Tech Brew Ride Home - Is Uber A Good Business? With Shira Ovide

Episode Date: May 11, 2019

I knew Uber was going public this week, and it occurred to me that since this podcast started, my default position has been: Uber: super cool company, but a lot of people have a lot of doubts about them. But I realized, I had never explained that, or gone into detail about WHY people feel that way… unlike how we’ve done with other things. So, I reached out to Shira Ovide at Bloomberg, not to talk trash about Uber, but to… let’s say… get the skeptic’s take about Uber’s business model— which is the ride hailing business model, in a way, which is also the sharing economy business model in a way—so, in that vein, we also talk about WeWork a bit too (which people are also skeptical of). Sponsors: Eero.com/ride promocode RIDE at checkout Sonic.com/ride Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to another weekend bonus episode of the Tech Meme Right Home. I'm Brian McCullough. So I knew that Uber was going to go public this week,

and it occurred to me that since this podcast has started, my default position has been Uber. Super cool company, but a lot of people have a lot of doubts about Uber. And I realized I had never explained that or gone into detail about why people tend to feel that way, unlike how we've done with other things. So I reached out to Shiro Ovid at Bloomberg, not to talk trash about Uber, but to, let's just say, get the skeptics take about Uber's business model, which is, of course, the ride-hailing business model generally, which is also the sharing economy business model in a way. So in that vein, we also talk a bit about WeWork, which people are also skeptical of. Please enjoy.

Essentially, if it's at all possible to summarize this, what would the skeptics take on Uber's business model be? Because it's not just that they're losing money. There's a whole ton of unicorns that are going public losing money. Why are people skeptical of Uber from a very fundamental level that almost maybe they could never, ever make money? Yeah, fair enough. So it's not just that Uber is losing money.

it's that it's losing a lot of money, right? So Uber's operating loss last year, which is basically the net income it reports minus taxes and some other stuff, was $3 billion. And that is the biggest loss for a company right before it goes public ever. So, you know, the scale of Uber's losses are huge. And to be fair, right, this is also a big company. It's 10 years old. It has $11 billion plus of revenue. It is big, but it is in this unusual position where, again, it's 10 years old, it's very big, it still loses money. And if you look just kind of at the economics of the business that it outlines to investors, I mean, you could certainly make an argument that this is going to be a great business at some point, but you could certainly

make the argument that a demand for Uber's product doesn't exist unless it subsidizes the heck out of it, either pays drivers, lots of money to drive and to be at certain places at certain times, and subsidizes in terms of cutting fares for riders or giving them kind of incentives or marketing to them. So there's the demand side that may not be sustainable. And then on the economic side, You know, we don't have a good look at a country-by-country basis where it might be different, but if you look at Lyft, which operates mostly in the United States, that's a company, again, where on a per-ride basis, they're not profitable, and they operate in a country where you would think, you know,

the product is furthest along in adoption, or arguably furthest along in adoption, and where you'd think the economics would be good and sustainable. Well, I want to come back to the demand side of it, because you've written interesting stuff about that recently. But let's start with the other side first, where we're not just talking about, okay, Uber took a flyer on self-driving cars and has spent billions on this really capital-intensive research and development, and they spent all this money trying to get into every market in the world,

although they dialed that back. what we're saying fundamentally is that maybe the actual unit economics of hailing a car and paying a driver enough to have enough drivers that, like, maybe the unit economics of that, at least right now and for the foreseeable future, do not add up. That's right. It's hard to prove. Again, you could make an argument either way, but based on the financials that Uber and Lyft gave us, it's right now those companies just on a very basic business of we put a person in a car and that car goes from A to B and that person pays us a fare. That business is not making money for Uber and Lyft overall.

