Tuesday, December 6, 2016

In which people discuss things I don't understand

  • Can Uber Ever Deliver? Part One – Understanding Uber’s Bleak Operating Economics
    If rapid growth could not drive major margin improvements between 2012 and 2016, there is no reason to believe that Uber will suddenly find billions in scale economies going forward. Fundamentally digital companies like Amazon, EBay, Google and Facebook had massive operating scale economies because the marginal cost of expanded operations was close to zero. Aggressive pricing fueled the growth that drove major margin improvements and also created major consumer welfare benefits.

    By contrast, in the hundred years since the first motorized taxi, there has been no evidence of significant scale economies in the urban car service industry. That explains why successful operators never expanded to other cities and why there was no natural tendency towards concentration in individual markets. Drivers, vehicles and fuel account for 85% of urban car service costs. None of these costs decline significantly as companies grow. As the P&L data above demonstrates, Uber has not discovered a magical new way to drive down unit costs.

  • Can Uber Ever Deliver? Part Two: Understanding Uber’s Uncompetitive Costs
    Every other transport industry depends on highly centralized management using highly sophisticated systems to ensure that capital assets are highly utilized and tightly scheduled around market demand. The Uber business model implies that all these industries are horribly wrong; decentralizing asset purchasing, maintenance and scheduling to isolated low-wage workers would not only reduce costs, but create an efficiency gain large enough to drive all incumbent operators out of business. No one has produced any economic evidence demonstrating that the Uber view might be correct.
  • Can Uber Ever Deliver? Part Three: Understanding False Claims About Uber’s Innovation and Competitive Advantages
    Hundreds of other consumer industries have migrated from telephone ordering to smartphone and internet ordering (pizza delivery, airline booking), but there is not a single case where this had any material impact on industry competition, much less created tens of billions of dollars in corporate value. The major emphasis on the app in pro-Uber articles appears to be symbolic; the app implies the existence of magically new “on-demand” efficiencies (just push a button and your car appears).

    Highlighting the app also implies that Uber is a “technology company” that has completely “disrupted” industry economics, and is not simply a traditional company like Domino’s Pizza that is utilizing smartphone ordering. Needless to say, none of these articles are written by anyone with actual expertise in ecommerce or urban transportation, and none provide any evidence supporting the claim that the app represents breakthrough technology that gives Uber a powerful competitive advantage.

  • Can Uber Ever Deliver? Part Four: Understanding That Unregulated Monopoly Was Always Uber’s Central Objective
    From its earliest days, Uber’s investors and managers have always recognized that investor returns would require global industry dominance, and the elimination (or effective nullification) of longstanding laws and regulations designed to protect competition, and to protect consumers from the risks of anti-competitive market power[1]. This presumes that urban car services can be turned into a “winner-take-all-game”, where the winner can earn sustainable rents once quasi-monopoly industry dominance has been achieved. Dominance would also allow Uber to leverage its platform in order to expand into other markets that it could not otherwise profitably enter.

1 comment:

  1. If drivers, vehicles and fuel account for 85% of the cost, then the only way for Uber to succeed is to put customers in lower quality vehicles with lower paid drivers. Cost savings by circumventing municipal permit processes probably help take a piece of the remaining 15%, too.

    In short, the business model is highly disruptive, in the same way Walmart is: pay the staff less, sell lower quality things, and the customers will come.