amazon-like financial performance, is it fiscally prudent to continue investing heavily in a wide range of highly uncertain new businesses?
• Do you have to own the expensive assets you are investing in, or can you lease or buy physical assets (autonomous vehicles, urban mobility aircraft) when they are available, like other transportation service providers?
• Are you rethinking your commitment to new business investment over the coming year?

Dara, I hope to hear from you soon on Uber’s exciting future. The company has made amazing progress in its first decade. Now comes the hard part.