Because they've been heavily subsidizing this whole time to grab share and to compete with the incumbent like cab stuff. And so, like, is it just that, are we saying that today it's not, today it's not even profitable, but especially if you take, if you're not able to take away those subsidies, it can't be possible, profitable. We don't know for sure, right? There is no, there is no, we can't have a different version of history where those drivers and writers are not subsidized and we have kind of a clean look at what the market looks like, but based on the information we have, no, they're not profitable. And I think, you know, if you talk to people inside these companies, they will say that, you know, just the sort of basic economics of a ride,

if you exclude things like subsidies, in certain markets that is profitable in places like New York, for example, which is a big market for Uber and Lyft or Los Angeles, but the companies don't break it down that way, so we can't see that. And we also don't know how much of the world or how much of the country looks like New York or Los Angeles or San Francisco. Right. I got you. So, but then, I guess the question would be they're going to have to get rid of those subsidies soon. So is this another way to look at it like we could be facing cash crunches at some point in the future, like in the next couple of years? If they're going to be forced to get rid of those subsidies, then you could have like that sort of negative flywheel effect where then that would, you know, depressed demand and then it would make it harder to be profitable.

But are we looking at like really tough numbers like that as well? I find it hard to believe that in the next few years we're really going to see that it's like put up or shut up time for Uber and Lyft. They both will have billions of dollars in the bank now thanks to their IPOs. I would think that if they needed to, they could get more money even as public companies. They can sell more stock. They can borrow money. it's been relatively easy for companies to do that in the last, you know, certainly five years when the U.S. economy has been very good and it's been easy for companies to borrow money at low rates.

So I don't actually think we're going to have a better answer in two or three years than we have today about, wait, are these real businesses if you remove all of these weird things about these companies like subsidies? I feel like it's going to take a lot longer to figure out. And again, that could change, right? If we get a recession, if these companies can't borrow money anymore, if they're forced to kind of retrench, cut back on subsidies, cut back on certain markets where they operate, then it really could be crunch time for Uber and Lyft.

But at least the conditions we have today, I don't think they'll face that kind of dilemma or cash dilemma. They'd have some. a while. They'd have enough runway, yeah. They have enough runway. Some of the most bearish people that I see talking about the ride-hailing companies, and especially Uber,

and maybe this is a Travis Kalanick legacy, the two things that they say are, well, originally their strategy was all predicated on flood the market, get big fast, create a moat by basically creating essentially monopoly, de facto monopoly

economics, and then that hasn't actually panned out. And then the other thing was as well, if we believe that self-driving cars are really five years away, then all we've got to do is ride it out until that happens, and then our costs are perfectly fine. How much do you buy into that? They basically are sort of wed to really aggressive strategies that didn't pan out, and now they're just going to have to try to iron it out as best they can. I think you're right. The driverless car, well, just wait until driverless cars come, and then this is a perfect business. I think that notion has been discredited or at least pushed out for a while,

both because driverless cars are not going to be ubiquitous as fast as technologists probably thought a few years ago. And also, I'm not sure that driverless cars really makes these business models for Uber and Lyft better. So instead of facilitating car rides and taking a fee for each car ride, they're going to maybe own cars, right, which is very expensive, right? You can look at the financial statements of like Avis, right, or any of the car rental companies. It's expensive to own cars, a depreciating asset. So then it's going to own cars, and yeah, it gets to keep the full fare, right, in a world where there's a driverless car sent to you instead of a person in a car. But I'm not sure.

sure those economics are going to be great either. We have yet to see in any way that future is not coming at least for a while. So I'm not sure driverless cars will fix everything is the solution. And the point you made about monopoly conditions, you know, that could still happen in certain markets, right? That you could see a case and it may be happening in some markets where Uber and Lyft, some cities where Uber and Lyft operate now, where they're able to be. to kind of remove some of the subsidies. They're able to kind of suddenly raise fares for for riders and remove some of the subsidies for drivers or take a larger effective commission on each ride, and that means that those companies make more money from each ride. And we're seeing that a

little bit now. The fare, the per ride number is kind of going up. Well, but as promised, except the problem is, the demand might not be there. So even if they have the pricing power, like in the S-1 or whatever, the gross bookings, which is 80% of their revenue, has stopped growing and is shrinking, essentially. So what do you think about this idea that maybe, what if, what if the market for ride hailing is just maybe never, it's not as big, at least in North America as everybody thought. Yep. Surprising conclusion, but I had, when I first saw the Lyft IPO filing, my first thought was,

