Uber basically promises investors that it will become a monopoly
We all know that the justification for such a huge valuation on an IPO is unclear.
Uber is not profitable: it lost more than 10 billion in the past three years and more than 3 billion in 2018 alone. Also, examine the inner workings of Uber’s business model, and it’s unclear how Uber can become profitable. However, it raised a lot from investors, more than any other startup.
What gives?
One should never rule out the possibility that Wall Street investors are not as smart as they think they are. But the other explanation is that Uber has a plan: these investments are not a bet for Uber to become a competitive company.
They are a bet that will become a monopoly.
Here is the basic outline of the problem: Under a free market system, companies are supposed to compete to come up with new innovations and better business models.
When they do, they can deliver more value for less cost and alienate customers from their competitors.
Everyone is always trying to become a monopoly, but no one is ever supposed to get there, because rivals always invent something to get the king off the throne and because a royal sustained monopoly would shut down innovation and steal customers.
Sure, there are certain “natural” monopolies like roads and power grids. But it is understood that they are unusual peculiarities in specific markets that, by their very nature, do not allow competition.
In those cases, companies should be regulated as public services.
If a normal company becomes a monopoly, something has gone very wrong.
This brings us back to Uber
It is actually really difficult to fit the company into this story of innovation in a way that also makes sense in its giant valuation.
Your transport app is certainly nice, but it’s no longer particularly innovative, as Lyft or the thousands of taxi company apps can attest.
The business of getting people from one place to another is fairly straightforward and does not lend itself to technological advancement or large economies of scale.
Uber has entered other markets, such as food delivery, but the same problems apply there.
It could eventually offer customers a unique value in the autonomous car arena, but then it would be an autonomous vehicle company that has an added passenger transportation service.
The other thing to keep in mind is that a big part of why Uber isn’t profitable is that it charges little for fares. Under the status quo, there is no way to increase profitability simply by claiming a greater market share.
All of which brings us back to the question of why investors continue to throw lots of money at the company. The simple story of how he is better than his rivals does not work.
Something else is happening
The point about Uber fares being too low for you to make enough money is telling.
Chances are, Uber is making a long-term effort to price all its rivals. “The IPO documents show that it plans to continue spending a lot to gain market share, even if it continues to accumulate multi-million dollar annual losses,” the Financial Times reported.
“It is a compelling reminder of the company’s founding mantra that passenger transportation is a business with strong network effects and a market that wins most, if not all, of the winners.”
The “strong network effects” are economic, they speak from the theory that the transport market is really peculiar in a similar way to the other “natural monopoly” markets.
And whoever dominates that market first will most likely dominate it in perpetuity. Therefore, the purpose of the money Uber gets from investors is not to finance new innovations.
It is to continue plugging the hole in Uber’s finances that its fares are left low, so that the company can continue to function financially while undermining its rivals.
Investors are only betting that Uber is more likely to become king of transportation first.
Then you can reduce payments to drivers and increase travel fees, as you have already started to do, and neither your drivers nor your customers will have competitors to run away from.
The Times, before Uber went public, said: “Many investors and analysts expect that once Uber and Lyft go public, travel prices will rise and driver payments will drop aggressively, which would help pave the way to profit ».
Frankly, it could be said that Uber’s greatest “competitive advantage” is that it exists in a kind of gray zone.
Not regulated as a taxi company
And the design of its platform was new enough when it was discovered that it could get away with claiming that its drivers were independent contractors rather than employees, allowing Uber to avoid all sorts of costly requirements, such as providing benefits and minimum wages.
But that means staying in that no-man’s-regulatory land is a central feature of Uber’s business model and its potential shareholder value.
The company’s extremely aggressive tactics to undermine local regulatory efforts are not just a consequence of its former CEO’s troubled reign, Travis Kalanick.
They are fundamental to your business model.
If Uber is ever regulated to make its drivers work and not self-employed, it’s done. The company has nothing else going for it.
As a result, the walls may be closing.
Uber basically promises investors that it will become a monopoly
–
