Finance / 

09 Dec 2018

I'll Have What They're Smoking: Uber IPO Edition

Uber apparently thinks it’s worth 120 billion US dollars. One hundred twenty billion. With a ‘B’.

I’d like to say that’s the craziest thing I’ve heard this year, but of course it isn’t, because we live in some sort of rejected Coen Brothers / Mike Judge mashup script world. One where not only is the Pizza Hut Stuffed Crust Pizza™ guy in the White House starting a (not undeserved) trade war, but one where the most exciting companies to investors seem to have in common that they don’t actually… do very much.

A lot of people are coming out of the woodwork to point and laugh at Uber’s insane valuation, and I guess I’m merely one of them at this point, but I just don’t get it. I mean, I have no issue with Uber; I use “ride-hailing services”, as we have politely decided to call what used to be called (offensively, I have been informed) “gypsy cabs”—back in the antediluvian days of the late 20th century—all the time. At least in my area, Uber and Lyft still have the incumbent taxi companies over a barrel in terms of having a decent app-based hailing feature and predictable pricing.

But nothing that I can see justifies that valuation. A few people have tried to defened Uber’s business model, suggesting that they are easily quite profitable in more mature markets. While they may be profitable in the sense of not losing money, I question if they are really making the kind of money anywhere that would lead to the overall $120B number.

It’s not clear why they would be bringing in big profits, anywhere. Perhaps due to name recognition and app ‘stickiness’ (people really hate installing new apps on their phones, almost irrationally so) they can charge a bit more than Lyft or the next clone that pops up in a particular city (and a quick peek shows that they do, in the DC area, right at this moment), but there’s no sustainable advantage there. If Uber consistently charges significantly more than some other app-based rideshare service—e.g. Lyft, Curb—why would I continue to use Uber? Eventually that reluctance to install Yet Another Stupid App is going to fall in the face of the almighty dollar.

On the supply side—which is drivers—they ideally want to push down compensation in order to take more profits. But if they do that, drivers will (understandably) leave for a different app/platform. It’s not like Uber has done anything to promote loyalty among its totally-not-employees. So they can’t extract some large margin there, without creating an identical opportunity for somebody else to spin up a clone service.

Bluntly: what Uber is selling is a nearly-fungible commodity—getting somebody to come pick me up in their car and drive me somewhere. The path to compete with them is very clear, because it’s exactly what they did to begin with: pick some vulnerable markets and start there, doing local advertising, and then slowly expand. There are already a bunch of Uber/Lyft clones in major US cities, basically nipping at their heels if they try to either raise prices for riders (in which case they’ll peel off riders) or lower driver compensation (in which case they’ll peel off drivers).

So I just don’t see the potential for big profits. It’s a ride-hailing app. Everything else—including the possibility of scaling via self-driving cars—is VC-baiting fluff; it seems suspiciously like the “???” part of the Underpants Gnomes business plan. And there are other ride-hailing startups with equally snazzy secret sauces—some with scooters instead of cars, some with only electric BMWs, etc. The market seems primed for fragmentation, not consolidation.

As far as I can see, the only real differentiator they have is the uncanny ability to talk very rich investors out of their money, and then funnel that money to drivers and consumers. Functionally, that’s what Uber has been doing for years: it’s a significant, albeit unintentional, subsidization of consumer transportation, paid for by greedy rich folks qualified investors with more money than sense.

But now that Uber thoroughly unstuck the logjam that was preventing new entrants from getting into the transportation market, there’s no reason to believe that they’re immune to market pressures. Brand loyalty is only going to carry them so far.