wow, this business is not that big. And look, we had a better sense of Uber's numbers because it's been kind of disclosing financials all along. But yeah, as you said, right, Uber recently reported its, um, kind of estimated revenue and some other financial metrics for the first quarter, so the January through March. And if you look at their forecast, the total value of car rides globally that Uber took in might decline slightly from three months ago to the March quarter. And look, this is supposed to be a growth business. And we're talking about already the company is just going public

and we may be in this kind of permanently declining or certainly slowing growth stage for the main business in Uber, which is connecting people in car rides. And I found that to be surprising. And I did wonder, as you said, maybe this market just isn't that big. Well, and then I got turned on this weekend to the idea that what if their labor market is constrained as well? Because we're already in a super tight labor market. There's not a ton of unemployment. And being an Uber driver is a tough, low-paying job. So they could also have maybe burned through a lot of the people that are willing to do this work.

And so, okay, maybe they can still raise prices, but maybe the demand is dropping. And then what if the actual ability to have people driving those cars around starts to get constrained? Yeah, and that obviously changes the economics, right? Because if it gets incrementally harder to get each new driver, and remember, we don't know for sure, but this, you know, the workforce of these companies, the quasi-workforce, I guess, of these companies, there's a lot of turnover, right, that somebody who's an Uber driver today might need to be replaced in, three months or six months. And if it gets harder or more expensive, you have to pay bonuses to sign up new drivers, and that gets harder every time or a year or two, then yeah, the economics of

the business start to deteriorate. And we've seen already some unhappiness among Uber and Lyft drivers. They want more guaranteed income or more certainty about their hours or other kinds of things that workers typically demand. And this will happen, I think, after we record this podcast, but there's an Uber lift strike scheduled for Wednesday in a number of cities, and big cities in the U.S. in which Uber operates. Real quick before we leave Uber, what do you think of direct cost for Shai in the job that he's done since he's come in

and basically shepherded to them towards this IPO? That was basically his remit to like steady the ship and get us out the door to an IPO. I don't think this IPO would happen without DARA, right? So this company, it was such a mess. It had employees complaining about everything, including kind of gender-based harassment and other kinds of mistreatment. Drivers were unhappy. There was that whole delete Uber kind of boycott. after people felt that Uber was taking advantage of some of these immigrant protests,

immigrant rights protests, it was just sort of a mess. And, of course, the board was totally divided over replacing Travis Kalanick, who should be the new CEO. If you look at some of the reporting from the New York Times and others, Darrow was sort of not anyone's first choice for that job. But in not very long, he has just made all of that go away. And look, the company still got cultural and financial and regulatory problems, but he just came in and said, we're resetting the tone. We're not the old Uber. Travis Kalanick kind of went away, and you really haven't heard for them for a while,

and that's probably good for the company. The board factions were repaired or certain members of the board replaced. This is just a very different company in a very different environment for Uber than it was two years ago. And I can't imagine that happening without DARA or certainly without replacing Travis Kalanick.

All right, real quick, with not as much detail, but the artist... Talk less. Yeah. Well, no, no, no. No, in fact, I don't want to take it. take up too much of your time, but also because... No, no.

Here's the deal. The artist formerly known as We work, now known as we. Tech meme doesn't cover it very much because one of the arguments that we have internally is, like, what is the tech here? But more, I guess, from a fundamental level, what I wonder is, like, what is the innovation here? And this is another company that tons of people are skeptical about their basic business model. But aside from maybe making offices smaller so you can just get a tiny desk, and you don't have to rent, you know, 900 square feet or something.

Or just being a landlord that caters to startups. What is the innovation of WEES business model that justifies WE? A question about WE work from the very beginning is, is this really a tech company that they basically rent out real estate spaces long-term and then lease it short-term and make a product? on the difference between long-term and short-term rental rates for commercial real estate. So yeah, you can say there is some tech sauce in there, right? They do make them cool. They do make them sort of tech-y and reserving conference rooms and things like that.

