2019 is shaping up to be the year of the dueling ride-hailing IPOs with Uber filing to go public next year within days of its rival Lyft. The move is likely to make the companies' early investors massively rich and stir up a frenzy of media coverage, but does it signal a golden future for the likes of Uber and a golden opportunity for new investors to buy in?
Not according to at least one extremely skeptical transport economist.
In a fascinating recent article New York magazine (hat tip to Boing Boing), Yves Smith draws heavily on the work of economist Hubert Huran to make the case that Uber's IPO is, essentially, a scam to get foolish investors to put their money into a company whose hype far, far outstrips its ability to ever turn a profit.
Why would anyone invest in a company that lost $1 billion last quarter?
It's no secret that up to now Uber has posted massive losses -- over $1 billion just last quarter. So perhaps the first order of business is explaining why anyone thinks the company is bound for greatness in the first place.
Smith's answer is the company's PR-savvy leadership and gullible journalists who have bought the story that Uber offers groundbreaking tech whose value will only grow as the company expands. Current losses, they insist, are just the price of reaching a point where economies of scale or so called "network effects" will make the business profitable.
That pattern of early losses followed by massive profits might be true for other tech success stories like Amazon and Facebook, but when it comes to Uber, it's baloney, according to Huran. "After nine years, Uber isn't within hailing distance of making money and continues to bleed more red ink than any start-up in history. By contrast, Facebook and Amazon were solidly cash-flow positive by their fifth year," notes Smith.
The difference is in the tech -- Uber's just isn't that spectacular, nor does it get more awesome the more people use it.
Uber "bears almost no resemblance to internet superstars it claims to emulate. The app is not technically daunting and does not create a competitive barrier, as witnessed by the fact that many other players have copied it. Apps have been introduced for airlines, pizza delivery, and hundreds of other consumer services but have never generated market-share gains, much less tens of billions in corporate value. They do not create network effects. Unlike Facebook or eBay, having more Uber users does not improve the service," Smith explains.
There's no magic tech pixie dust on the horizon.
In short, more people using Uber doesn't make Uber more profitable, or a better deal for drivers, or really better in any way. In fact, all Uber has is its willingness to subsidize rides to get consumers to like it and the storytelling chops to convince people it will some have some magic profit-making pixie dust it can deploy. (The fact that drivers seem to be terrible at calculating their true costs and wages works in the company's favor too.)
Given all this, why would anyone ever expect Uber to stop losing money at a horrific clip?
The article pokes holes in the arguments of Uber defenders one by one: No, the data isn't worth much; no, it's near impossible to make routes and usage more efficient; recent decreases in losses have all come from squeezing drivers more, etc. That leaves just one answer left. Smith doesn't put it quite so bluntly, but the only reason people buy into the Uber mythology is because they're suckers.
If you're thinking of investing in Uber, or even if you're are just curious about the economics of the whole ride-hailing sector, definitely read this one in full.
Does the case made by the Uber skeptics convince you or do you still think the future is bright for the company?