But I think that's been the biggest question for WeWork and a lot of tech startups in the last 10 years is, what is tech about this? Well, and then, I mean, I guess it's tech in the sense that they seem to be like, give us all the money, we'll grab everything we can, and again, go for, like, I guess, some sort of monopoly, quasi-monopoly economics. But again, almost like what you were talking about earlier with Uber, but more so in the real estate space, they've only existed in like a real estate market that was either growing in health or was very healthy. So more than Uber even, like if the music stops, where's we at?

Yeah, I find it hard to sort of see the, yes, to see the upside for a company like WeWork that, you know, they now owe, they have sort of billions of dollars of kind of lease commitments. And they have raised tons of money, mostly from SoftBank now, and spent tons of money. And, yes, gotten a lot of sales. You know, they have a lot of clients. They have a lot of tenants. But I don't know what normal looks like if you remove all the money coming in and real estate purchase crash or we can't borrow money. I don't know what happens.

Or just like the amount of tenants you have. If you have vacancy, a certain percentage of vacancy, you can't. That's right. Right. If the clients, if the tenants can't pay the bills anymore, we just don't know what that reality looks like. Is there any sort of long-term benefit to having these long-term leases? Like, locking them. Like, are they some sort of geniuses that in the, you know, five millennia of real estate,

they're like, well, if we just lock all these down, then when the bad times come, we're going to be sitting pretty because of X? I don't understand. Well, look, I'm not a real estate specialist. Right, right. Maybe there is some argument that they're brilliant about, you know, the real estate business. but I think it's interesting to see that my colleagues have written that some of the commercial real estate landlords are basically copying what WeWork does.

Because ultimately, right, it may not have the WeWork special sauce, whatever that is, the coolness, but the we lease the space long term for X price and rent it out for tenants on a shorter term basis at a higher price. that is not a, you know, a new idea in real estate, nor is it some kind of unique business that only we work can do. So we're starting to see people replicate that. Well, I'll tell you what, though, the thing that is somewhat unique is that when their financials came out, it's like, it's dollar to dollar, their revenue grows by 106% year over year and their losses grow by 107% year over year. Like their losses grow almost dollar to dollar with their revenue growth. So like that's an innovative trick right there. I'm sure these companies will say that this has been a conscious strategy, right? Because

money has been freely available to young companies in the last 10 years, they've been able to get big really fast and to expand. all over the world and to just operate on on warp speed in a way that their counterparts in 2007 or 1997 really couldn't and they haven't really had to worry about about turning a profit and it's by design right so that has meant that they can build these companies and make them much bigger than any period in previous history. And that could be great, right? It could be that we have these, you know, huge transformative companies that in 10 years will look back and say, this was a period that created all these enormous lasting, disruptive tech companies. Or we could look back in 10 years

and just see carnage from all these, you know, well-capitalized companies that went away or shrunk. Well, of course, that's how the dot-com bubble burst is no one had to make profits. And no one had to make profits, no one had to make profits until one day everyone woke up and investors were demanding profits. So the problem will be all these unicorns if one day investors wake up and the first company they demand profits from, that could be like a domino thing. Yeah, I think that's right. And that's how market bubbles end or that's how market booms end, that all of a sudden, there's a crisis of confidence. I think the difference, and look, I wasn't around in the dot-com bubble days, or at least I wasn't

reporting back then. But it does feel like the difference between then now is that these companies are real, right? It's not like in 2000 or 1999, you could basically start a company and then three months later, you could take it public at some enormous valuation and sell stock to like the dentist down the street. You know, a company like Uber is 10 years old. It has a long track record. It's a real business. Is it a real business that should be valued at $100 billion? I don't know. But it's a real business that has created, you know, this new form of transportation that people now demand in many parts of the world. And this is not some kind of fly-by-night thing that will die.

in freelance.